From CeFi to DeFi: the 5 problems with Centralized Finance

The history of finance is going through a period of momentous change. No longer will we have to settle for the services of giant organizations that control how money works. But to understand why decentralized finance (DeFi) is so groundbreaking, you have to face the problems with centralized finance (CeFi). Follow the article and have your mind enlightened!

Major problems with Centralized Finance

1. Limited access

There are billions of people all over the world. All of them in some way or another live in society and at some point need to make financial transactions. They go to the shops, buy clothes, sell what they grow, and so on. However, the centralized financial system that we have governing the world today is not intended to provide services to all these people.

There are about 1.7 billion people in the world who are unbanked, that is, excluded from being able to even have a bank account in their name.

Banks don’t want customers without insuring their assets, and they don’t need anyone as a customer. Furthermore, any business that could be created with a loan from a bank, and that would bring financial return and growth, is impeded.

So what happens is that many entrepreneurs often use their own credit cards to finance their new businesses, as banks won’t lend them to them because they are small. This becomes one of the biggest problems with centralized finance.

2. Lack of interoperability

Another big problem for CeFi is linked to the lack of interoperability between financial institutions.

These siloed institutions find it difficult to simply move money from one bank to another, and of course, from one bank to any non-bank institution or individual.

Organizations don’t always talk to each other, let alone find a quick method for transfers.

Behold, in the traditional and centralized financial system, we have to wait between 2 to 10 days to make a simple transfer — and we still pay high fees for it.

It’s the way banks have worked for decades. But how is it possible for these financial systems to remain the same — unchanged — for so long while the rest of the technologies evolve so quickly?

3. Inefficiency

Inefficiency is perhaps the most glaring problem and also the one we are most used to dealing with in any centralized organization.

The amount of our credit card payments does not fully reach the service or product providers we pay. 3% of each payment goes to the financial institution that owns the card brand. In other transaction types, this percentage is even higher.

It takes days to transfer funds between accounts, even more between banks, and there is no mention of when the transfer is international.

Frauds and chargebacks are also common, no matter how secure the institutions.

Of course, we are used to having to wait, to have to pay more for a super simple transaction, to enriching the big institutions of centralized finance. But for how much longer?

4. Opacity

Despite having such bad conditions for financial services, we continue to support this unsustainable industry — precisely because we can’t do anything about it.

We have no decision-making power. We don’t even know what’s going on. At least until now, thanks to DeFi.

One of the biggest problems with centralized finance is that it gives the public and its own clients very little transparency about what goes on inside.

Bank customers have no idea how healthy their bank is. Instead, they have to rely on expensive regulations with no confidence in the institutions where their money is.

• Read further: What is DeFi? Learn all about Decentralized Finance

5. Centralized control

And finally, here is the problem that is at the very essence of the traditional financial system: centralization.

The centralized banking system is highly concentrated, which means that the power to control economies is in the hands and interests of a few.

National central banks control entire currencies — as well as much of their value and distribution.

Having all this decision-making power so controlled can be highly risky for those voices that are not heard, those people that do not have access to banks, and an entire society that could thrive economically if it were free and inclusive.

What’s the result of CeFi problems?

The world we know today, where CeFi predominates, suffers from the consequences of this model. For all these problems of Centralized Finance, there is a huge inequity of opportunities for autonomous business growth around the world.

This, in turn, triggers a series of socio-economic delays and prevents the world economy from being truly free.

From there, when we see all the problems with centralized finance, we can understand why the concepts of decentralization are so important.

DeFi will change the world as we know it today. How CeFi institutions will do to survive the future is what remains to be seen. And who wouldn’t love to see the big banks run after the loss?

Did you like the article? Don’t forget to react to this post on Medium to show your appreciation!

This article was originally published on the Lady Nakamoto blog on April 16, 2022.