Traditional vs. Decentralized Finance: a Jenco Analysis Report
What is Traditional Finance? Traditional finance uses a centralized authority that maintains distinct currency values across nations. Banks and other financial institutions enable monetary transactions using uniform values that may change, depending on the present GDP (Gross Domestic Product) of the different nations whose currencies are used in particular exchanges. For instance, if the current exchange rate is 1 USD is 0.76 GBP, then all monetary exchanges are based on this present value. Currency values change depending on the time frame and location.
What is Decentralized Finance? In contrast, decentralized finance (DeFi) does not use a centralized authority to maintain currency values across nations. Due to the inequalities observed across the different financial systems worldwide, the necessity of enabling convenient cross-country or cross-currency exchanges was developed.
Various digital currencies were developed — and are still being developed nowadays. The common intent of these digital currencies is “to make financial services accessible on a global scale�.
The Difference between the Two : Basically, here are several differences between traditional finance and decentralized finance:
Differences between traditional finance and decentralized finance
Why is DeFi More Beneficial? DeFi uses electronic devices to interact and display bidding or asking prices in real-time. Hence, traders do not necessitate being in the same location to initiate transactions. Everything is done virtually, and digital markets are made secure by blockchain technology. Utilizing DeFi is more beneficial since users do not have to follow centralized rules. Direct, peer-to-peer exchanges can occur, given that various values are agreed upon irrespective of the current offline values. Dealers or third-party mediators can also be utilized. However, transactional prices are significantly lower than when using traditional and offline institutions. At present, these virtual markets are not regulated — a trait that most traders and DeFi proponents find beneficial. Hence, digital asset prices tend to be different across transactions and markets, especially because DeFi provides increased anonymity and price control to its traders.
Pros and Cons of DeFi Like traditional finance, DeFi isn’t perfect. It has its own set of advantages and disadvantages. Below is a summarized list of them.