DeFi: Know the Basics, Its Advantages, and Disadvantages

People used to mistrust bitcoins because it is a decentralised currency. However, as bitcoins became more widespread, individuals preferred it compared to other choices like traditional currency.

These people understood the concept of DeFi, where there is no control from regulators on crypto as the investor becomes the sole owner. DeFi is also known as decentralised finance.

DeFi operates through blockchain technology that has revolutionised the traditional payment system into online transaction systems and payments.

Here are the benefits of DeFi:

Transparency

Decentralised finance is transparent in its operations and processes. Blockchain technology or a network of computers that work hand-in-hand does not allow invisibility in the online transactions of decentralised finance. DeFi provides users access to the public ledger that records information about activities and transactions in this network. It operates based on cryptographic principles of systematic verification of each transaction before storing it. Put simply, people will be notified if there are irregularities within the system.

Non-Regulated

DeFi is not regulated by higher authorities which makes it a desirable technology for people. Backed by blockchain technology, DeFi has unburdened agents and corporations because it has worked on data storage and server space issues.

New Application Development

Another reason people find it worthy of investing in DeFi is its ability to develop peer-to-peer network-based solutions. There is no need for a ‘middleman’ when completing these applications. In addition, DeFi also provides assurance of intelligent contracts that increases its trust ratings among its users. Online transactions such as borrowing and lending through this system are verified without any go-between.

Security

Blockchain technology uses highly advanced algorithms that are no match to other technologies. Its high security makes DeFi based transactions secure from manipulation. There is no central authority that can cause data changes with DeFi-based platforms.

Opportunity to Save

Decentralised finance has increased the sense of saving among people. Moreover, with the highly productive and high potential of DeFi saving products, users could store their funds in DeFi products and make a good amount of revenues by earning interest on them.

Currently, there are numerous saving products based on DeFi that are available in the market. In addition, users understand that the DeFi system can allow one to earn interest from engaging in lending products.

Currently, DeFi markets yield farming where investors lend their cryptocurrency to earn revenues through interest. To start trading various cryptocurrencies, rely on a beginner-friendly and regulated platform like the Yuan Pay App.

Tokenisation

Tokenisation emerged because of the blockchain ecosystem. This allows smart contract abilities that will enable the issuance of crypto tokens.

Crypto tokens operate as digital assets on a blockchain that has unique uses and features. Utility tokens for a specific app, security tokens, and real estate tokens are some examples of these tokens.

Tokens have different functions. Security tokens work as digital shares in specific apps, while real estate tokens provide fractional ownership of physical properties. Furthermore, tokenisation allows broader exposure to both digital and physical assets. Fiat currencies, digital currencies, gold, or oil are some of these assets.

On the other hand, the following are the disadvantages of DeFi:

Uncertainty

One of the main concerns with DeFi is that of uncertainty. A DeFi project would automatically inherit the instability of the blockchain that hosts it. Currently, there are significant changes that happen in the Ethereum blockchain. Therefore, there is a possibility of risks with the mistakes that transpired from PoW consensus to the new Eth 2.0 PoS System.

Liquidity Issues

One significant concern in DeFi based projects is liquidity. There is only around $12.5 billion total value locked in DeFi projects as of October 2020. Thus, this would make an investor find it challenging to trust the market compared to the traditional financial systems.

Shared Responsibility

Users might find the shared responsibility factor unattractive as DeFi projects will not shoulder the burden of responsibilities. DeFi does away with intermediaries, and it is the investors who will be responsible for their funds and assets.

Conclusion

Knowing the advantages and disadvantages of DeFi will allow a user to discern whether to proceed with investing with it.