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Is decentralized finance, also known as DeFi, the way of the future? This question is open for debate, but there is an argument highlighting its importance and influence in the broader financial sector. DeFi has made significant strides, from the developed technologies to the number of people participating in this economy. It is hard to disagree that DeFi will continue to grow and contend with the conventional banking system.
What is defi? DeFi is an emerging financial technology that functions on a secure and distributed public ledger, otherwise known as a blockchain. DeFi uses cryptocurrencies. This system is popular because it removes the intermediaries from day-to-day financial transactions, be it money or financial services.
Some may dispute its necessity since the world already has plenty of banking options. Other critics point to how DeFi is too intricate for the average person who only wants to access their cash. However, DeFi is becoming mainstream in numerous ways, including the DeFi app, the DeFi platform, and the DeFi infrastructure. A laundry list of useful goods and services is now accessible to the everyday person.
Here are five reasons why DeFi is important and why people need it:
1. Transparency
In the conventional banking system, it is hard to access your personal data. You may not understand where your information is being used. There is also a lack of clarity about where your deposits go.
DeFi promotes transparency thanks to blockchain technology. The smart contract code allows users to inspect and scrutinize the data, gathering valuable information efficiently. As such, you can understand your finances better under this system. Governance, transparency, and security are the chief components of DeFi.
2. Asset Control
Today, financial institutions can loan out your money to other clients, known as fractional reserve banking. This is part of the reason why you receive interest on your deposits. However, it also diminishes your control over your assets.
Since DeFi eliminates intermediaries from financial services, you have full access to your assets without barriers to entry. It also removes bureaucratic restrictions. For example, you won’t have to sign endless forms before withdrawing all of your cash from the account.
3. Openness
One of the key benefits of DeFi is the treasure trove of financial services and apps available. Some are hosted on a single DeFi platform, while others are on different outlets. Whatever the case, DeFi has plenty of tools to utilize, from exchanges to prediction markets to insurance to stablecoins.
What’s more, DeFi is not bound to borders. Someone in El Salvador can engage in P2P transactions with an individual in Belgium. You only need three things: an internet connection, a crypto wallet, and a computer or mobile device.
4. Competition
DeFi is a crucial development in the world of finance because it threatens the monopolistic power structure on Wall Street. It threatens the foundation of Morgan Stanley or the Royal Bank of Canada. In other words, DeFi manufactures much-needed competition to keep the big banks on their toes. It spurs innovation in an industry that hasn’t evolved as rapidly before the emergence of DeFi.
With smart money eventually taking over, DeFi will only become more sophisticated in the future. It could emerge as a genuine threat to the big banks. DeFi is already adopting or replicating many of the same products and services in the financial system. It is a worthy alternative to the traditional banking system.
Experts believe that centralized finance will take many of the attributes of DeFi and integrate these functions into its system. Whether this will be a successful model remains to be seen. Nonetheless, DeFi will continue to blend some of the features from CeFi into its world. The systems will experience ongoing improvements due to the millions of people who partake in the DeFi society.
5. Maturity
Right now, many aspects can make DeFi seem too good to be true. The reality is that the current correction unfolding is healthy for the market. The popularity skyrocketed too much and too fast, allowing the dumb money to flood the industry.
“DeFi is growing so fast and the yields are so high that opportunities can feel too good to be true. When in doubt, trust your gut or look for more objective members of the community with the technical expertise to thoroughly review the code,” John Wu, president of Ava Labs, a team supporting development of DeFi applications on the Avalanche blockchain, told CNBC last year.
Do people need decentralized finance? Will it become an integral part of the financial sector’s future? The answer to both questions is an astounding yes. With DeFi, you have money in a digital wallet and can utilize the wide-ranging services in the ecosystem. DeFi has become an imperative industry, offering many unique benefits not available in traditional banking systems. Its prevalence in society will continue to grow in the future.
