Pros and Cons of DeFi
De-Fi, or Decentralized Finance, is poised to be a major disruption to the traditional way of handling financial – and many other – transactions. It’s a system based on cryptocurrencies that replaces traditional, centralized financial institutions with distributed blockchain technology, taking much of the complication, time, and fees out of the transaction process.
Like anything else, there are upsides and downsides to De-Fi. Read on to find out about some of them.
What Are the Pros of Using DeFi?
Three of the main benefits of DeFi are that it’s transparent, permissionless, and trustless. Its transparency results from the blockchain technology it’s based on. Every step of the transaction is recorded in the chain and can be reviewed by all parties at any time. It’s permissionless in that anyone and everyone can access and use any DeFi protocol or tool for their apps or for personal use and, unlike with traditional banking, there aren’t any “Know Your Customer” guidelines for end users to navigate. Additionally, DeFi is trustless.
Waitinute! “Trustless”? Why would that ever be a good thing? In the traditional, centralized financial system, an element of trust is always part of the deal since, throughout the process, human beings need to be trusted to do their jobs accurately and ethically. DeFi is dependent, instead, on the smart contract to conduct the transaction. Hence, it’s trustless in that you don’t have to trust that a potentially flawed carbon-based lifeform is handling the deal for you, possibly making errors or engaging in nefarious activity. Software has no agenda or greed and therefore doesn’t require us to trust that it’ll do its job properly. It just will, provided it’s been coded properly, of course, and everyone involved in the transaction can look at the smart contract to review it and audit it which will determine if it’s malicious or not.
Unlike banks and other centralized financial institutions, DeFi doesn’t dictate who can and can’t participate in financial transactions. Anyone can participate without having to live up to whatever predetermined standards a bank might have. Additionally, the barrier to entry for DeFi is very low. A bank will have a complex set of forms to fill out and other hoops to jump through before they’ll even consider handling your transaction. DeFi just requires that you create a wallet to house whichever cryptocurrency you’re using for the transaction.
Unlike centralized financial transactions, DeFi completes its deals fast, usually within minutes or even seconds.
Are There Any Cons With Using DeFi?
Now it can’t all be good news, right? Indeed, there are some downsides to DeFi that you should be aware of and most of them stem from the fact that DeFi is a new technology in early development and so it’s susceptible to bugs and hacks and many of its transactions go unaudited. It’s all unregulated right now, which has its upsides, but that also means there aren’t laws in place, for instance, to handle an international DeFi transaction that goes badly. So, for the time being, anyone engaging in a DeFi transaction really has to do their due diligence in vetting the individual or entity they’re dealing with since there’s no legal safety net in place if things go sideways.
Click through for a deeper dive into the pros and cons of Decentralized Finance.
If De-Fi is to truly replace the old way of doing things, then it needs to be simple and available to all people. Right now, that’s not the case. Let’s explore that further.
Additional Challenges For DeFi: Scaling and Accessibility
To reach its full potential, De-Fi needs to be accessible to the general public. Initially, De-Fi was coded for people well versed in blockchain technology and finance, which means that only a small percentage of the potential user population can make use of it. So what it needs is a simple user interface that you don’t need a degree in programming to use. Companies like Relite are tackling this problem with an interface that greatly simplifies the transaction process.
De-Fi’s availability is also hitting some scaling limitations as the vast majority of transactions use the Ethereum blockchain. Simply put, there’s only so much data one blockchain can handle at a time so, if De-Fi is to continue growing, it needs space to expand. Enter “cross-chain transfers” where one blockchain can transfer its data to another to process and house. Blockchains like Polkadot have been developed with that kind of interoperability. As that approach becomes the norm, the issue of scaling De-Fi will be solved.
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Disclaimer: This post is not intended to give out financial advice. All readers should do their own research and consult a financial professional.