Decentralized finance has become a common buzzword in the world of finance and blockchain. For those who don’t know what it is, we’ll explain. Decentralized finance or DeFi is a financial framework that uses blockchain technology, eliminating the need for centralized financial institutions and individuals like banks and brokers.
DeFi provides individuals the autonomy to function under their own watch. Users can connect and transfer assets and data without the need for a central server. Instead, people use emerging technology to conduct financial transactions. You can use peer-to-peer networks as long as you have an internet connection.
Possible Benefits of DeFi
At first glance, there are many obvious benefits of decentralized finance. For starters, it makes financial services more accessible to the average person. No matter where you are, you no longer need a centralized model to perform transactions! Most DeFi solutions use Ethereum, which is the second-largest blockchain technology and permissionless by nature.
DeFi also enables people to save the transaction fees that banks charge for their services. It also opens up avenues of peer-to-peer lending and borrowing for users without the need for intermediaries.
It also allows users to take full control of their finances. Moreover, the use of blockchain technology ensures transparency. Since the blocks are chained together, there can be no alteration. This nature and other security protocols make DeFi a largely safe financial ecosystem.
The Disadvantages of DeFi
However, it’s not all that simple. There are some challenges to using blockchain technology, which might render decentralized finance a dangerous choice for finance. There are some setbacks you should be prepared to experience by using DeFi.
Let’s take a look at some of the negative implications of decentralized finance.
The instability of the host blockchain could affect the DeFi project. For example, the Ethereum blockchain, which DeFi uses, is undergoing changes that could have serious implications for the users.
The immutability of DeFi transactions could make users more susceptible to financial loss. For example, if you made a transaction to the incorrect address, it would likely be irreversible. However, in the case of centralized finance, you can call up your bank to undo the faulty transaction.
Risk of Scam
DeFi is constantly at risk of faulty smart contracts. Hackers can try to manipulate weak coding to gain access to pilfer user funds. Hackers could exploit a vulnerability in the system, which can prove detrimental to the user.
Decentralized finance is gradually gaining momentum. It has its pros and cons, so the decision to use it rests on your situation. While DeFi provides greater accessibility, permissionless financial transactions, and greater financial privacy, it may be at risk of fraud and hacks. Gaining more cryptocurrency and blockchain technology knowledge will help you make an informed decision.