What is DeFi Crypto?
Decentralized finance, or DeFi, employs innovative technology known as Blockchain to eliminate the need for central authorities or third-party intermediaries in financial transactions. DeFi transactions are possible with DeFi's automated smart contracts; these smart contracts execute financial transactions under specific conditions and cannot be interrupted by an administrator or central authority as traditional financial systems do. DeFi leverages Blockchain technology to take out central authorities in the financial system. DeFi opposes centralized financial services like our traditional banking system and other traditional financial institutions. DeFi lets participants use cryptocurrency and transact peer-to-peer automatedly with no central authority to provide most services that traditional banks offer. DeFi offers banking services like transfer of funds, borrowing, lending, trading assets, earning interest, buying insurance, etc. DeFi services are done in a decentralized way with no governing authority. DeFi services are faster, cheaper, transparent, incorruptible and less tedious, with new advantages and services being offered each day.
DeFi exchange does not involve any physical transactions. The entire operation is managed by smart contracts, which are automated programs built on blockchain networks. DeFi financing also provides an equitable and accessible financial system in which anyone, regardless of financial status, can participate. It makes use of a blockchain network to provide unbanked and underprivileged people with access to economic goods and services. The goal of DeFi is to create an anonymous decentralized open-source and transparent platform that will lead to transparent economic services. The decentralized financial industry offers services like lending, DeFi yield farming, cryptocurrency borrowing, asset holding, and other services.
Limitations of Centralized Finance (CeFi)
Centralized finance is the traditional financial system our banks use with a central authority governing our banking services. Centralized systems are significantly less risky than DeFi and have insurance as well as strict well-established policies and regulatory safeguards in place to ensure user account privacy and integrity.
From the standpoint of centralized systems, there is no technical knowledge required to log into your bank account or centralized money transfer apps like Western Union, Skrill, or Neteller. Customer service is provided by centralized platforms, whereas DeFi platforms do not. Regardless, there are a lot of limitations to centralized finance or banking systems.
Transaction fees are unavoidably higher in a Ce-fi due to the multiple financial intermediaries available. This is one of the primary reasons why millions of people around the world are moving to decentralized platforms. Most centralized finance providers may temporarily suspend your account due to a violation of some policies. Most exchanges, however, such as CoinEx, allow you to share your USDT, BTC and other cryptocurrencies at any time.
DeFi vs CeFi
DeFi lets you have total and complete control over your assets and own the key pair for your wallet. This key pair gives you complete control over your assets which isn’t the case for centralized systems due to governing central authorities. In centralized finance, central authorities work under policies structured by the government and they have the right to freeze your financial assets without your approval. In order to access DeFi services, users must use decentralized applications, also known as dApps, these apps are built on blockchain platforms.
Centralized Finance (CeFi) has more users as it’s our traditional and more dominant financial system and it has been around a lot longer compared to DeFi. CeFi has lower risk due to its less volatility and it’s backed up by the government, CeFi also has I insurance which makes it less risky compared to DeFi. CeFi guarantees the privacy and integrity of user accounts but this hasn’t always been the case as a lot of user data are hacked due to its security vulnerabilities like data breaches. Customer service is also one of the advantages of CeFi over DeFi.
On the other hand, one of the disadvantages of CeFi is the high fees given to the middlemen and central authorities for simple tasks done by DeFi efficiently such as the transfer of funds. There are charges implied in CeFi just for keeping your money in your account, SMS charges for banking notifications, and a lot more. Another disadvantage of CeFi is low-interest rates averaging well under 1%, which is ridiculous compared to interest rates in DeFi. The lengthy verification process is one of the disadvantages of CeFi, as this is a tedious process, and it demands a lot of trust as user privacy is in question here. CeFi which is our traditional financial industry is inaccessible to some who are known as the “unbanked” due to a lot of reasons, including privacy, ridiculous charges, trust, and illiteracy.
Features of DeFi
1. Transparency:
DeFi is built on blockchain technology, and this technology is permissionless and decentralized, each participant's profile is transparent, and transactions are recorded on immutable open transparent ledgers. User accounts are anonymous regardless of the feature of transparency. Every change on the blockchain is visible and thus increases its reliability due to transparency.
2. Immutability:
Immutability is one of DeFi's characteristics. CeFi databases are vulnerable to data breaches because they rely on trust in intermediary data companies to keep the database secure.
Blockchains keep their ledgers in a network that is decentralized and transparent. Every network node (computer) has a copy of the digital ledger. To add a transaction to the network, each node must verify its validity and confirm the transaction or data's legitimacy. If the majority of network participants agree that it is valid, it is added to the transaction ledger. This increases transparency and makes it impervious to corruption.
Once the transaction blocks are added to the ledger, no one can delete or edit them, making them immutable.
3. Non-Custodial:
Another advantage of DeFi is that users can maintain complete control over their assets and personal data. The use of web3 wallets like Metamask, Trust-Wallet, and other decentralized wallets allows users to interact with permissionless financial protocols and applications more efficiently without the aid of third parties or central authorities. With greater control over your personal data, DeFi can usher in a new era of customer-tailored financial services.
4. Security and Privacy:
Sha256 public key encryption is used to protect data security in DeFi. Every user has their own set of private and public keys. The private key is used to sign or authorize data, while the public key validates the signed or authorized data. As long as the user keeps the private key safe, the data will be secure. In DeFi, each user is anonymous, and each user can have multiple addresses. The anonymous address is rarely and hardly mapped to a real person, thus securing the user's privacy.
Conclusion
In conclusion, both DeFi and CeFi share the same goal. However, the methods by which these two financial systems achieve their goals differ. CeFi ensures finance security and fair trade on those finances. CeFi organizations offer customers customer support services that DeFi services do not. DeFi, on the other hand, wishes to make the space free of intrusion, trustless, permissionless, transparent, and thus reliable, and not governed by a central authority (decentralized).
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