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The idea of decentralized finance was born around 2017, a few years after the launch of the Ethereum blockchain. Since then, the DeFi space has increasingly attracted the attention of many different key opinion leaders, influencers, and investors.
The general idea is to decentralize financial activities and give financial control to individuals. DeFi has reshaped the world of finance, and because of this, many analysts and participants in finance see the network as the future.
Nearly instant and secure transactions
The room goes beyond traditional norms by offering fast and secure transaction options. Traditional transaction networks always lack speed, convenience and security.
A large transaction throughput always requires several visits to the bank and a lot of paperwork. Banking institutions are highly centralized – and hacking the institutions could easily lead to loss of funds for all accounts. Even highly reputable financial institutions are vulnerable to such hacks.
Decentralized finance is a transparent and very secure payment solution. It decentralizes services and makes investors’ wealth safer. Completing transactions on platforms using the technology is convenient for everyone – with no paperwork required.
See also: How blockchain and cryptocurrency can revolutionize businesses
Easier borrowing and lending
Decentralized financial networks streamline the borrowing and lending process. Traditionally, borrowing often takes a long time. The banks check your creditworthiness before lending and require collateral for property, plant and equipment.
In DeFi, things are pretty simple for everyone. The only thing needed is collateral, which could be another crypto asset.
Decentralized finance goes beyond traditional norms by eliminating intermediaries in lending and borrowing. Therefore, you don’t have to deal with intermediaries like banks to get loans. Instead, you can get a loan directly from the lender.
The networks often use overcollateralization to ensure loan repayment. Here you deposit more collateral than the loan you want to take out. Hence, the lender is assured that the funds will be repaid.
Cross-communication and the possibility to exchange assets
The traditional financial space offers a degree of interoperability. For example, tools like Swift help connect one banking institution to another.
However, DeFi offers the highest level of interoperability across blockchains and between two different financial worlds (crypto and traditional). At the moment, some projects are already unlocking decentralization in fiat systems in a variety of ways, including;
- Trade traditional financial assets in DeFi as synthetic assets.
- Some platforms offer peer-to-peer payment options.
- NFTs are already reforming the traditional payment systems used in the music industry for royalties and others.
Cross-communication is essential to facilitate the conversion of a DeFi or crypto token into fiat (and vice versa).
Earn Passive Income
One of the biggest benefits of DeFi is its ability to actually generate returns. Unlike traditional financing, the space offers many options for the average investor. Among the yield options: Staking, Yield Farming, Liquidity Mining, Gaming for Earnings and Trading.
Related: How to Make Smart Crypto Investing Decisions Using Data Analytics
honesty and trust
Dishonesty is a prevalent attribute of the traditional financial system. During the 2008 financial crisis, banking institutions were corrupt with the mortgages they offered, contributing to the recession.
DeFi offers more honesty, transparency and trust. Its applications are based on blockchains. All transactions are public and permanent for future review. Anyone can view and audit blockchain and DeFi data.
Improving customer service and availability
Most banks work five days a week, eight hours a day. Therefore, it can be inconvenient when you need to transfer cash urgently, especially on a weekend.
No third-party approvals are required within the DeFi space. The network works 24/7, which means you can make quick transactions whenever you need to.
Availability and easy access are key. In 2017, there were 1.7 billion unbanked adults as traditional finance failed to streamline access for all. DeFi makes financial services accessible to all to remit the unbanked.
There are only two requirements to access DeFi services – the internet and a computing device. These low requirements make access to the fintech platforms relatively easy for everyone.
Also See: Crypto vs. Banking: Which is the Better Choice?
Is DeFi the future of wealth management?
The failure of banking institutions to bank with over 1 billion people is mainly due to accessibility, security and reliability issues. However, DeFi is very accessible, secure and reliable for all parties involved.
Unlike traditional financial institutions, DeFi also allows you to hold custody of your financial assets. This is a very modern and decentralized approach. DeFi technology is the future as it offers solutions to traditional financial problems.