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The idea of decentralized finance was born around 2017, a few years after the launch of the Blockchain Ethereum. Since then, the DeFi space has increasingly caught the attention of many key thought leaders, influencers, and investors.
The general idea is to decentralize financial activities and bring financial control to individuals. DeFi has reshaped the financial world, and for this reason, many analysts and participants in the financial space see the network as the future.
Bring almost instantaneous and secure transactions
The space goes beyond traditional standards by offering fast and secure transaction options. Traditional transaction networks still lack speed, convenience and security.
A large transaction throughput will always require multiple visits to the bank and a lot of paperwork. Banking institutions are highly centralized – and hacking institutions could easily result in loss of funds for all accounts. Even very reputable financial institutions are susceptible to such hacks.
Decentralized finance is a transparent and very secure payment solution. It decentralizes services, securing investors’ assets. Conducting transactions on platforms that leverage technology is acceptable to everyone, without any paperwork.
Related: How Blockchain and Cryptocurrency Can Revolutionize Businesses
Borrow and lend more easily
Decentralized financial networks streamline the borrowing and lending process. Traditionally, obtaining loans often takes a long time. Banks check your credit score and require collateral on fixed assets before granting the loan.
In DeFi, things are quite simple for everyone. The only thing needed is collateral, which could be another crypto asset.
Decentralized finance goes beyond traditional norms by removing intermediaries in lending and borrowing. Therefore, you do not need to work with intermediaries like banks to get loans. Instead, you can get a loan directly from the lender.
Networks often resort to overcollateralization to ensure loan repayment. This is where you give more collateral than the loan you want to take out. Therefore, the lender is sure that the funds will be repaid.
Cross communication and ability to exchange assets
The traditional financial space offers a limited degree of interoperability. For example, tools like Swift help connect one banking institution to another.
However, DeFi offers maximum interoperability between blockchains and between two different financial worlds (crypto and traditional). Currently, some projects are already exploiting decentralization in fiduciary systems in various ways, including;
- Trade traditional financial assets in DeFi as synthetic assets.
- Some platforms offer peer to peer payment opportunities.
- NFTs are already reforming conventional payment systems used in the music industry for royalties and the like.
Cross-communication is essential to facilitate the conversion of a DeFi or Crypto token to fiat (and vice versa).
earn passive income
One of the biggest advantages of DeFi is the ability to actually earn returns. Unlike traditional finance, space presents many options for the average investor. Yield options include staking, yield farming, cash mining, gambling for earnings, and trading.
Related: How to Make Smart Crypto Investment Decisions Using Data Analytics
Honesty and Trust
Dishonesty is a widespread attribute of the traditional financial system. During the financial crisis of 2008, banking institutions were corrupted with the mortgages they offered, which contributed to the recession.
DeFi offers more honesty, transparency and trust. Its applications are based on blockchains. All transactions are public and permanent for future review. Anyone can view and audit blockchain and DeFi data.
Improving customer services and accessibility
Most banks work five days a week, eight hours a day. Therefore, it could be inconvenient if you want to transfer money urgently, especially during a weekend.
There is no need for third-party approvals in the DeFi space. The network operates 24/7, which means you can transact quickly when needed.
Availability and ease of access are vital. In 2017, there were 1.7 billion unbanked adults since traditional finance failed to streamline accessibility for all. DeFi makes financial services accessible to everyone in a mission to bank the unbanked.
There are only two requirements to access DeFi services – internet and a computing device. These minor requirements make access to fintech platforms relatively easy for everyone.
Related: Crypto vs. Bank: Which is Better?
Is DeFi the future of asset management?
The inability of banking institutions to serve more than a billion people is mainly due to problems of accessibility, security and reliability. However, DeFi is very accessible, safe and reliable for all parties involved.
Unlike traditional financial institutions, DeFi also allows you to remain in custody of your financial assets. It’s a very modern and decentralized way of doing things. DeFi technology is the future as it provides solutions to traditional financial problems.