Taking a peak at all of the challenges, we have a brief idea about the challenges that people are facing in the centralized system. The centralized system has caused not only the people to suffer, but even led to the overall doom of the economy. To help you understand this a bit deeper, in this section, we will be looking at the disadvantages of the traditional finance system and various solutions that DeFi has to offer to our users. Let’s take a detailed look at DeFi vs Traditional Finance.
Limitations of the Traditional Finance System
The reason why DeFi came into existence was because the traditional financial system had its own limitations. The traditional system may have started with some primitive method that may have evolved but with some flaws. Going through the traditional finance system also means waiting for approvals, getting paperwork done, and, at times, having long processes that could be time-consuming. In the decade of technological boom, it is only fair to have a system that is fast-paced and paperless, which would never be the case with traditional finance. Let us take a look at some of the limitations of the traditional finance system:
Service Offering Is Slow
Banks can provide you a wide variety of services that can help you with your daily life. The only catch is that these services are fulfilled at a snail’s pace. Even in the age of the internet that has internet banking, the services can be slow as they require too many approvals from the authorities, which are human beings. This is one of the reasons why the banking system operates slowly. The traditional technology, which is also lagging at times, can slow down the platform and sometimes delay your process. Lastly, most of the decisions require approval from centralized authority, which is bound to affect the service offering.
Paying the Extra Commission
Banking services aren’t exactly free, you will incur charges for using the banking infrastructure and their technology at all times. These charges are known as commissions that you will have to pay to your bank for maintaining your account or for making different types of transactions. You have to even pay annual credit card charges so that you can use the bank’s credit facility. All of these small amounts can add up and you may have to spend more just for maintaining your account with the financial institution.
Lower Interest Rates
Traditionally, the banks offer high interest rates to their customers on savings accounts, which would encourage more people to open an account with the bank. Earning an interest on your account is a smal form of passive income, which was one of the main reasons why people stored money in the banks. In the modern world, just saving your money in the bank won’t help you against the ever-increasing inflation. FDIC data, as of October 2021, has shown that the average national deposit rates on savings accounts stood at 0.06% APY and the national rate cap should not exceed 0.81%. The savings interest has been lower in recent years ever since the Great Depression in 1929 and the financial crisis in 2008 that hit the economy. Today, having a savings account is more suitable to keep aside some money for a different purpose rather than regarding it as a treasure (like it was considered in the ancient times).
Inefficient Banking Technology
Although most of the financial institutions have powered up their system through technology, it still lacks some features that the blockchain technology has to offer. Banking technology may have upgraded but has never been revolutionized. The centralized system has most of the banking services linked to either credit or debit cards which may at times lack transparency in terms of managing your money. Another point to be noted is that many times, the system can crash or have data breaches, which means that traditional finance also lacks security in terms of storing your money with the technological upgrade.
Restricted Access to the Public
Financial institutions will have a detailed history about your transactions and credit, but they will never reveal their own list of transactions. When it comes to transparency and data access, the centralized system is rigid and will never reveal any material, non-public information. Many times, the public records may show some transaction history, which is just used as a window dressing to cover up the fraudulent transfers in the system. Leaving the control of your money in one hand just to be exploited by the system seems unfair and disappointing.
Looking at all of the limitations, it is clear why and how traditional finance is a primitive system that could only perform in the past. With the tech boom, where many companies are adapting big data and cloud technology to improve their operational capacity, it wouldn’t make any sense to lag in terms of their finances. The blockchain technology that has been adapted into the DeFi system has the solution to all of these challenges and limitations that we have listed above. Let us take a look at some of the solutions that DeFi has to offer against the limitations of the centralized system.
Decentralized Finance: The Problem Solving Machine
After listing down all the problems of the centralized finance system, it is time to understand different ways to resolve these issues. Every economic problem that has the involvement of the financial system is always accompanied by certain revolutionary solutions. Previously, when the Gold Standard and the Bretton Woods System failed (pegging currency against gold) to make the cut, the countries through the Smithsonian Agreement decided to make the US Dollar the reserve currency. Back then, the US Dollar was considered to be the most stable currency. In recent years, the inflationary pressure and failure of the fiat currency to prevent the global economic crisis led to the foundation of the decentralized financial system. Indirectly, DeFi is not just another invention that has graced our presence by surprise, but a revolutionary solution that could change the way our financial system functions. Let us take a look at some of the most prominent solutions that DeFi has to offer through its new technological upgrade:
Rapid Processing of Transactions
The transactions that are made using the decentralized finance system must be faster and far more effective than the traditional banking system. In America, the Automated Clearing House (ACH) payment technique gained popularity after transactions took only a few hours to process compared to two or three business days. However, the ACH method does not process high-value transactions on the same day for its users, which would most likely be the business clients. Imagine waiting for a whole day or two just to send across a $25,000 payment. With DeFi, the users can process transactions in a matter of minutes, including high-value transactions as they need not wait for days to make the payment. This feature is what makes the DeFi system more efficient over the traditional finance system.
No Additional Charges
As mentioned earlier, maintaining your account in the traditional banking system can be expensive, which is one of the reasons why poorer people don’t have a bank account. The charges keep on piling until they become big and the customer cannot afford them. In the DeFi system, there are wallets that store your money in the form of crypto tokens. These wallets are cost-friendly as they do not require you to pay any additional charges to maintain the wallet. The best thing is that the transaction cost is quite low and the users can rejoice as they will never incur any additional fee for international transactions.
Investing Into Cryptocurrencies
The traditional system will only offer you traditional services, such as savings accounts or even fixed deposits. We already discussed how low the interest rates have been in recent years. The inflation rate has been constantly increasing since the pandemic hit the businesses. According to the Bureau of Labor Statistics, inflation of the Consumer Price Index (CPI) of all items rose to 5.4% in the United States as of September 2021. The ever-increasing inflation and falling interest rates does not give you any option to override the inflationary effect on the monetary currency.
The return on investment in fixed deposits isn’t exactly high either, which is why investing in cryptocurrencies could be a better option. Cryptocurrencies that function on DeFi technology have been known for giving extremely good returns in the past year compared to the traditional services. As per the article written by Justinas Baltrusaitis on Buy Shares in May 2021, Bitcoin’s return on investment was 70.16 times higher in the last five years (June 26, 2015 to June 26,2020) compared to the average return of five major indices (NASDAQ, Dow Jones, S&P 500, FTSE 100, and NIKKEI). Wouldn’t it be better to have at least a minimal holding in the cryptocurrencies along with stock investments?
Information Is Publicly Available
The decentralized system is powered in such a way that the information is publicly available to everyone. This means that the transaction history will be visible as long as it has been stored on the blockchain technology. Other than this, DeFi is not controlled by a single entity, so everyone has the power to make their own decisions and manage their money.
The DeFi system overcame most of the problems that the centralized system has never been able to solve. In addition to all of this, DeFi is available online, powered by the technological revolution, which means you don’t need to go to the bank to verify the transaction through your presence. All of the verifications take place live on the system. In short, DeFi is a pathway to freedom, and by adapting decentralized technology, we can revolutionize the global financial economy.
