Decentralized finance versus traditional finance

 

According to an analysis report by Jenco, a decentralized financial service platform, “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 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,” says the same report.

Apart from maintaining the distinct currency values across countries, it also works as a restricted medium. This type of financial system uses banks and intermediaries to perform a single transaction. This means that the whole process in this system takes time, where some of it takes days to execute, and it is also costly. Almost every transaction has a service charge attached to it.

“In contrast to the traditional financial sector, DeFi does not rely on intermediaries and centralized institutions. Instead, it is based on open protocol and decentralized applications (DApps),” says a study published in the University of Basel. When it comes to decentralized finance, there are no mediators involved. Since there are no intermediaries to charge for fees, transactions can occur within seconds, through smart contracts, and are free.

Most importantly, decentralized finance is secure and transparent. Unlike other centralized financial services, this system has no hidden costs involved. That’s why it is set to increase the competitiveness of the financial systems in the world.

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