DeFi platforms are structured to become independent of their developers and funders over time and ultimately to be governed by a community of users whose power comes from holding protocol tokens.
In comparison, centralized finance, or CeFi, businesses are more like traditional finance, or TradFi, where consumers make a deal with a company like BlockFi that collects information about them, requires them to hand over their crypto, and also serves central point for regulators.
What is Ethereum?
Ethereum is the primary network used by developers to create decentralized platforms for borrowing, lending, trading, and more. Ether is the cryptocurrency, or token, used to pay to operate on the network. Because the Ethereum blockchain is so popular and has created new offerings, Ether is widely used and crypto fans are excited about its value. It is the second most valuable cryptocurrency by market cap after Bitcoin, with more than $ 460 billion in early September.
What are the risks associated with DeFi?
DeFi eliminates the third parties that U.S. financial regulators rely on to ensure market integrity. Licensed operators such as banks and brokers play a quasi-governmental role in traditional finance, collecting and reporting data to authorities, including information on capital gains on investments made by their clients, in order to guarantee the payment of taxes. Their participation in the market depends on compliance with many rules.
In contrast, DeFi programs are unregulated applications created by coders interested in capital markets. User assets can and have been hacked, and not all operations are built in good faith. Rugged pullovers, when developers abandon programs after investors bring in significant assets, are notorious in DeFi.
What’s good about crypto finance?
Innovators argue that crypto promotes financial inclusion. Consumers can earn an exceptionally high return on their holdings, unlike banks. One in 10 American adults say they don’t have a checking account, and about a quarter are “underbanked” and unable to qualify for a loan. Crypto firms say they meet their needs and, outside of the United States, provide financial stability to customers in countries where government-issued currencies are volatile.
Crypto finance gives people long excluded by traditional institutions the ability to engage in transactions quickly, cheaply, and without judgment, industry advocates say. Since the crypto guarantees their loans, the services generally do not require a credit check, although some do use the customer’s identity information for tax reporting and anti-fraud purposes. On a DeFi protocol, users’ personal identities are generally not shared, as they are judged solely by the value of their crypto.