In my first article, I deep-dived into what Defi is all about, you can read more : https://dev.to/maakai123/why-defi-decentralized-finance-252h
In this article, we will look at Defi(Decentralized Finance) if it is really decentralized as the name "Decentralized Finance" implies.
Defi allows users to utilize financial services such as borrowing, lending, and trading without relying on any centralized entities.
How does Defi Dapp (Decentralized Application ) work?
Decentralized Finance Applications can only work well when collateral ( a valuable asset that a borrower pledges as security for a loan) is locked into smart contracts.
The sum of all collateral locked in DeFi Dapps is also known as the Total Value Locked.
After the collapse of the Crypto exchange FTX last year, the total value locked (TVL) in Defi fell 25.5% and as of December 12, 2022, The TVL was estimated at $ 41.67 billion.
But since the start of this year, things have improved, as of Thursday, February 2nd, 2023, the value locked in decentralized finance (Defi) increased to nearly $50 billion.
Is Defi really decentralized?
A lot of newbies in the space are still confused about this topic, Is Decentralized finance really decentralized?
We will explore and answer all these questions as we progress.
Decentralized protocols can be categorized into three
1) Centralized CEFI:
They are custodial(It is controlled by a third party who has access to customer's private keys), and they use centralized price feeds, centrally determined interest rates, and centrally-provided liquidity for margin calls.
Example includes BlockFi, Binance, Coinbase Exchange, Kraken and KuCoin.
2) Semi-Decentralized:
They are non-custodial, have permissionless initiation or margin calls, and permissionless provision of margin call liquidity, while centrally administering price feeds, centrally controlling interest rates, and centrally controlling platform developments and updates.
Example includes Compound, MakerDAO, dydx and bZx.
3)Decentralized :
Every component is decentralized,
When talking about Decentralized protocols, protocols like Uniswap, and SushiSwap comes to mind but in a real sense, no DeFi protocol is completely decentralized yet.
*Advantages and Disadvantages of Decentralized Protocols and Centralized Protocols.
*
Advantages of Centralized Protocols
1) Centralized protocols are very convenient
2) Highly liquid and very popular
3) They are also very cheap because trades take place on
matching engines and not on the blockchain.
4) Customer service is active
5) centralized protocols support the conversion of fiat
and cryptocurrencies (for example, the U.S. dollar
and bitcoin).
Disadvantages of Centralized Protocols
1) They get hacked more often
2) The founder can temper with private keys of customers
3) Customers do not have authority over their funds
Advantages of Decentralized Protocol
1) Users/Customers have more control over their funds, they can
send money directly from wallets like MetaMask.
Disadvantages of Decentralized Protocol
1) Transactions are less private
2) Customers can only trade crypto for other crypto within
the Dex, unlike Cex which can convert Crypto to Fiat.
3) No customer support to help if lose Keys or Seed phrase.
My name is Maakai Princewill a DeFi content creator
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