The concept of cryptocurrency is still fairly new to an average person. Within the last few years, cryptocurrencies have become the talk of the town. Still, people are not sure what to make of this trend.
They are introduced with a new trading system and most of them are still trying to figure out if Crypto-currency investment is their cup of tea. The reason is the varied information being circulated from time to time. However, they know a big change is coming and they want to be a part of it.
If you want to get familiar with the benefits of decentralized finance this article is for you. So without further ado, let’s get into the details.
What Is Decentralized Finance?
The concept of the cryptocurrency market and decentralize finance cannot be explained in a sentence or two. DeFi or decentralized finance is the trading system that allows users to trade, lend and borrow cryptocurrencies including Ethereum and the famous, Bitcoin.
This tentative form of finance is independent of central financial intermediaries. It relies on smart blockchain-based contracts. This system is designed to eliminate the need for banks and brokerages.
Benefits of Decentralized Finance:
The decentralized financial system is a pragmatic intervention. It is not a redundant theoretical concept without any practical application. It has various real-world advantages people have yet to get familiar with. Some of these advantages include:
- Elimination Of Human Error And Mismanagement:
The cause of the majority of the financial crises is mismanagement. It is the consequence of poor decisions made by the in-charge of monetary and financial decisions within central banks or third-party intermediaries.
But with the advent of technology, financial crises caused by mismanagement and human error can be prevented. All thanks to smart contracts. The contracts are carefully written to eliminate human error from financial processes.
- Independent Operations:
DeFi system has eliminated the need for intermediaries to carry out a financial operation. The traditional financial system involves various mediators making a simple financial operation more complex than it should be.
With a decentralized financial system, you can avail financial services quickly and without any hassle. Various online trading services today rely on smart contracts. DeFi systems allow decentralized token exchange, eliminating the need for third parties.
- Easy Access To The Market:
Decentralized financial systems have made it easy to loan money. The traditional financial system required individuals to visit banks several times to get their loans approved. The entire process was extremely exhausting and time-consuming. DeFi has solved this problem by offering its users easy and quick access to the market.
Applying for a loan is very easy with DeFi. All you need is an internet connection. You can borrow money in a matter of clicks from anywhere you are and anytime you want.
- A Shock-Proof Financial System:
The current global crisis has revealed the vulnerability of the traditional financial systems. CeFi systems are not immune to economic shocks. These financial systems are based on direct human contact which makes them ineffective during the Coronavirus pandemic.
The traditional financial system has failed to survive the economic shock caused by the COVID-19 pandemic as it depends upon physical contact. Replacing the CeFi system with DeFi can bring the economy back to its feet.
- Automated Market Maker:
Automated Market Makers are also referred to as AMMs. They are very similar to decentralized exchanges or DEXes. However, DEX prices are set using order books. These books contain P2P orders.
On the contrary, AMM platforms price assets using a mathematical formula. This system allows individuals to trade against a token pool also referred to as a liquidity pool. Liquidity is provided in the form of tokens by Liquidity providers who earn a fee in exchange. This fee comes from the traders who interact with the pool.
- Easy To Lend And Borrow:
One of the most viable business options today is the crypto loan business. The DeFi system has simplified the process of lending money and earning interest. It provides borrowers easy access to capital. They can borrow capital without a credit score and can use their resources as collateral.
- No-Loss’ Lotteries Game:
No-loss lotteries games are a risk-free application of decentralized financial system. They are called no-risk games as the participants recover their total investment and the winner gets to keep the profit. The entire process takes place with the help of smart contracts. Intermediaries are not involved.
The decentralized financial system has numerous applications and DeFi space is expanding with time. However, just like any other thing in life, DeFi platforms and services are not completely risk-free. This system is still in its experimental phase. Some security issues need to be fixed.
However, this system is constantly evolving. The users are hopeful that the DeFi system will be improved and widely used in a matter of time.