The onset of finance and monetary control was followed by rapid globalisation and industrialisation as human needs evolved. Initially, finance systems like DeFi or cryptocurrency investments did not hold a place in our world, but as globalisation, trade, and industrialisation increased, causing rapid communication between human beings after human society evolved from hunting and gathering to agriculture and then industrial society, finance gradually became a significant part of human life.
As the need to decide exchange ratios emerged at first in our human society, the monetary experts worked to develop a Finance system that would govern the exchange ratios and all monetary issues. If you had extra meat, you could exchange it with a friend, family, or neighbour in return for another commodity needed for survival. But what would determine the exchange ratio of commodities? No one had a certain answer because there were no set criteria for exchanging ratios for the value of goods.
With increased trade and globalisation, there was a greater need for a set exchange ratio or criteria and a certain value of goods to be set. This need gave birth to the development of money systems, and human society experienced the rise of finance’s first generation.
Evolutions in the Money Trade System
Finance and the monetary system have gone through levels of evolution since their emergence in human society. The first-ever financial system was based on coins made out of alloys of silver and gold back in 600 B.C. Evolutions in the industrial society introduced more types of money and financial assets, banks, and third-party financial controlling organisations to coordinate between the humans of today’s economic system.
But with greater innovations come greater problems. Financial confusion and problems only increased from thereon. As governments played a monopoly on the printing of currencies in their respective states and introduced central banks to coordinate between two parties of trade, the value of goods increased while the quantity remained the same. This largely resulted in high inflation and fluctuations in currency value, further leading to depreciation in currency values.
The traditional financial system has gone through many crises and challenges, which has resulted in weaker confidence in the conventional monetary system. In place of conventional financial ways, Decentralised Finance or DeFi systems or platforms are now gaining more confidence from all around the world.
With the emergence of digital money and assets like NFTs, Bitcoin – traditionally known as the best crypto to invest in, and other assets, the trajectory of finance has been completely transformed.
Decentralised Finance, also known as DeFi, is mainly expanding influence amongst people because of its ability to provide financial trade without intermediaries like banks, exchanges, and brokerages, with the help of blockchain-run smart contracts.
As mentioned above, while the traditional monetary and financial system brought advantages to the world, it quickly raised disadvantages for financial societies around the globe on the other hand. In the same way, DeFi has brought many advantages and benefits for the 21st-century financial society, but this revolutionised financial system poses equal challenges as well.
In this article, we will be guiding you through both the advantages and disadvantages of Decentralised Financial systems posed to this century.
Exclusion of Mismanagement and Human Error
Intermediaries and mediating parties like banks, exchanges, or other financial institutions used in the traditional monetary system caused a great deal of financial crisis over time due to mismanagement and human error. In the revolutionised DeFi system, human error and mismanagement are eliminated with the help of smart contracts. The only time a human error can occur in DeFi platforms is when a smart contract is written poorly.
Permanent and Swift Access
Unlike central banks and financial organisations, DeFi platforms allow increasingly easy and permanent access for millions of people around the world. DeFi can be handled from the comfort of your home rather than going out and wasting hours travelling to and from a bank. All you need is a stable internet connection in any part of the world to access your DeFi platform.
Operations without Permission
In the traditional financial system, you need permission to carry out any financial activity, even as much as withdrawing 10 dollars from your account. However, in the DeFi system, operations can be carried out without permission seamlessly.
While the advantages of DeFi platforms are evident and in front of the world as it is, many stay unaware of its disadvantages. To start with a few, we can list a series of disadvantages the DeFi system entails for the financial society. As DeFi is the complex technology itself, it comes with all the disadvantages such innovations generally include.
Uncertainty is the first disadvantage of the DeFi system. The biggest uncertainty is a faulty blockchain that can result in an unstable DeFi yield platform. Other than this, if a blockchain is going through changes, it can also risk operational challenges in the linked DeFi platform as well.
Problems in Smart Contracts
As seen in many DeFi platforms, faults or poor mismanagements in smart contracts can cause vulnerabilities and in the associated DeFi projects as well. Funds can be lost at the hands of even the slightest faulty smart contracts of those DeFi platforms.
The creation of blockchains like Bitcoin was solely aimed at decentralising the finance system globally. But rather, decentralisation has been lost in translation as DeFi platforms aren’t decentralised as they should be. The gradual centralisation of DeFi projects has greatly re-included any risks previously brought in by decentralisation.
The bottom line is, DeFi is a comparatively new industry that is not as perfect as the traditional financial systems. So it does come with its fair share of risks and challenges as any other monetary system. What is yet to see is how Decentralised projects and platforms age with the centuries and how the challenges we are faced with right now will be converted into pros.