Decentralized Finance (DeFi) vs Centralized Finance (CeFi).
Decentralized finance, also known as DeFi, is a new way of managing financial transactions using cryptocurrency and blockchain technology. DeFi intends to democratize finance by substituting centralized institutions with peer-to-peer transactions that can provide the same services as conventional banks.
DeFi is a new form of banking and financial services based on peer-to-peer payments made possible by blockchain technology. DeFi enables “trustless” banking bypassing traditional financial intermediaries such as banks and brokers.
See also: Ethereum May Transition To Proof Of Stake In August.
Investors Are The New Financial Institution
DeFi enables investors to “become the bank” by providing them with opportunities to lend money through peer-to-peer transactions and earn higher returns than traditional bank accounts.
Additionally, investors can quickly send funds anywhere in the world, and they can access their funds via digital wallets without incurring traditional banking fees.
Comparing DeFi vs CeFi
One of the best ways to appreciate DeFi is to comprehend the challenges faced by the traditional system (CeFi). Some of them include:
- A significant part of the population in most countries remains unbanked.
- Your personal information is a hidden cost of financial services.
- Governments and centralized institutions can close your accounts at will.
- Business hours are frequently constrained to specific time zones.
- Due to human processes, money transfers can take days.
- Bank fees are typically expensive.
Know your customer (KYC) refers to the procedures that financial institutions use to confirm a client’s identity and legitimacy before conducting business with them. The traditional banking sector (also known as CeFi) relies on KYC. In short, a customer must provide evidence that they are who they claim to be.
If you wish to borrow money from a bank, a credit check, proof of identity, and income verification are required.
With DeFi, however, customers can often remain anonymous and conceal their personal information and identity. Typically, you only require digital assets.
Instead of going through financial institutions, participants in DeFi enter into a “smart contract,” which is a computer code that ensures all parties fulfill their obligations.
“By eliminating intermediaries, DeFi promotes a fluid, global financial system accessible to everyone, without any barriers,” thereby democratizing the financial system.
