The Importance of the DeFi System

With the change of Technology, we can have the better options at our hand in many cases. Whenever we have better option at our hand, we try to update ourself with the best option. Centralized or traditional finance has some limitations and with the help of decentralized finance we can come out from those problems. Decentralized finance is one kind of finance which has almost all the features of centralized finance but the functions of middle man is being eliminated.

Decentralized finance is not working like traditional financial system rather it is making the financial products available to ultimate users through public blockchain network and usable by its users directly without any help of traditional middle man. It's a system software used by the blockchain network where financing related activities can be done directly. As all other facilities of financing is available but in smarter way without central control that's why it expected that decentralized finance will take over the traditional finance in the distant future. Some importance of Decentralized Finance (DeFi) is stated below-

• No middleman:
  We know in case of Banking transactions and financing systems we need to incur loss due to the banking channel. Bank borrows money from us and landed at higher interest rate. But from the spread, they are giving us a few. That's the problem and this is common in all other traditional financial systems where intermediaries are common.

• Modification:
  As it is based on a specific blockchain Technology then it can be modified or updated according to the requirement. In financial World, it is important to adapt with the change of the system and policies. It is very possible due to blockchain technology to make any change in the system.

• Authority and control:
  In DeFi system, there is no specific authority to impose some law rules and regulations on the money asset. A system has been developed with the blockchain Technology and that's why the control of the asset is on the hand of its users or owners. In Centralized Finance, the trader or investors are the owner of the money but they don't have control over their money when they deposit their money in the financial markets.
  
  Source: Image by Elvis Tile from Pixabay

Flaws in centralized finance

What are the advantages I have discussed in previous question are the main disadvantages of the centralized finance (CeFi).

• Central authority and control over fund:
  Main feature of the centralized finance is the central authority who is issuing the money and have the control on the circulation of the money. According to their monetary policy they implement some policies to restrict or increase the flow of money circulation in the financial system. As the money is issued by the central authority and they are controlling the flow of the money then you can say that control and authority of the money is on the hand of a specific authority who is controlling the system.

• Risk:
  As the middleman is here, so it is not possible to get out of the risk. When someone is lending money to the bank he/she cannot be assured about his/her money back with interest. In the middle man part, there are always some risk involved in traditional financial system.

• Inflation and low return:
  As the inflation is not at our hand so the central authority should manage the inflation in case of money circulation and return calculation. But if the central authority failed to adjust the inflation with the interest, then it needs to be managed or adjusted by the investor that is another flaw of centralized finance. With the same time, we can have the experience of low return as middleman will charge it’s fee and after their profit they will distribute the profit to the depositors. There is a huge maintenance fee of a bank and other financial institution, and that is covered from the money or interest of depositors. Although the loan rate is high but still the depositors are not getting that much of money due to this middleman policy.
  
  Source: Image by PublicDomainPictures from Pixabay

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