A number of people might not have heard of the term decentralised finance. However, there is a great possibility that Bitcoin and Dogecoin are familiar terms. As of the present, there are thousands of decentralised currencies that exist and have a total value of more than $2 trillion this year as these continue to gather more global investors.
DeFi’s appeal stems from its autonomy from traditional financial systems the protection and anonymity that it offers. However, this shook the foundations of decentralised finance when Bitcoins that were used in the Colonial Pipeline ransomware attack were recovered by the FBI. Many are bewildered on how the payments were traced back to certain individuals when it was said that DeFi is untraceable.
With various misconceptions that hover around the crypto space, it would be best to decipher these misconceptions about decentralised finance. Bitcoin Era is a platform that is a good option to start trading.
Decentralised finance equals anonymity.
DeFi permits the creation, trading, and managing of digital currencies on the blockchain. There is data synchronisation and sharing across various computing nodes that verify transitions. No single entity controls the system. Users create an account or trade currencies without being required to provide proof of their identity. This provides a different anonymity level not available with other financial institutions.
Blockchain is a public ledger that records all transactions made in the system. Anyone with access to the system can see the transactions. Although information about one’s identity is not a requirement when making transactions, these are still traceable. Law enforcement and government agencies follow the trail of the money where the funds are deposited to connect to the owner of the bank account.
Blockchain technology’s main purpose is to support decentralised finance systems to facilitate the verification of each transaction through millions of individual nodes and publicly share this information. This boosts the confidence of users in the system’s accuracy. The process involves that although a person’s identity is not disclosed, transactions can still be followed, which does not equate to full anonymity.
Major financial institutions will end when cryptocurrency is adopted.
In the late 2010s, decentralised finance systems gained momentum. This circulated rumours among financial industry experts and enthusiasts that the technology will trigger the end of most major banking institutions in the world. Centralised fiat currencies will be taken over by digital funds. There will be ease in investing, lending, and handling of real estate deals with blockchain’s smart contracts. The International Monetary Fund recently released a white paper that assessed DeFi’s potential to become the new global norm.
It is true that banks could become outdated if they do not become proactive. However, this would not probably happen as some financial institutions have made major investments in cryptocurrencies and related services. Blockchain was first used by DeFi services. However, this is not exclusive to crypto alone.
Blockchain transactions are completely secure.
Another misconception about blockchain is that it is more secure than centralised systems because of the multiple nodes that verify and record transactions within the system. A common thought is that a single transaction would be verified by thousands. Thus, these multiple people would be able to identify and prevent the use of one’s account without the owner’s permission. However, this is not true.
What is true is that blockchain protects against accounting or administrative errors. Blockchain does eliminate the protection provided by centralised financial institutions. These institutions have been in existence for years, and there have been protocols set up to protect users from fraud.
On the contrary, a person can only be protected from illegal access to their accounts through a piece of unique login information which usually consists of a username and password. Knowledge of this information can allow hackers to zero out the balance of a victim.
The growth of decentralised finance through the years is evident. Despite the new services that crypto and blockchain technologies could offer consumers, it is important that consumers can identify truth from myths about these services.