In Part I of the DeFi series, we defined what decentralized finance is and the differences between DeFi and traditional finance. In this section, we are going to dive deeper into the benefits of decentralized finance.
The benefits of DeFi
In a centralized financial system, banks are the primary intermediaries performing and managing transactions. They help minimize transaction costs, enabling financial transactions to be executed effectively and seamlessly. As the main intermediaries facilitating financial transactions, nevertheless, banks can grow to dominate economic activities. For example, when a financial institution, like PayPal, rises to dominance, it can accumulate a disproportionate market monopoly and gains.
Contrary to that, in a DeFi ecosystem, transactions are facilitated by decentralized peer-to-peer networks, rather than centralized third parties. By eliminating the intermediaries, DeFi networks minimize transaction costs and create network effects without experiencing monopoly expenses. When a DeFi network rises to dominance, no single entity can accumulate total monopoly over the network and exclude other participants, enabling everybody to gain from the network effects to expand transaction opportunities.
A centralized financial system cannot be truly borderless since it is based on particular jurisdictions with specific base currencies. Because of this, transferring assets and value across borders often experiences friction and delay.
On the other hand, DeFi is fundamentally borderless and, therefore, facilitates borderless transactions, since it is not localized to certain jurisdictions or fiat currencies. With the use of digital currencies, DeFi is not tied to particular geographical locations but can be leveraged by anyone from any part of the world. Besides, it does not need a central bank or government to function. With DeFi, therefore, moving assets and value across different jurisdictions is as simple as sending an email, eliminating barriers to global value transfer.
DeFi supports permissionless and combinatorial innovation. While a centralized platform may promote open innovation and research, the owners often control access and can restrict access to exercise governance control. Consequently, third party developers often have to withstand the risk of being denied access to their hosting platform when platform owners make unilateral decisions. Though most platform owners are kind and supportive to third party users, they have made one-sided changes that hurt developers time and again.
On the other hand, a decentralized platform eliminates controlling bodies and, therefore, facilitates open access and permissionless innovation- that is, developers can freely crate and test new dApps without asking for permission. By advocating for permissionless innovation, DeFi ecosystems empower developers by giving them access to transform the DeFi infrastructure in organic and unprecedented ways.
The traditional financial system functions in silos, increasing transaction barriers. Various financial institutions must maintain their own ledgers, hence, one institution may not be interoperable with another. Consequently, transferring assets and value across silos is expensive and complicated. In contrast, DeFi runs on public blockchains and open standards, increasing the interoperability across different services. High interoperability ensures that transactions and value flow seamlessly across various services and jurisdictions, potentially creating a valuable internet.
DeFi can also bring transparency to the financial system. Centralized systems are translucent since they have to secure their centralized ledgers by limiting access. On contrary, DeFi secures its public ledgers via distributed consensus and drastic transparency. A DeFi system keeps a copy of every transaction that can be easily accessed and validated. Public ledgers ensure DeFi ecosystems create distributed trust and, therefore, participants can transact with each other without pre-existing relationships, or trusted third parties, enlarging the scale and scope of potential transactions.
Additionally, DeFi platforms are often designed with open source code, hence, external parties can verify business logics to unearth any hidden risk and biases, assuring, and protecting the participants. Open-source codes further stores records of all transactions, which can help access the route of any financial incidence.”
The Tokenizer End-to-End DeFi infrastructure
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