Decentralized Finance (DeFi) – Benefits and Challenges

Lina Network

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August 24, 2020

In recent times, DeFi has become a controversial topic. DeFi is more than just a decentralized financial platform through cryptocurrencies, it aims to take a broader approach of decentralization in traditional finance. The core of DeFi is to expand access to traditional finance services to everyone by creating a financial ecosystem on a permissionless Blockchain infrastructure.

In this article, Lina Network will introduce to you what DeFi is, the benefits of DeFi and its challenges.

What is Decentralized Finance (DeFi)?

Decentralized Finance (DeFi) is an ecosystem of financial applications and services, built on a decentralized Blockchain infrastructure. In this ecosystem, users take full control of their personal assets and interact with the application ecosystem through a peer-to-peer (P2P) network, using decentralized applications (Dapps). The main benefit of DeFi is the ability to easily access to financial services, no hierarchy, creating a completely new financial field without being manipulated by parties.

Differentiate DeFi from FinTech and Traditional Finance

Decentralized Finance (DeFi) - Benefits and Challenges

The benefits of DeFi

DeFi is built on the Blockchain platform. In simple words, Blockchain is the first layer of technological infrastructure, while DeFi is the second operational application layer. Therefore, DeFi inherits many outstanding features and advantages of Blockchain technology, such as:

  • The decentralization networks allows everyone to participate without being restricted from accessing regardless of their social status, and avoid censorship.
  • All transactions are done automatically and do not require a trusted intermediary.
  • Transactions/ payments are done relatively quick at low cost, and all data is immutable.
  • DeFi applications often allow users to own a private key to secure personal wallet information.
  • The transparency and efficiency of the financial ecosystem is guaranteed, reducing risk factors.
  • DeFi encourages the interaction and combination of different projects to create innovative products.

In traditional finance, enormous resources are allocated in a single trust-based system, of which transparency and integrity is questionable. Not only that, the traditional financial platform fails to keep up with the pace of the digital era. For instance, a cross-border transaction takes 3 days on average to execute, at a cost of approximately 6.8% fee.

Barriers to success of DeFi

Although DeFi has many benefits and promises to replace traditional finance in the future, the implementation of DeFi still faces many obstacles:

  • Adequate performance: Since Blockchain platforms are inherently slower than centralized networks, DeFi applications will also be affected. Therefore, developers of DeFi applications need to consider those limitations and find solutions to optimize their products.
  • User errors: By eliminating intermediaries, DeFi applications transfer the responsibility to users, which likely lead to user errors. How to reduce the risk of user error is a difficult challenge for DeFi application developers.
  • Community support: In order to develop the DeFi application ecosystem and make it an integral part of the global financial industry, support from the users community is necessary. However, most DeFi applications require extra effort from users. Therefore, DeFi developers need to create tangible benefits to attract and encourage users to switch over from traditional finance to decentralized finance.
  • Cluttered ecosystem: It is relatively difficult for users to find the most suitable DeFi application for specific use cases because of the lack of systematic in DeFi ecosystem.

DeFi is a financial system separated from traditional finance, with more openness, less descrimination and no censorship. However, this disrupted field still needs to overcome many obstacles in order to be widely developed. Nevertheless, DeFi’s potential and novelty cannot be denied.

Follow Lina Network’s articles to learn more about DeFi and other groundbreaking technologies.

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