Defi's market demand is increasingly prominent. Although monetary value related to DEFI cannot be compared with the traditional financial market, DEFI has made great progress. Decentralized finance has a significant impact on bank operation methods and has changed the entire financial ecosystem. For correct reasons, there are many different critical views on decentralized finance. In this article, the advantages and disadvantages of decentralized finance will be discussed.

What is centralized finance (CEFI)?

Central finance is the financial system you know. Look at your wallet. You may have a debit card extracted from your bank account. You may have a credit card, which is borrowed to you on behalf of the bank or other entities. There is physical cash, which is cast and supported by your national government. In addition to your wallet, you may also have a mortgage loan issued by the bank, a personal loan issued by the bank, or investing in stocks or bonds conducted through a brokerage company. These banks and brokerage companies interact with other greater institutions, such as your country's regulatory agencies or central banks ("Central" is the keywords here.)

As you can see, our financial system runs on a network composed of a powerful institution. They constitute what we call "CEFI" (CEFI). CEFI has promoted the vast majority of transactions -almost any time from one person to another. This gives institutions huge money and information power. Therefore, the world.

What is decentralized finance (DEFI)?

Decentralization Finance (DEFI) aims to create a financial service ecosystem outside the traditional system. As you know, this is a huge change in our current system, and there are many, many different ideas about how to achieve it. But there are several potential themes: no central authority, universal access, tolerance, and clear source code. To achieve these goals, the DEFI project is based on blockchain technology.

The advantages of decentralized finance (DEFI)

Holidays related to DEFI discussion pointed out the advantages and disadvantages of effective observation of DEFI. The DEFI movement aims to bring various benefits to customers and investors. Some of the significant advantages of Defi include eliminating intermediary agencies and centralized control.

In addition, its goal is to improve the accessibility of financial markets to institutional investors. At the same time, DEFI will also be committed to creating new investment opportunities to raise this concept to a new level. In order to achieve returns, the DEFI solution depends to a large extent on the basic characteristics of blockchain technology.

1. No license

The primary factor of defining decentralized financial identity is "decentralization". The advantages and disadvantages of decentralized finance depends to a large extent on the definition of concepts. Decentralization is one of the basic principles of blockchain, which helps reduce dependence on the company.

In addition, decentralized finance also eliminates the pressure of dependent institutions for supervision, data storage, server space and other factors. Blockchain networks can easily spread between all members by ensuring a specific transaction history, thereby successfully realizing all these aspects.

Differential methods are very helpful for the democratization of banks and finance. DEFI can ensure that everyone can simply and effectively obtain financial services. Defi discussions will also show that most Defi solutions are running on Ethereum. Ethereum is the second largest blockchain agreement, and its nature does not need to be licensed to ensure that it is essentially decentralized.

In addition, any individuals related to the development and use of DEFI applications should be able to easily access it. The exemption characteristics of the blockchain in DEFI applications can also be supported by the blockchain operating. Therefore, it can ensure flexible options to ensure different types of third -party integration.

At the same time, it is important to observe how the blockchain function that does not require licenses is not unique to Ethereum. Because Ethereum is the first choice for developing smart contracts, it is a reliable choice for building a DEFI application.

2. Non -degenerative

Consensus algorithms such as the effective use of cryptography and the workload certificate help the blockchain help the blockchain to achieve the actual invariance. Therefore, the advantages and disadvantages of decentralized finance have enabled the true benefit of financial invariance.

With the help of non -degeneration, it is almost impossible to manipulate any records on the blockchain network. In addition to the characteristics of decentralization, invariability also provides promising security guarantees. Interestingly, the uncharacteristic function of the blockchain ensures the integrity of the DEFI solution during financial transactions.

3. Transparency

Although non -degeneration is the basic requirement for security assurance in the field of DEFI, transparency is also one of the significant supplements of Defi professionals. Decentralization obviously requires better transparency. The distributed ledger contains information about all activities on the blockchain network.

The principle of cryptography of the blockchain also ensures that the information will be recorded only after verifying the authenticity. The advantages and disadvantages of DEFI show how customers benefit from the transparency of the DEFI application.

For example, the transparency of DEFI applications can improve due diligence. At the same time, DEFI applications can also help people identify and avoid possible financial fraud and bad business behaviors. Through the appropriate audit tracking, the DEFI application can easier to identify who has changed the transaction and when the time is changed. Therefore, there is almost nothing that can damage the integrity of the financial ecosystem.

4. Borrowing application

DEFI has also played an important role in promoting point -to -point lending solutions. This type of lending solution provides considerable benefits for end users. The advantages and disadvantages of decentralized finance are obviously reflected in the password verification mechanism.

