DeFi, or decentralized finances, has overgrown rapidly in recent years, becoming an alternative to current financial systems and gaining relevance in the economic and financial sectors. Below, we will be able to learn more about DeFi and its more relevant advantages and disadvantages.
What is DeFi?
DeFi is short for Decentralized Finance, which refers to a group of financial applications designed by developers on the blockchain. With this ecosystem, they provide open-source products and financial services that allow users to control their assets from decentralized applications (DApps) and peer-to-peer (P2P), among others. It is essential to highlight that users audit all ecosystem operations without a central authority.
Advantages of DeFi
Transactions without intermediaries
Because DeFi is decentralized, it does not require any entity, agency, or intermediary in its transactions since its guidelines and business rules depend exclusively on smart contracts implemented in the blockchain network ecosystem, where such contracts are executed in an automated manner.
Greater trust
The DeFi ecosystem runs within the blockchain network technology, where all its transactions and operations are carried out with transparency, as they are visible to all network participants, generating greater trust among its users since anyone can verify such transactions.
Easy access
In DeFi, transactions can be carried out from anywhere in the globe, without any sort of border restriction (a restriction that can occur in the traditional financial sector). By simply having an internet connection, users can carry out transactions within its ecosystem.
Immutability
Once a transaction is recorded on a blockchain, it is very difficult to alter or delete that transaction. This is due to the cryptographic nature of the blockchain and the distributed consensus that verifies and approves such transactions.
More inclusive financial services
Users who do not have access to traditional financing can access this sector, thus being capable of entering different financial services such as credits, loans, transactions, and remittances, which significantly improve their standards and lifestyle.
Disadvantages of DeFi
New industry and technology
Because the DeFi industry is relatively new and continues to evolve, some “new” users may have to use an interface that is not well optimized or that requires a certain level of knowledge, which can “force” some users to a constant updating of their technical expertise or learn about the later trends in the DeFi industry.
Irreversible transactions
Although irreversible transactions are one of the main advantages of the DeFi ecosystem, the truth is that, in some occasions, this can be a disadvantage, as assets can be lost due to a personal error. Therefore, since there is no financial backing from a third party or centralized authority when sending funds to the wrong address, there is no way to reverse the process unless the recipient acts “responsibly” and returns the funds received through a new transaction since this type of transaction cannot be canceled (unlike traditional finance where operations can be annulled if an error or fraud is proven.
Protocol Vulnerability
Because this is a new and growing industry, hackers may exploit certain flaws and vulnerabilities on some platforms. For this reason, it is advisable to use DeFi products with a high level of security in their ecosystem.
How to take advantage of DeFi’s potential
Although DeFi has certain advantages and disadvantages, the ideal way to take advantage of its full potential, is through the services of a serious and experienced provider in the sector. An example is the products and services provided by Pilsenga, which allow different companies to access all the benefits of decentralized finance through a friendly and efficient ecosystem.
What do you think of this topic? Would you like to learn more about the decentralized finance or DeFi?
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