Advantages Of Decentralized Finance Over Traditional Finance
The exponential growth in decentralized digital currency (cryptocurrency) in the past decade has posed revolutionary development features or products in the space economy.
- What Is Blockchain Technology?
- What Is Traditional Banking/Finance?
- What Is DeFi?
- Advantages Of DeFi Over Traditional Finance
DeFi was proposed to be a threat to traditional banking, and it has been showcasing its true concept as it was planned since the inception of the new financial revolution. Hence, there has been a variety of strong debates on the topic “Advantages of Decentralized Banking (also known as DeFi) Over Traditional Banking”
However, we will discuss the advantages of a decentralized, open-source remittance system over traditional banking in this article. Before I proceed, it's crucial to understand the concept of the technology that powers DeFi, which is Blockchain Technology.
What Is Blockchain Technology?
Blockchain is a conjunction of the two words “Block” and “Chain”, which technically has their meaning. The Block is information of data and transactions while the chain is what connects these data which then form a Blockchain.
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Basically, blockchain is a distributed and decentralized ledger that's used to record data and information in a way that cannot be duplicated or counterfeit and also without the need for central authority or entities, it is open to everyone in the network and every data and information recorded is irreversible due to its immutability feature.
What Is Traditional Banking/finance?
Traditional banking is the banking method that has been used in the past decade, whereby you go to the bank to withdraw or deposit money or partake in other financial transactions like borrowing and lending.
If you want to request a loan, you will have to go to the bank, fill out some necessary forms which include your identity, and also provide collateral to determine your loan score. The bank is the intermediary between you, “borrower” and the “lender”.
What Is Decentralized Finance (DeFi)?
Decentralized Finance – DeFi is a financial protocol that was built and developed on the blockchain, to disrupt the traditional banking system by eliminating the need for central authorities to execute or manage a financial transaction. Instead, intermediaries like the central bank are replaced by smart contract codes.
There has been a strong indication of interest in DeFi as it allows anyone across the globe to access financial services, such as lending, borrowing, etc, seamlessly
Also read: What Is CryptoCurrency And How Does It Work?
Advantages Of Decentralized Finance Over Traditional Banking
DeFi has been gaining traction and going mainstream, it's being commonly placed above traditional finance. Hence, there must be an advantage it proffers that the traditional finance sector lack, let's look into some advantages of this decentralized, open network remittance system over traditional banking.
- Transparency And Permissionless
As it was previously discussed, DeFi enables transparency in the network whereby every transaction is recorded on the distributed ledger, which is open to everyone to see how the transactions are being processed without seeking permission from anyone whatsoever. In contrast to this, traditional bank transactions were held in the central authority's custody, which means only the central authority can see the transactions and participants can see the record of the transaction if and only they were granted permission to.
- No Entry Barrier
There were a significant number of people that are “unbank” due to the unavailability of requirements to start using the traditional banking system. Most people are also finding it difficult to participate in financial transactions because of geographical barriers, a must to license a license and authorization, and a very strict rule to access the financial system.
Decentralized finance allows anyone to participate in financial transactions irrespective of their financial status and location, with just crypto assets without the need to use their physical asset or landed property as collateral.
In traditional banking, before you can start participating in any financial transactions, you are required to go through paperwork by filling your full identity and even family, but decentralized finance allows you to participate in financial transactions anonymously, without giving out your data.
- Trustless, No intermediaries
When you participate in any financial transactions in the traditional banking sector; a request for a loan is a good example. The middlemen are the central authority that manages the transaction and your trust is solely on them, they are the ones that serve as the escrow between you and the lender.
In contrast, Decentralized Finance enables the automatic execution of transactions without the need to trust anyone. Instead, it is executed by a smart contract (a line of code deployed on a protocol that sends transactions automatically to the blockchain) when a certain condition is met between two participants.
Related Topic: Centralized and Decentralized Cryptocurrency Exchanges: Pros & Cons
In conclusion, the Decentralized Finance concept is to utilize blockchain technology to disrupt the traditional banking system by enhancing privacy and permissionless financial transactions.
Hence, it has grown significantly since its inception despite that it's still considered an infancy industry.