Today we finish what we started last week. We are going to compare TradFi and DeFi in terms of accessibility and security and risks.
Accessibility
Due to different factors, both traditional and decentralized finance have certain barriers that influence people’s access to their respective financial systems.
Let’s start with traditional finance.
First, it is often necessary to reside in a country to open an account in a financial institution or to carry out different operations. This is intensified if presence in the offices of an institution is required, which is very common.
This type of requirement limits or hinders access to the traditional financial system for people residing in certain countries or who cannot go to an office.
On the other hand, regulation plays an important role. Regardless of how easy an institution wants to make the operational or registration process for users, they have to comply with regulations, which often prevent them from working with certain individuals and legal entities, especially when it comes to cross-border transactions.
Finally, we already know that in traditional finance there are intermediaries. This implies that as more agents are involved in transactions and activities in general, the processes are slower and more tedious.
These factors limit access to the traditional financial system for many people.
DeFi, on the other hand, has very different characteristics.
This financial system is practically unregulated, so all these requirements of customer identity verification are not necessary, and there are no impediments to work with different types of individuals and legal entities.
This is linked to privacy. We have already mentioned that in DeFi anonymity is maintained, so that no one can be discriminated against because of their nationality, income, residence…
On the other hand, decentralized finance forms a fully digital financial system. This can be beneficial for some people as it breaks down the barriers mentioned above in terms of residence or face-to-face.
However, it can also create another barrier for other people. For example, for the elderly. With no office and nowhere for them to go if they need help, they may not be able to carry out many transactions.
As for intermediaries, we already know that at DeFi they are conspicuous by their absence, which increases the simplicity and speed of operations.
Security and risks
As we are seeing, everything has a double side and security is no exception.
The traditional financial system has more regulation and less privacy, which in turn has several security implications.
Firstly, the fact that people give their data to financial institutions and that they are the ones who move people’s money, means that there is a risk that personal information will be used against people and that the money will not be used properly and may not even be recovered (for example, in the case of a bank failure).
At the same time, if you combine the possession of users’ funds by entities such as brokers with the ability of regulators to intervene in the markets, you get things like market manipulation of different assets that can be dangerous for investors. We can exemplify this with the case of GameStop shares. Brokers like Robinhood and regulators intervened in the market by prohibiting the trading of the stock.
However, this may have some advantages. For example, thanks to regulation, if a person has investments with a broker and that broker goes bankrupt, in many countries, the government gives investors much of the cash deposited with that broker. At the same time, any assets held by the investor are not lost with the bankruptcy of the broker.
As far as DeFi is concerned, the risks to be taken into account are different.
Being unregulated and anonymous, it does not present the risks of loss of funds or data leakage.
At the same time, the entire decentralized financial system is code-based. This implies that no matter how decentralized it is, if the code fails the consequences can be dire. Transactions may not go through or money may be lost. In addition, there are people who can take advantage of the vulnerabilities in the code and steal people’s money, which has already happened on many occasions.
On the other hand, the lack of regulation is very beneficial, especially in terms of improving access to the system. However, it also carries certain risks.
For example, if a person is defrauded, there is no one to complain to and the regulators cannot help him.
Finally, to enjoy privacy, you have to take some responsibility.
The best way to look at this is to compare cryptocurrency digital wallets and with a bank account.
To access your bank account, you have your username and password. And the bank has access to the password. This implies what we have already discussed, and also that if you forget your password it can be reset and you can access your account again.
On the other hand, when you create a digital wallet of cryptocurrencies you have the public key (as the user) and the private one (the password) and also a secret phrase. The latter is a set of words that are randomly generated when you create the digital wallet. If you forget the password the only way to access your wallet is through the secret phrase. If this too is forgotten then you have lost the funds you had in the wallet.
This is a risk that is only present in DeFi. And it is the price to pay for privacy and decentralization.
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