As defi continues to expand, it risks embracing the very ideology it initially sought to reject as the primary beneficiaries of this new financing paradigm are those who already own digital assets.
Replacing Intermediaries Doesn’t Directly Improve Finance
When it comes to financial products and solutions, almost everything comes with a catch, be it exceptional returns on investments or low financing rates. Decentralized finance (defi) is no exception.
Defi has gained immense popularity because it sought to remove traditional finance’s (tradfi) inherent problems and downsides. While there is no denying that the emergence of defi has indeed lowered access barriers to financial solutions, we can’t overlook the uncomfortable reality that defi is becoming, at least to an extent, the same as tradfi, with a ‘decentralized’ tag.
The Blurring Line Between Defi and Tradfi Lending
In the traditional system, anyone who wants to borrow funds from banks or private lenders must furnish their credit score. If the score meets the criteria, the loan is approved at a fair rate. If the credit score is low, the borrower might need to compromise for higher rates. In some cases, the lender may also ask the borrower to post collateral for the loan.
While defi exchanges central authorities with a peer-to-peer system, accessing products like defi lending requires borrowers to post substantial collateral, often higher than the total amount they want to borrow, called over-collateralization. Moreover, entering the defi market and using its financial products demands an understanding of blockchain technology