Decentralized funding has become one of the hottest topics in this year’s cryptomonies. Although the activity and volume in the DeFi space is still below its popularity, this is beginning to change as new protocols become available. In fact, according to a recent report by Consensys, the number of blocked Ether (ETH) and active users on DeFi platforms has skyrocketed after being „fairly stagnant“ for the rest of the year due to the release of Compound.
DeFi tokens have also been the subject of much discussion, as they have outpaced Bitcoin on the price charts week after week. In fact, Compound’s COMP token was up 233% in its first week of trading, and Aave’s LEND token has been up 1,000% in the last three months. Therefore, an obvious comparison between decentralized finance and centralized finance may emerge. Centralized systems have their advantages and disadvantages, and it is likely that even if DeFi take off, both types of financial products and services will always be available to the masses.
Below, some of the advantages, disadvantages, challenges and problems of each of the financial world’s partners – centralized and decentralized – are examined in more detail. Specific emphasis will be placed on decentralized lending and borrowing, which is currently one of the most popular applications of DeFi in terms of volume/value lock-in and which, in a sense, has triggered the uproar around the broader concept of DeFi.
What is DeFi and traditional finance?
The DeFi is a group of financial services and products based on Blockchain that mimic those that people have become accustomed to in traditional finance, but do so without a centralized part to provide such services. Instead, these are provided by other users who act as financial counterparts without intermediaries involved.
The last Ethereum 2.0 test network will be launched on August 4
These financial products range from popular credit and loan services and decentralized exchanges to housing, insurance, payments and custody services, among others, but it is mainly the first application that has boosted the popularity of DeFi. According to Jon Jordan, director of communications at DappRadar, DeFi protocols have the ability to learn, adapt and evolve from each other, which is one reason why decentralized finance is moving so quickly. He told Cointelegraph:
„Because the DeFi operates on an open Bitcoin Rush without permission, the interoperability of Dapps and tokens is a huge advantage. One dapp can create a new feature – like flash loans – and then other dapps can integrate that into their product without asking permission. This interoperability has been the underlying reason for the current explosion in Yield Farming, for example.
Services like MakerDAO, Aave and Compound, among others, offer the loan and credit services that traditional banks do, but with some differences, both potentially good and bad. These loan and credit services are similar to each other and even to the centralized services they emulate; however, the internal workings of each project are often very different from those of traditional services.