➠ In Traditional Financing System or you can say Centralized financing system, your fund are stored and managed by centralized institutions like Banks. These firms make money by lending out your cash and charging interest on top of the loans. they also collect various fees and commissions for the provision on their services.
➠ The Modern payment system is riddled with third parties who pocket a cut from daily movement of money, for example:-
Retailers are required to pay interchanges fees somite as high as 2% every time a shopper uses a credit card to make a purchase.
In DeFi:-
New infra-structure is being build that takes these banks and institutions out of the equation. Anyone with a computer can create some software and launch their own financial services on a blockchain network, meaning the barrier to entry is much lower than in traditional banking.
➠ One of the most popular applications of DeFi is in lending. User s can lend out their crypto just like a traditional lender does with government issued currency and Earns interest or they can Borrow funds by putting their to tokens (Cryptocoin) up as collateral.
➠ Rates for lending or borrowing on these decentralized platforms are adjusted by an algorithm based on how much demand there is for the loans.
➠ All these transactions are managed by pieces of code called Smart Contract. these are agreements written on blockchain network, which execute automatically once certain condition are fulfilled.
➠ In DeFi, there is no central authority sitting in the middle of each transaction, meaning transactions can be accepted while funds appear on the other side, much more rapidly than SWIFT system.
➠ The problem is that you may not know who wrote the program you may not know how secure the program you itself is. that is a significant risk that you really can't overlook.
➠ In many cases people facilitating DeFi transactions are anonymous. this has caused fraud to become rampant. A poorly created smart contract could have loopholes that allow scammers to steal or other design flaws that affect the value of assets.
➠ Another risk is security and because most DeFi services aren't insured. if a platform fails or hacked millions of dollars can be on the line.
➠ Benefits :- The benefits are an ability to make money, you are either lending out your cryptocurrency and you are getting interest paid back on that and that interest can be anywhere from 5% to 20% and even more. You can be a passive investor and earn money on an asset that you were probably storing in a wallet, that was doing nothing.
➠ The Other benefits is you can borrow against your holdings. A lot of these services are being used as a way for people to get a bigger pool of cryptocurrency to go through a bets out into the derivative market. So it is a way for you to turbo-charge your cryptocurrency gaming habit essentially.
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