The uncertainty posed by the year 2020 has made investors explore beyond traditional investment options. The blockchain and cryptocurrency space have appeared to be quite attractive for investors. Moreover, the cryptocurrency industry seems to have recovered way faster than the traditional investment markets.
Decentralized Finance or DeFi is the one industry that has been booming this entire year. While the use cases of blockchain have been explored in the banking and finance domain, with DeFi, they have become even more relevant. Decentralized finance holds promise to bring transformation into the banking and financial system.
In this article, we are going to discuss how DeFi differs from centralized finance and what are the benefits of a decentralized financial ecosystem.
Centralized vs Decentralized Finance
A decentralized finance network allows anyone to access its tools irrespective of their citizenship, location, and so on. Centralized finance, on the other hand, allows only verified and credible individuals to participate. Not only the identities of participants are known, but the respective transactions can also be easily audited.
Likewise, in the question of centralized vs decentralized access control, DeFi and centralized finance differ with respect to their basic functionalities. A decentralized finance system allows wider access to financial products or services without any intermediary organizations. It promotes financial inclusion and allows the unbanked to get access to services like loans. Moreover, with DeFi, a user remains in control over their financial assets instead of a centralized institution like banks.
Decentralized finance incorporates dApps and smart contracts based on blockchain technology. DeFi eliminates limitations of geographical location and time of centralized systems as the financial ecosystem can be accessed through dApps from smartphones.