Is DeFi Just a Buzzword?
There is a wide range of factors and life circumstances that restrict people access to the traditional financial system. The barrier between them and the world of money started to get smaller about five years ago when the idea of DeFi (decentralized finance) was born in the minds behind Compound, Dharma, dYdX, and MakerDAO.
Today DeFi is known as the new financial system for the globe and the know-how in getting everyone together on the same level. It’s the concept of traditional financing with the decentralization of all operations.
This means that the system is open for each and every individual with the internet, and it offers (or at least it aims to offer) the same line of traditional finance services. DeFi is based on public blockchains and smart contracts (automated enforceable agreements) which actually guarantee that openness to the users.
The blockchain structure of Ethereum helps the system to remove the excessive intermediaries in every financial operation leaving only the two peers making a deal.
FinTech stands for financial technology meaning that there are companies that try to implement contemporary technological advancements in their financial operations in order to improve and automate all the processes. FinTech and DeFi have major differences in their cores.
FinTech is built on the existing financial system of traditional banking where there is a customer, a bank, and their relations. What FinTech does is facilitate those operations by means of modern technologies for both parties.
Below you can find the main reasons why decentralized finance gains popularity around the world:
- Transparency of Dapps. They operate on open-source code and public blockchains making every transaction open for verification and history confirmation.
- Trustworthiness and reliability. Open-source of the DeFi makes its apps and source code available for any user.
- The constant availability of DeFi. Whether you don’t have a bank account, it is 3 AM or you are in the middle of the hiking trip — with a smartphone and internet connection you can access the money and perform any financial action within seconds.
- Permissionless. Although it scares developers., it also gives the possibility to build over an existing code for improvement.
- Flexibility. Whatever one wants to do in DeFi, one can! Take someone’s code and redefine it, improve someone’s app, build an idea from scratch, improve the UI, integrate with others, and many more solutions.
- Universal improvement. The community from every country makes DeFi an ever-changing and ever-developing structure. DeFi redefines the rules and brings them to a new level of comfort and peace of mind.
- Low fees for transactions. Forget about overpaying for a house 40% of the initial price, pay less than 1% in DeFi, and get your own place of dreams.
- Access to financial operations even if they are prohibited. For example, a citizen of Syria cannot officially pay for anything in US dollars. Yet with DeFi, they can pay for a house in the US via some Dapp by simply having an internet-supplied phone.
- Lack of currency implanting. DeFi offers a number of cryptocurrency alternatives and does not make any user select any particular one.
- Peace of mind. ETH is a relatively stable cryptocurrency and it is much more reliable than many fiat currencies used by countries.
- The speed of operation. Whether it is a purchase, a loan, or lending — the protocols get verified almost instantly by the miners saving the peers a lot of time on the long-lasting verification and decision-making procedures of traditional banks.
- Passive income options. There are Dapps like Compound and Dharma that offer high-interest “savings accounts” (around 4% monthly interest if compared to the bank’s 0.15% at most). Other apps allow you to invest some money for interest at the end of the month.
Although DeFi has thrilling benefits, there are still a few risks and user needs to be even more attentive to the downsides:
- Multiple security weak spots.
- The data feed is centralized in DeFi.
- Risk should become your best friend and enemy with decentralized finance and apps. Knowledge is yet another characteristic that might turn some people away.
- Constant monitoring is a must for any financial matter.
- Admin keys also pose some concern in the community since de-facto they would guarantee that admins have access to the users’ tokens.
- Centralization within decentralized finance is omnipresent and has no solution as of today. Smaller loan amounts are a thing with DeFi. While anyone who has some collateral in DeFi can get a loan, its size would be smaller if compared to the FinTech offers on the table.
DeFi is definitely the future. And despite the threats listed above, even the critics (Vitalik Buterin) say that “Plenty of responsible DeFi projects have survived a long time without getting attacked. It’s definitely not an inherent property in DeFi itself, and there is a way to do it responsibly”.
Yes, there are risks, yes there are gains, and yes it develops fast. So if you doubt whether the crypto world and DeFi solutions are your cup of tea, start small and buy very little ETH to make a test drive.
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