DeFi is a continually growing sector within finance. We break down the positives and negatives of this alternative blockchain-based economic ecosystem.
A portmanteau of “decentralized” and “finance,” DeFi has become a common term within the world of blockchain and web3. Bitcoin and the alternative blockchains that succeeded it aim to decentralize currency (via cryptocurrency). DeFi is aiming to go beyond decentralizing mere currency by doing the same for borrowing, lending, trading, remittances, and other services customarily found in the traditional finance (TradFi) realm of credit unions, banks, and other legacy institutions.
Not to be confused with financial technology (FinTech) apps (Venmo, Revolut, Paypal, Robinhood) that are more closely related to TradFi than DeFi, decentralized apps (dApps) take these same services and decentralize them via blockchain protocols. We’ll be focusing on decentralization (the “De” in “DeFi”) as this is the core distinction between these financial worlds. First, let’s take a look at some of DeFi’s benefits.
Advantages of DeFi over TradFi and FinTech
For many, a key advantage of DeFi is that it is permissionless; this allows you to engage with DeFi without having to ask for permission to send a remittance, get a loan, or send an online payment. With a bank or the FinTech apps mentioned above, you need permission from them to use or access their services. Depending on the needs you have, you may have to provide personal information, go through rigorous Know-Your-Customer (KYC) procedures, or provide evidence that your finances and credit history can satisfy the requirements to receive a loan.
On the contrary, nearly anyone can access DeFi alternatives to these services with only an internet connection, a crypto wallet, and a smartphone (or computer). This allows you to send permissionless payments via a variety of blockchain protocols to anyone in the world. These payments can be big or small
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