Decentralized Finance
The goal of DeFi is to become a complete alternative for the traditional finance. What are some advantages of DeFi compared to the centralized financial services?
1.The change of credit relationship: Since DeFi protocols rely on the blockchain, DeFi financial services can be highly transparent and tamper-proof. This allows people to trade directly with one another without the help of trusted third parties such as banks.
2.Low transaction costs: As financial transactions occur in a peer-to-peer mechanism, transaction costs is significantly reduced in DeFi. Traditionally, transactions were and costly due to the intermediary fee imposed by banks. But in the DeFi ecosystem, people are free from most of the fees caused by intermediary service.
3. Efficiency: DeFi improves the efficiency in financial industry. Financial institutions have been playing a vital role in the traditional finance industry. High commission fees and slow transaction process were two main problems in centralized finance. The DeFi service is cheaper and faster because it operates based on Smart Contracts and cryptocurrencies.
Traditionally, it took more than 3 days to receive a secured loan or an overseas remittance in CeFi, not to mention the numerous documents required for the service. On the contrary, the DeFi service only requires depositing the collateral in the loan smart contract, and then the loan is made immediately. As long as the recipient's wallet address is known, the money can be sent within 10 minutes.
In light of these advantages, the value of the DeFi market is surging. As shown in the graph below, The Total Locked Value (TVL) in DeFi Market has reached $11 billion from 600 million in less than a year.
Although the decentralized finance solves many problems existing in the financial industry, it has some limitations.
Firstly, it is hard for DeFi to take part in the traditional financial industry, especially the investment industry. The investment industry is the biggest trappings of the whole financial industry, and it is difficult for DeFi projects to enroll in the investment industry because of complex rights and obligation issues between parties involved in security transactions. Since security tokens can avoid legal restrictions, there are serious legal risks. Investors’ reluctance in taking legal risks hinders DeFi from engaging in international revenue securities.
Secondly, DeFi projects failed to attract new capital inflow; most DeFi projects could not provide a strong investment factor to investors. People outside the DeFi industry did not consider DeFi projects as the primary investment target. This is because the projects were limited to the DeFi ecosystem itself.
Lastly, the fluctuation of market price and interest rates have been the major concern for investors. The failure in controlling interests and distribution could cause a disastrous effect on investors.
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