Blockchain and Cryptocurrency Beginner - Flaws in Centralized Finance

Centralized finance is what is most common presently and is what we have been used to for a long time before the emergence of blockchain and cryptocurrency. The main attribute that is associated with centralized finance is central authority or entity which is one of the main elements that DeFi eliminates. Hence the benefits of blockchain and cryptocurrency. As always, centralized finance has a lot of flaws which is one of the main reasons for blockchain and cryptocurrency. Hence the emergence of DeFi which aims to solve a lot of the problems and flaws of centralized finance. Some of the flaws of centralized finance are;

Transaction limitations

This is one of the major flaws in centralized finance. There can be limitations when it comes to the number of transactions that can be made in centralized finance. Take banks or other centralized financial institutions for instance, there is always limitations when it comes to the number of transactions a user can make in a particular time.

Users do not have full control of their funds and assets

This is another major flaw in centralized finance. Users do not have full control of their funds and assets because the central entity can decide to do what they like with the user funds. This means that users funds and assets are less secured with the centralized financial entities and anything that happens to the centralized entities would also affect users funds.

Slower transactions due to third parties involved

This is another very big flaw in centralized finance. The third parties involved causes slower transactions. For instance, when sending funds to another person in another country, it can take a lot of time since the transaction would have to go through various third parties for approval. This processes add to the transaction time which can lead to slower transactions. Some transactions can take days or weeks to deliver.

Higher cost

The cost of sending funds to other users using certain services in centralized finance can be very high especially when sending large funds to another part of the world. This is one of the benefits of blockchain and DeFi because transactions take place on the blockchain and can be sent to anywhere in the world at a much lesser cost and transaction fees. In centralized finance, the fees to send funds can become very high depending on the transaction and the distance.

Lack of transparency

In centralized finance, there is lack of transparency because the central authorities keeps all the details private. This also increases fraudulent activities and manipulation in the system. Because of the lack of transparency, transaction records can be altered or manipulated by those in power, which is a major flaw in the centralized financial system.