DeFi vs Traditional Finance
As we continue to see a surge in the popularity of decentralized finance, or DeFi for short, the sector is likely to have a significant impact on how banks operate in the future and even has the potential to shift the structure of the whole financial system at a macroeconomic level. The article compares traditional finance and DeFi, introducing you to some unique benefits DeFi has to offer.
What is Traditional Finance
Beneath the surface of the financial system we are all familiar with, traditional finance encompasses a large network of companies engaged in investing, credit, debt, money markets, lending, insurance, and anything that has to do with managing money. These traditional finance systems are heavily centralized, and usually run by for profit companies.
Today, traditional financial systems across the world operate on fiat. The central banks print money that is backed by no real asset, and lend it to banking institutions. The banks are at a huge advantage, because they receive loans directly from the central bank at a low rate. The banks then turn around and lend that money for a higher interest rate, and collect the difference.
Wouldn’t you like to be able to receive loans from the central bank, and then lend it out at a higher interest rate and pocket the difference? That’s where DeFi comes in.
How DeFi is different
You can view DeFi as a financial system built on the blockchain that makes everything open to everyone at every level. DeFi opens up the world of finance and puts it in the hands of the people.
DeFi is a financial system that functions without any intermediaries, such as banks, insurances or clearinghouses, and is operated just by the power of smart contracts. DeFi applications strive to fulfill the services of traditional finance but in a completely permissionless, global and transparent manner.
DeFi protocols enable you to borrow or lend money on a large scale between unknown participants and without any intermediaries. Those applications bring lenders and borrowers together and set interest rates automatically in accordance with supply and demand. Moreover, those protocols are truly inclusive, as anybody can interact with them at any time, from any location, and with any amount.
The Trust Factor
If you deposit money into the bank, you inherently trust that the money will be there. This trust is backed up by the government, which will enforce laws if the financial institution does something illegal.
In DeFi, the trust comes from the open-source code in the smart-contract. Smart contracts allow developers to create financial applications with rules written in code. Since the smart-contracts run on the blockchain, they are always active, and follow the rules no matter what. Since the code is open source, anyone can look under the hood and view how the contract works. The collective efforts of the people is what brings the trust factor to the DeFi community.
We at Vee Finance vow to earn your trust while serving your DeFi needs. Follow us on our socials below for more details.