Decentralized finance, in a nutshell, promises transparency and offers beneficial terms for borrowers. DeFi platforms are supposed to build an alternative financial system for offering/receiving loans, exchanging currencies, making payments, etc. There are no banks, brokers or trusted third parties, governments are not involved, and finally, notorious middlemen are eliminated. There is just secure, transparent software.
DeFi allows borrowers to take hassle-free loans: You don’t have to worry about bank account creation, lengthy application reviews or paperwork. For crypto holders, DeFi offers an opportunity to lend their assets to other users, thus earning a profit of about 20%. Decentralized exchanges often act as custodians of funds, thus eliminating that annoying middleman again. This is how DeFi should work and probably will work someday. And what follows is the actual current situation.
What’s wrong with DeFi in its current state
Decentralization is a very lucrative word. The philosophy behind it is rather romantic, or in more honest terms, utopian: a world without vertical order and rules imposed by archaic governments, organizations and banks. Everything is managed by a community of enthusiasts who religiously worship transparency. Nothing is bad with this one.
The problem is that such thinking can result in anarchy, which many consider a desirable backdrop to the “new world” — but not when it comes to personal finance and savings. Here, we still crave at least some order and rules of play.
And that’s when the tricky part of DeFi emerges: the disregard of regulations and Know Your Customer/Anti-Money Laundering procedures. This leads to a high risk of money laundering via liquidity pools. And make no mistake, the United States Securities and Exchange Commission will notice such activities pretty soon. There are too many DeFi projects that scream “bubble,” but for general users, it’s really hard to crack down on such frauds. So, serious sums…