There is reason to be optimistic about the use of blockchain for the expansion of financial services availability. The development of smart contracts by Ethereum represents a significant step forward in technological advancements since it enables the handling of monetary transactions in a manner that is both permissionless and non-custodial. At the same time, the resilience of Bitcoin indicates the practicability of a decentralized financial system independent of centralized banking.
However, blockchain technology can also be utilized in a restricted fashion when it’s put to use. This would imply that the protocol implementation is supervised and governed by an authoritative body. A necessary component of this has your keys.
This is the interesting primary point that can be made among CeFi and DeFi development services.
What exactly is the term “decentralized financial service,” and what are its defining characteristics?
Bitcoin was initially conceived of as a P2P) digital payment system. This made it the first based on distributed service in the history of the world. It does not have a governing body that can manage the allocation of Bitcoin or limit access permissions to the Bitcoin community. Even the identity of Satoshi Nakamoto, the person credited with developing Bitcoin, is shrouded in mystery.
The most crucial thing to note is that anybody can extend Bitcoin’s capabilities. Individuals can exchange and store value without the assistance of a bank or a company since they have become miners and are operating network nodes. Currently, 14,185 Bitcoin nodes spread across North America and Europe validate and process Bitcoin transactions. Most of these nodes are located in Europe.
One example of a decentralized application (DApp)
The DeFi development services concept revolves around decentralized applications or DApps. In what ways do they run their business? Take, for example, the participants in the market makers. These institutions contribute to the adhesion of the capital markets in the conventional financial sector by purchasing and trading assets in anticipation of the sales of their customers’ assets. They assure that everything runs as smoothly as it possibly can by supplying the markets with the cash liquidity that is so desperately needed.
Trading would halt without market makers and the liquidity they provide. Similarly, sufficient liquidity is required for banks to conduct money transfers and loan applications.
Users handle all these important duties, making DeFi extraordinarily user-friendly and straightforward.
As an illustration, Uniswap is responsible for the creation of the Automated Market Maker (AMM) protocol, which makes it easier for users to conduct transactions.
See the Example:
- User A intends to turn into a liquidity provider so that they can create yields, often known as annualized interest rates (abbreviated APY) (annual percentage yield). To do so, User A will deposit tokens into liquidity pools, which are essentially smart contracts designed to gather and redistribute cryptocurrency.
- It would be desirable for Users B and C to engage in a transaction involving cryptocurrency. User B can achieve this goal by using a liquidity pool to which User A has contributed. When user B finishes this, user A receives a percentage of the whole transaction as their reward.
Users A and B can use this method to establish a decentralized ecosystem without ever having to communicate with one another. The only places where smart contracts are used are on the supply and demand sides of the equation. In addition, approval is not required for anything at any time.
The USDC/ETH pair is included in one of the many liquidity pools that are currently available.
Both lending and taking out loans are governed by the same principle known as liquidity provisioning (LP). Lending smart contracts are typically infused with liquidity by a third party known as a liquidity provider. When the loan is utilized, the borrower is responsible for paying the loan provider an interest rate.
Why would we even bother to bring up centralized finance (CeFi) when the entirety of the financial system has been reorganized to be decentralized? Isn’t that the same thing as traditional banking institutions? CeFi performs its functions substantially more efficiently, which significantly improves the experience for its users.
The concept of controlled centralization of finance, also known as CeFi, lies at the core of blockchain technology. Sadly, the failure of the Celsius Network has shown us all what is involved in this process.
Both systems’ digital assets can interact with that of other blockchain systems. On the other hand, rather than the customers themselves, the distribution of the tokens was often controlled by the firms that issued the tokens. All can participate in riskier procedures, such as lending activities and other activities traditionally associated with banks.
What is the Market Cap of Cryptocurrency?
To achieve yearly percentage yield improvements in the double digits, Celsius Network overleveraged its resources and exceeded the limits of its financial statements. According to Celsius’s records in bankruptcy court, the company’s bitcoin assets are only worth 4.3 billion dollars, while the company’s liabilities are $5.5 billion.
A rising market may enable Celsius to offer annual percentage yields (APYs) of up to 18%. As a result of the Federal Reserve’s decision to increase interest rates, traders left riskier investments, including such stocks and cryptocurrencies, which negatively impacted the value of Celsius’s CEL utility currency.
Users were attracted to join Celsius Network because of the large payments generated by its business model; however, doing so was accompanied by significant leverage levels.
Also Read: Web3 DeFi: What Is It and How Does It Work?
Does This Indicate That Defi Is the Superior Option?
A non-custodial wallet, such as MetaMask, is often required to access DeFi decentralized applications (dApps). Since self-custody is the same as non-custodial storage, only you have access to your funds because you are the only individual who owns the secret keys to a blockchain network. This means that non-custodial storage is identical to self-storage.
This is different from traditional banking systems or with CeFi platforms.
Beginning with Celsius and progressing via Coinbase, Nexo, and Gemini…
Most of the assets are being supervised by the guardian. They are online banks, yet, they do not provide deposit insurance guaranteed by the government.
Your life savings may be lost if corporations that engage in unethical business practices go bankrupt. Because of decentralized applications (dApps), one’s financial situation can always be kept under control. Hacks and attacks can be performed on platforms that use DeFi development services, but they can also be performed on devices that use CeFi.
A few additional percentages of APY and other benefits aren’t worth taking the chance on. In any event, you hardly know whether you’ll wake up to discover that “severe economic conditions” have prevented you from accessing your account. This could happen at any time.