DeFi is a type of finance that is becoming more popular. It uses blockchain technology to create a new way of doing business. Let’s explore the Pros and Cons of this different kind of economic system.
Advantages of DeFi over TradFi and FinTech
DeFi is a type of financial system that allows you to use financial services like remittances, loans, and payments without having to ask permission from anyone. This is different from traditional financial institutions, where you need permission and often have to provide personal information. With DeFi, all you need is an internet connection, a crypto wallet, and a smartphone or computer.
DeFi is especially helpful for people who have been banned or limited by the traditional financial system. For example, people in countries with capital controls or in situations where their finances have been restricted can use DeFi to send and receive payments, get loans, and earn interest on their crypto holdings.
In DeFi, you can also borrow and lend money without going through a bank. You can use your crypto as collateral to get a loan, which is paid to you in stablecoins that can be exchanged for fiat currency. You can also lend out your crypto to earn interest, acting as a bank for others. These interest rates are often higher than those offered by traditional savings accounts.
Finally, you can trade your crypto for other cryptocurrencies and stablecoins using a decentralized exchange (DEX), without having to ask permission from anyone. This is different from traditional financial apps like Robinhood, which can restrict your ability to buy certain assets.
To repeat some of the pros mentioned earlier, DeFi usually offers financial deals and arrangements that are speedy, inexpensive, don’t require permission, don’t need trust between parties, are more confidential (anonymous), and can’t be censored.
Helping the Unbanked — and Unbanking the Banked
The Disadvantages of DeFi
Determine if DeFi is Right for You
- DeFi allows for transactions that are permissionless, trustless, and censorship-resistant.
- DeFi provides online financial privacy.
- DeFi transactions and processes are usually faster and cheaper.
- DeFi offers financial services to the unbanked.
- DeFi can be an alternative way for bank to manage their finances.
- DeFi options can be more difficult to use due to poor UI/UX and/or the need for crypto knowledge.
- Losing funds due to accidentally misdirected transactions and unrecoverable crypto wallets is possible.
- DeFi protocols have been exploited by hackers who have stolen large amounts of crypto, which can result in the loss of your funds.