There’s no doubt that decentralized finance (DeFi) is the most prominent part of the cryptocurrency market in today’s world. With billions of dollars in locked funds currently circulating and more people poised to enter the market, the DeFi space is more vibrant than it has ever been.
This vibrance has also spilled over to meet the rest of the crypto space. Traditional crypto companies are rushing into the DeFi space as a means to capture some of it. Despite the many criticisms that have come from these companies, even they know now that DeFi is the future.
With that in mind, it’s worth understanding what makes DeFi so popular and how it manages to stand out from the hoard of crypto concepts that have been developed in the past few years.
To gain this understanding, it’s worth knowing what both are. If a crypto project isn’t a DeFi-based one, there’s every probability that it is centralized. This means that users trust the people behind the project (be it s lending platform, a payment processor, a custody eservice, an exchange, etc.) to operate ethically and execute their business the right way.
With DeFi, there’s no need for these people. Instead, DeFi users trust on the underpinning technology to handle all tasks and get the job done. There is no central authority or “guys behind the curtain” pulling strings. The technology is coded to act in a certain way, and that is how it works.
So, how do they differ?
With centralized services, we have a great deal of operational flexibility. Companies can help customers by handling their funds and providing support, while also providing holistic services and answering customers’ needs efficiently.
Take centralized exchanges for example. All off the top exchanges – including Coinbase, Binance, Huobi, and more – are centralized. Users have accounts with these exchanges, and they send funds to these accounts for the exchanges to manage. When funds are on these exchanges, they are stored outside of user control and can be hacked. We already saw several examples of this in the past.
However, the benefit of centralization is that many off these exchanges can now branch out. Coinbase has a primary exchange client, but it also handles custody, analytics, and several other services. Most top exchanges focus on other services, from trading, OTC, lending, and others.
So, they achieve flexibility in the sense that they can satisfy customers’ needs with a single account. You don’t need to open an exchange account on Coinbase and travel to Binance just because you want to trade. It’s all in one place.
There’s also the benefit that centralized services can support several blockchains at once. By taking custody of money from different blockchains, centralized services can easily bridge the gap between these chains and offer their services with greater ease.
DeFi, on the other hand, is unable to achieve this. Due to the complexity involved in swapping between chains, this is just impossible.
Centralized services are also better at converting between fiat and cryptocurrencies. DeFi services don’t have fiat on-ramps, so conversions aren’t as easy. Due to this challenge, DeFi services tend to have a difficult time onboarding new customers.
The most significant benefit to DeFi is the fact that it is private. You don’t need to divulge your information for a service to handle your funds. This reduced the risk of identity theft or any unlawful uses of your information.
DeFi also allows you to independently manage your funds, while still providing some of the many benefits that you get from centralized services. Some of these benefits include:
A decentralized exchange doesn’t have any central body powering it. Instead, it is facilitated by a system of smart contracts on a protocol. These contracts are hard-wired with instructions, so only them and the users are involved in making transactions happen.
The trustless and permissionless nature
As explained, one of DeFi’s many benefits is that you don’t need to trust anyone to operate it. You can audit a DeFi platform’s code to verify that it does what it says, and you can use external sources to verify that transactions have been executed.
The permissionless nature also means that you don’t need anyone’s permission to use DeFi. Centralized servers usually ask users to update AML and KYC procedures before accessing their services, so you will need to provide your information.
With DeFi, you can directly use a service by connecting your wallet. Since it’s supposed to be open to all, there are no barriers and discriminatory processes.
Users who want to build on DeFi protocols can also do so. One of the main points of decentralization is accessibility and openness to all. If you think a protocol can be improved, you can try your hand and see how your theory checks out.