A great way to better understand how decentralized finance differs from centralized finance, is by using ledgers as an example. We now know that a ledger is a synchronized database shared among a network of systems. This is how DeFi achieves decentralization, but what about centralized finance? With centralized finance, rather than a ledger being distributed among a network of systems across the globe. A centralized ledger is instead distributed among a network of systems that exist only within a certain location. For example, think of a local bank, in order to access the information to your bank account. You must go to the bank for the information. This ledger exists in one central location, making it a centralized ledger.
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Benefits of DeFi
Many individuals are attracted to the world of DeFi due to the fact that it offers better protection of their money. This protection is provided in a variety of ways, most importantly, DeFi is not regulated by a specific country. This is a controversial subject, however less government regulation means DeFi users can avoid things such as taxes. As long as the crypto in their wallet isn’t converted into fiat currency. Not only this, but crypto is widely viewed as an investment, which means converting money into crypto could potentially yield profits. This is one of the major reasons so many people are beginning to pay attention to crypto and the world of decentralized finance.
Drawbacks of DeFi
Although DeFi is appealing for a variety of reasons, some concerns over the new technology still exist. For example, it is widely accepted that the crypto market can be extremely volatile. With major price fluctuations, many individuals worry they could end up losing money with DeFi. Although this is possible, generally speaking, the crypto market continues to increase in value. Another major drawback of DeFi is how much technology an individual needs in order to send or receive crypto. This can become a major problem for third world countries that lack the infrastructure necessary to shift towards DeFi.
DeFi began from questionable origins, many DeFi experts believe cryptocurrencies such as Bitcoin helped enable crime. This is due to the fact that cryptocurrency is almost impossible to trace. Naturally this attracted individuals with criminal intentions. However as DeFi becomes more mainstream, it is building itself the reputation of being a reliable way to store money and perform transactions.
How Secure is DeFi?
Before investors dump their hard earned money into DeFi, many are curious as to just how secure this investment is. The answer is… very secure, for a variety of reasons. First, the potential to counterfeit cryptocurrency is almost zero, which is a safer bet than traditional fiat currency. The reason for this is again because of blockchain. The ledger would simply not be verified by every system on the network if somebody attempted to use a ‘fake’ ledger. Not only this, but DeFi wallets are built with security in mind. If you need an idea of just how secure DeFi wallets are, think back to the man who forgot the password to his wallet. Without his password, literally nobody could access the crypto it was holding. In fact not even a computer wizard would be able to crack into a crypto wallet without the required credentials.
The Risks of DeFi
Since DeFi and crypto go hand in hand, they also share many of the same risks. One of the biggest risks associated with DeFi, is the potential for money to be lost. This is one of the biggest challenges faced, not only by DeFi, but by the crypto market as a whole. If crypto and DeFi can truly act as better protection for investments, the potential to lose money must be significantly decreased. It is likely that as the popularity of crypto continues to increase, we could see cryptocurrencies such as Ether and Bitcoin hold a more stable value.
One potential risk of DeFi is for it to gain a criminal reputation, which could result in governments further banning this emerging technology. Bitcoin is widely accepted to have questionable origins. These origins consisted of criminals performing transactions which allowed them to remain hidden from governments. Bitcoin also introduced potential money laundering issues, which do not help to support the future of crypto. Although it appears Bitcoin has recovered from this poor reputation, the risk is still there to a degree.
Should We Use DeFi?
The list of use cases for DeFi continues to grow every single day. For investors, it offers the potential to profit exponentially. For concerned money hoarders, it offers a new way to securely store money. Whether or not these are logical reasons to use DeFi, is definitely up for debate. However we should not shy away from such a new technology. With so many major companies investing millions of dollars into DeFi. It is clear that many people do indeed believe we should be using DeFi. Not only this, but many financial experts advise that people spread their money out among a variety of investments. Converting fiat money to crypto offers another layer of diversification, which wasn’t available to previous generations.
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