Even though Defi is an appealing idea, it is important to know that not everything is improved by decentralization.
Before creating a valuable foundation of open financial products, it is essential to identify the most prevalent use case for the blockchain’s characteristics.
I explain how Defi differs from other financial systems in this article.
Traditional Finance vs. Defi (Decentralized Finance)
Since anyone can start using Defi services by creating a wallet as long as they have some cryptocurrency to invest in with no requirement for identity verification, it might be claimed that accessibility is the only distinction between Defi and traditional finance. Unlike the traditional financial system, which has requirements like Know Your Customer (KYC) checks.
The distinction between Defi and traditional finance is how much better Defi makes financial inclusion for the unbanked.
Additionally, Defi offers varieties of services that are not attainable through traditional finance. The ability to create cutting-edge items that utilize several platforms and let consumers develop various methods is one of Defi’s services.
Defi (Decentralized Finance) Vs. Cefi (Centralized Finance)
It’s good to know that, even in the crypto world, not all financial services are decentralized.
For instance, if you choose to invest through centralized exchanges like Gate.io and Binance, you frequently give up the security of your token to them. In this scenario, it implies that you need to trust the centralized organization you’re putting your funds with.
However, the majority of the services they provide are similar and are probably carried out using the same Defi platforms that you can access yourself.
CeFi helps you in navigating the regular intricacy of handling your Defi assets, and it might also provide some assurance regarding your funds.
Despite this, CeFi is still not less dangerous than Defi. Your needs and wants will differentiate everything. Giving up some of your control in CeFi provides you with stronger security and relieves you of the duties of managing your funds and transactions.
What differentiates Defi from Open Banking?
I’ll start by defining what open banking is to focus on this;
Open banking: What is it?
It is a banking system that makes use of an open Application Programming Interface (API) to enable third-party developers to establish secured access to financial data and services within the traditional financial institutions.
Fundamentally, it throws up the financial institutions to new products and services.
Defi aims at creating a unique financial system that is independent of the prevailing infrastructure.
For example, in open banking, the management of all the traditional instruments could be accessed in one application in a stable drawing of data from various banks and financial institutions.
Meanwhile, Defi could also allow the management of new financial instruments and other means of dealing with them.
Access to a more open financial system will be made possible by Defi’s focus on developing dependable financial services that are independent of traditional and political institutions. Additionally, it can stop global discrimination, financial monitoring, and prior censorship.
If Defi succeeds, power might be transferred from centralized institutions to the hands of individuals and the open-source community.
However, Defi’s ability to transform the financial system will completely depend on how widely it is adopted.
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