Although the traditional financial system still plays an important role in financial services, it seems that the whole world will have to get used to the new financial system called DeFi in the nearest future. Let’s take a closer look on decentralized financial system and its advantages and disadvantages against the traditional financial system.
Decentralized Finance: Blockchain Technology Based Financial System
Decentralized Finance is a financial system based on blockchain technology that provides access to financial services without the need for traditional intermediaries such as banks. One of the biggest advantages of DeFi is that it is open and accessible to anyone with an internet connection. As you can imagine, this feature gains special value in countries where access to traditional financial services is limited. Decentralized Finance users can easily perform money transfers and credit transactions without having to apply to banks or other financial institutions. Another advantage is that it is transparent and secure because it is based on blockchain technology. All money transfers in the chain are recorded in a way that everyone can see, and this feature reduces fraud and other financial crimes. In addition, DeFi offers greater inclusivity and more cost-efficient services that users cannot access by contacting traditional financial institutions. For example, it is the provision of a loan to individuals with a low credit score or the opportunity to trade assets that are not available on traditional financial exchanges. Because it is based on blockchain technology, it has the potential to make its financial services more efficient and more cost-effective by making connected money transfers faster and more cost-effective.
So What are the Disadvantages of Decentralized Finance?
- The complexity. It may be difficult to understand and comprehend the DeFi system, especially for people who do not know blockchain technology.
- Lack of regulations. Earlier, we mentioned some advantages because it is based on blockchain technology. This feature can also lead to some disadvantages. The fact that the system is decentralized means that it is not controlled by anyone, and this feature may cause a sense of suspicion in some potential users.
- The risk of loss. The risk of loss in other financial systems is also present in the DeFi system.
- Hacking. Since the DeFi system is decentralized, it is considered safe, but we should not forget that there have been cases when it was attacked.
- Limited use in the world. Although it is developing rapidly, DeFi is still a new system in the sector and therefore its use is not very widespread.
Decentralized Finance System vs. Traditional Finance
- Credit platforms. Unlike traditional financial systems, Defi’s credit platforms provide access to borrowing and issuing transactions using cryptocurrency.
- Decentralized Exchanges. Exchanges such as Uniswap and Kyber Network offer the opportunity to exchange cryptocurrencies in a way that is not controlled by anyone.
- Stablecoins. As an example, Tether and USDC are digital coins pegged to the US dollar. Since fluctuations in their values are very rare, these cryptocurrencies can be used to store assets and transfer money more securely, and they can also be considered as an alternative to currencies such as dollars and euros.
- Payment platforms. Alipay and PayPal pay platforms make it possible to pay using cryptocurrency.
As can be seen from the article, the DeFi system has some advantages and disadvantages, and it may be much more useful for potential users to research this system and ask for advice from financial experts before making any decisions.
- DeFi is a financial system based on blockchain technology that provides access to financial services without the need for traditional intermediaries.
- DeFi, which is an open, transparent and secure system, offers greater inclusivity and more cost-efficient services to its users.
- Some potential disadvantages it has complexity, lack of regulation, risk of loss, limited use in the world and hacking.
- DeFi tools that compete with traditional finance include credit platforms, decentralized exchanges, stablecoins, and pay platforms.
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