How The Benefits Of DeFi Can Completely Alter The Financial System
It has become clear that the world needs decentralized finance (DeFi) and that it represents the natural evolution of the financial system, but what exactly are the benefits of it and the technology that it uses? Why should finance be decentralized and what does decentralization offer that the older, centralized banking system doesn’t?
In order to answer these questions, this article will describe in detail some of the most commonly referenced benefits that proponents of DeFi use when speaking about its advantages.
DeFi’s Benefits
Although there are many benefits of DeFi, here are some of the most commonly referenced ones. We will cover key DeFi benefits including:
- The fact that DeFi offers better returns
- DeFi makes financial transactions available to anyone
- There’s no need for intermediaries with DeFi
- There’s no single point of failure with DeFi
- DeFi offers greater transparency
- DeFi is immutable
- DeFi is borderless and
- DeFi focuses on innovation
DeFi Offers Better Returns
The average bank interest rate in 2019 in the U.S. for checking accounts was 0.06% and the average savings account interest rate was 0.09%. The average money market interest rate was 0.16%. Money market accounts typically earn the highest rates.
If you hold your money in a DeFi protocol like Yearn.finance vaults, you can receive a much higher APY. At the time of writing you could earn 37% more in weekly fees/CRV rewards by staking your crypto with yearn.finance. Yearn users can also earn 11.4% APY on stablecoins. As you can see, the return from a DeFi protocol on average far exceeds what you can earn at a bank or another traditional financial institution.
Making Financial Transactions Available To Anyone
Since DeFi transactions are possible with just a cell phone and internet connection and consumers don’t always have to provide their personal information in order to complete DeFi transactions on a blockchain, DeFi has the ability to be available to anyone.
Unfortunately, there are 1.7 billion people globally without access to financial services because they don’t qualify for banking services. Reasons for this can include a lack of access to legal paperwork in the country where they reside, unstable governments undergoing a financial crisis and more. These people can finally gain access to the financial services they need to grow their wealth, which is why DeFi also has the potential to lift millions of people out of poverty.
No Need For Intermediaries
In the traditional financial system, intermediaries like banks and bank personnel have been required in order to mediate any potential disputes and assist customers with various aspects of the transaction process, to assist them in procuring loans, etc. In decentralized finance applications, the code specifies resolutions of any possible dispute, and the users never lose control of their funds, as nobody else has access to them.
In the traditional financial system, intermediaries are involved in the handling and management of customers’ funds.
By eliminating intermediaries from the process, the costs associated with providing and using DeFi products is greatly reduced, and is overall less expensive than completing the same transactions through a traditional bank which must hire personnel and then charge extra fees to cover the cost of them.
No Single Point Of Failure
Due to the fact that DeFi services are deployed on blockchains, there is no single point of failure that can easily be exploited by hackers, and censorship is also more difficult. Blockchains spread data across thousands of nodes, making it impossible to find all of the data in one place. This adds an additional layer of protection to the data, and less incentive for robbers than a centralized database would provide.
Greater Transparency
Blockchain technology distributed ledgers contain all of the transactions that have occurred on the chain, making the transactions open to the public to inspect. This adds a level of transparency that doesn’t exist in the traditional finance world, where transaction histories are only visible to bank personnel and whoever was involved in each particular transaction.
Immutable
Blockchains are designed so that the records stored on them are unable to be changed, and doing so is almost impossible. This adds an additional layer of security to them and helps ensure that transaction histories are not altered by people wishing to change them for their own gain.
Borderless
In traditional finance, sending money or executing other transactions across borders can be expensive, and issues can arise if banks in different countries are not partnered with one another. This makes transacting across borders difficult for many low income people who may need to send remittances to family members in other countries. It also has the tendency to make transactions slow.
These same issues can complicate international business transactions, especially for smaller companies and startups that may not have the capital to cover the costs or enough employees to handle any issues that may arise when completing transactions.
Decentralized Finance is borderless since blockchains can be accessed by almost anyone, anywhere in the world, as long as they have an internet connection. Companies like Stellar are using DeFi and blockchain to make moving money across borders inexpensive, with transactions that take only a few seconds.
Focus On Innovation
DeFi focuses on innovation. The banking sector is rather slow at adapting or innovating to create better offers for their customers. Thanks to this focus on innovation, in 5–10 years, the products that make DeFi successful today will be even better. Banks, unless they adapt a more innovative approach, will likely offer about the same services and products that they offer today.
Mass Adoption Of DeFi And What It Represents
The benefits listed above are just some of the benefits available with decentralized finance. However, in order for the benefits to be experienced by as many people as possible, decentralized finance needs to reach mass adoption. The popularity of NFTs has accelerated the adoption and use of cryptocurrencies, and has placed a spotlight on the industry, but DeFi is still relatively unknown to many in the general population, meaning that most people are missing out on benefiting from it.
Through the invention of DeFi, a more open, secure, and inclusive financial system has been made possible.
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