Most individuals are used to centralized financial institutions and never seek out alternatives. Yet, decentralized finance (DeFi) lets us in on a secret: we can take full control of our finances without third parties involved.
This article will cover the basics of DeFi, and explore the benefits of it as well as its shortcomings.
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Decentralized Finance For Dummies
In 2009, Bitcoin debuted. Since then, cryptocurrency has taken over the world. Without Bitcoin, we’d never see concepts like DeFi. Cryptocurrency didn’t fit into the traditional financial mold. So, decentralized finance took its place. It introduced new possibilities for cryptocurrency usage, including the usual financial services. DeFi has been mostly based on Ethereum, and the latter’s market dominance is about 20% as of March 2023.
So, how is it different from your mainstream bank? Instead of one central establishment taking control of the system, the masses power DeFi. The system is based on small contracts that power DApps and protocols. Nowadays, DeFi users can manage, save, invest, trade, and do more with their finances.
Pros of Decentralized Finance
Here are the benefits you can get from DeFi compared to traditional financial systems:
- Permissionless Engagement. DeFi is famous for its accessibility without third-party permissions. For example, when you want to get a loan from a bank, you’ll have to obtain permission to use its services. Through DeFi, you don’t have to provide personal information to send a payment, get a loan, borrow, or lend.
- Anonymous transactions. As mentioned above, there’s no need to provide personal information to engage in DeFi. That includes your legal name. You can make transactions without mentioning your name or using a pseudonym. Besides, your payments will go through faster and cheaper.
- Financial freedom. Many centralized financial institutions use various measures that restrict your freedom. DeFi, on the other hand, lets you use your assets without limits. That includes using services like JumpTask to earn cryptocurrency.
- Blockchain safety. We’ve already said that there’s no third party involved in your finances. Thanks to peer-to-peer technology, you don’t have to trust anyone with your assets. Indeed, you’re the only one responsible for transactions. The usage of blockchain makes all verified cryptocurrency transactions irreversible.
Before you indulge in a new ecosystem, learn more about it. Even DeFi has a few disadvantages, risks, and issues:
- Lack of crypto knowledge. Despite the inconvenience of traditional banking, DeFi hasn’t been adapted to general usage yet. Users must know how to handle crypto and tech to be in the decentralized niche. Otherwise, no dApp‘s as convenient as other financial apps.
- Transaction irreversibility. As much as this feature is impressive at ensuring crypto safety, it can also pose specific problems. Users have to be very careful when completing transactions. If you send money to the wrong address, no financial institution will be there to reverse the action.
- Lack of recovery options. Since you’re responsible for your financial actions, you’re also the one setting up recovery options. You can lose access to your assets if you don’t have a wallet backup. At the same time, losing access to a bank account is much more complex.
- Hackers. Unfortunately, using DeFi doesn’t guarantee your financial safety 100%. Hackers can find gaps and faults in a DeFi protocol to steal your crypto.
DeFi aims to create a safe and accessible financial space for all. Yet, there are both pros and cons to the new system. Ultimately, it’s your choice, depending on your personal, financial, and political stance.
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