Advantage and Disadvantage of DEFI
What is DeFi?
DeFi is the term used to refer to financial services that are based on block chains (blockchain). It could be translated as Decentralized Finance and is considered a growing sector that comes to integrate with traditional financial services.
How do DeFi work?
To understand how DeFi works, it is necessary to understand the figure of smart contracts and decentralized applications.
A smart contract is a contract made on the blockchain based on a predetermined schedule and that is self-executing. What it does is enable the possibility of carrying out specific operations and transactions that respond, in a decentralized manner, to certain requests.
For example, we can program a smart contract so that a cryptocurrency is activated by a certain stimulus, a price variation, a date, etc.
What the smart contract avoids is brokering . Another example, if a DeFi loan is to be requested, the Smart Contract will execute the order when activated, recording the data permanently (and privately) on the blockchain.
This contributes to the transparency of operations, since they will not depend on intermediaries: blockchains are built under the governance of multiple users that guarantee said transparency and anonymity.
How DeFi is different from traditional finance.
There are many differences between decentralized and conventional finance . The main one would be the simplification of the access processes for the end customer: in conventional finance it will generally be necessary to provide other complementary products such as bank accounts, etc.
In decentralized finance, the processes are simplified, defi development service they are carried out through the Internet and, in many cases, they can even be executed without being banked (banks do not intervene).
The other important difference is that, being based on open source, decentralized finance has a much higher interoperability and connection capacity than conventional finance, generally limited to the products and services of the entity that offers them.
What can DeFi be applied to?
There is an enormous (developing) number of DeFi applications and administrations . It is a growing sector within the Fintech label. For example:
Cryptocurrency decentralized loans: through platforms that connect lenders with people seeking financing. This association is made through savvy contracts without the utilization of delegates.
Decentralized Exchange Platforms (DEX) – They are one of the best examples of decentralization. They are dedicated to the exchange of cryptocurrencies in which there are no intermediaries since defi smart contracts development are what facilitate the P2P function.
Predictive platforms : they are decentralized predictive markets in which different types of speculation and information trading are carried out. In this case, also without the use of intermediaries.
DeFi Advantages and Disadvantages
The main advantages of DeFi are:
- They eliminate intermediations facilitating faster and safer operations.
- They offer greater transparency as collective governance is much more effective than centralization.
- It lowers costs by eliminating the figure of intermediation and many verification processes that are carried out automatically.
The disadvantages of DeFi
- Danger of technical errors : Errors in the coding of a smart contract can cause serious problems with its performance.
- Exposure to fraud : as it is a new and still little-known model, it has a high exposure to possible fraud.
- Governance problems : collective governance, although it is considered a benefit, misused can also generate problems of control attempts or similar.
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