At the same time, they also provide a guarantee of smart contract integration. The convenience of such functions ensures that intermediaries such as banks are eliminated, and these intermediaries are usually responsible for verifying the parties of the transaction. In addition, it is also used to verify processes related to borrowing transactions.

Therefore, DEFI can achieve a faster and easier verification process in borrowing applications. At the same time, DEFI also ensures the security of the opponent. DEFI's application in borrowing will also promote faster transaction settlement and better accessibility.

At present, lending applications are the most famous DEFI applications. One of the most famous examples of DEFI's advantages and disadvantages is Compound, although it focuses on advantages. It is a decentralized lending platform that allows a loan pool with a certain number of loan to provide encrypted assets.

The borrowing pool is available for others to borrow, and the lender will get part of the interest of the borrower to the interest of the borrowing pool. The interest rate earned by the loan depends to a large extent on their contribution to the capital pool. In addition, the liquidity of encrypted assets also plays a vital role in determining the Internet interest rate of the DEFI lending platform.

5. Savings application

The advantages and disadvantages of decentralized finance have also made DEFI savings products increasingly dominated as the focus of people's attention. People can also use DEFI to effectively manage their savings. Users can start making interest from their assets in the assets that they are locked in the borrowing agreement such as Compound. As a result, many DEFI savings applications have emerged in recent times.

This type of application provides the ability to insert various loan agreements to improve the ability of users to make interest. At this time, it is reasonable to mention "massive agriculture". Increase farming has always been one of the favorable aspects of the DEFI ecosystem, especially in showing how users transfer their idle encryption assets in various borrowing agreements to obtain better returns.

6. Atlantic

Any discussion on the advantages and disadvantages of DEFI, if it does not mention the advantages of the tokenization, it is incomplete. The tokenization is one of the significant themes that have recently appeared in the blockchain field. Ethereum supports powerful smart contract functions, thereby opening the road to issuing cryptocurrencies.

The encrypted tokens are basically used as digital assets on the blockchain, and they have different functions and uses. Some well -known token examples include the native practical tokens of specific DAPP, real estate tokens or securities tokens.

Activities can help you achieve different functions. Real estate tokens can help you realize part of the ownership of physical property. On the other hand, security token can also be effectively shared in specific applications. The most important thing is that standardization can also ensure better contact with other assets, including physical assets and digital assets.

These assets may include digital currency, legal currency, oil or gold. In an intelligent contract based on Ethereum, encrypted synthetic assets have token mortgages. Interestingly, Synthetix, one of the largest synthetic asset platforms, has now locked about $ 600 million in smart contracts.

Disadvantages of decentralized finance (DEFI)

Many important discussions currently focusing on decentralized finance are mainly focused on the advantages of Defi. However, it is important to have a neutral impression on the advantages and disadvantages of Defi in order to effectively estimate its potential. In fact, most of the problems and risks related to the DEFI project are mainly related to their related technologies. Blockchain challenges are usually the reason for exacerbating DEFI disadvantages. Here are some serious frustrations you may encounter when you adopt DEFI.

1. scalability

The DEFI project is undoubtedly suitable for the extensive people to achieve inclusive finance. However, the DEFI project has encountered huge difficulties from all angles in terms of scalability of the host blockchain. First, Defi transactions require incredible long -term confirmation.

At the same time, transactions on the DEFI protocol may become very expensive during congestion. For example, Ethereum can show the ability to deal with nearly 13 transactions per second, and Ethereum runs full load. Instead, DEFI's centralized transaction opponents can accommodate thousands of transactions during related periods.

2. Uncertainty

Personation of uncertainty also reflects the advantages and disadvantages of decentralized finance. If the blockchain of the host DEFI project is unstable, the project can automatically inherit the instability from the host blockchain. As of now, the Ethereum blockchain is undergoing various changes. For example, errors made during the transition from POW consensus to the new ETH 2.0 POS system may cause risks.

3. Lobricity issues

Lobricity is undoubtedly a key factor based on the DEFI project and blockchain protocol. As of October 2020, the total value of the DEFI project was more than $ 12.5 billion. Therefore, it is clear that the Defi market is not as large as the traditional financial system. Therefore, it may be difficult for you to trust a department that owns too many assets like a financial department.

4. Common responsibility

In all the advantages and disadvantages of Defi, the common responsibility factors have a negative impact on the user. The Defi project is not responsible for your mistakes. What they do is to cancel the intermediary, and users must be responsible for their own funds and assets. Therefore, DEFI space needs to prevent man -made mistakes.

The above content introduces the advantages and disadvantages of decentralized finance. The advantages and disadvantages of decentralized finance have always been the most valuable input of Defi value today. A fact can be clearly observed from the advantages and disadvantages of DEFI, that is, the benefit is greater than the disadvantages. Decentralized finance has become a promising darling that changes the benchmark of traditional financial services.