Decentralized Finance vs. Traditional Banking — Which is better?
Decentralized Finance (DeFi) can offer any type of digital financial services or products securely and transparently. It operates and controls financial transactions without any bank or central authority’s input and is possibly accessible to anyone.
Is the bank a safe place to keep your money?
The bank is often touted as the safest place to keep our money. But what is not often talked about is the constant risk of default. The government or bank can freeze or close your account and confiscate the money in it anytime without your permission. Also, a bank can go bankrupt and collapse anytime, leaving you with zero balance.
The Collapse of Cypriot Banking
There are a couple of good examples of banks failing to return account holders’ monies, and we will consider a few of them here.
The 2012–2013 Cyprus bank crisis resulted from bad investment and lending decisions by the Cypriot banks. With the banks on the brink of a collapse, they had to raise funds and bailout themselves. The only place Cyprus could find such large amounts of money was in people’s personal savings accounts.
The country’s biggest bank, the Bank of Cyprus, was forced to seize deposits from its account holders to survive in 2013. It taxed everyone with a savings account between 6% and 10% and used it to pay its debts to avoid collapse.
Benefits of a Decentralized Finance
In comparison, Decentralized Finance technology is a much better alternative to a traditional banking system. It is an ecosystem of Internet-based financial products and services built on decentralized blockchain technology.
Decentralized Finance offers a few promising advantages over the traditional financial system:
• the main advantage of DeFi comes from being an open-source, permissionless, and transparent, decentralized network of digital financial services. It operates independently and needs not to be managed by an institution or any third party.
• DeFi is an immutable and censorship-resistant ecosystem. There is no single point of failure, as these financial services are built on blockchains networks. All financial transactions are recorded on the blockchain ledger and distributed across the entire decentralized network of computers. It makes it practically impossible to censor or shut down DeFi services.
• Decentralized Finance can provide better security for users’ funds than traditional banks. Users interact directly with the smart contracts from their secure cryptocurrency wallets. Hence, they maintain full ownership, control, and access to their funds at all times.