Decentralized finance (DeFi) is a relatively new concept in the world of finance, and it is based on blockchain technology. Yet DeFi and TradFi (Traditonal Finance) standsout in several key ways;
- Decentralization: One of the main differences between DeFi and TradFi is the level of decentralization. Traditional finance involves centralized financial institutions, including banks, credit card companies, and investment firms. These entities have control over the flow of money and make decisions regarding lending, borrowing, and investing. DeFi differs from traditional finance as it operates on a decentralized network of computers. The control over financial transactions in DeFi is distributed among the participants of the network, unlike traditional finance where it is concentrated in the hands of a small group of centralized institutions.
- Transparency: Another key difference between DeFi and TradFi is the level of transparency. Financial institutions in traditional finance often keep financial transactions and records private, making it difficult for the average person to track where their money goes or how it is being used. DeFi operates on blockchain technology, providing transparency and immutability of transactions. This allows everyone to see and verify the transactions taking place on the network.
- No intermediation: Another is lack of intermediaries in DeFi. In tradFi transactions typically go through intermediaries like banks,brokers etc, and those intermediaries take their cut and take time to execute. In DeFi, transactions can happen directly between the parties using smart contracts and without intermediaries, making transactions faster, cheaper, and more efficient.
- Multilevel Inclusion: Another point is that DeFi is more inclusive in nature by providing access to financial services to people who might not be able to access them through traditional channels because of their location, credit score, or other factors. DeFi’s decentralized nature enables people from any part of the world to participate in the network, making it possible for everyone to have access to it.
- Hub for innovation: DeFi is open to innovation, allowing for the creation, building, testing, and trading of new financial instruments, lending, and borrowing in open marketplaces. This leads to more experimentation and faster adoption of new financial products.
- Accessibility: DeFi is accessible to anyone with an internet connection, unlike traditional finance, which is often only available to those in certain geographic areas or with specific qualifications. This means that DeFi has the potential to reach a much larger population than traditional finance and provide financial services to people who might not have had access to them before.
- Automation: DeFi protocols and smart contracts execute specific actions automatically based on predetermined rules, enabling faster, more efficient, and accurate execution of financial transactions.This can help to reduce the costs and risks associated with traditional financial intermediaries.
- Liquidity: In DeFi, users have access to a wide variety of lending, borrowing, and trading options, which allows them to move their assets around and take advantage of changing market conditions more easily. This can make DeFi platforms more liquid than traditional financial markets, as it is easier for users to buy and sell assets in a short period of time.
- Open-Source nature: Most DeFi protocols and platforms are open-source, meaning that anyone can access the code and build on top of it. This allows for a more transparent and open ecosystem, and encourages experimentation and innovation.
- Censorship Resistance: Due to its decentralized nature, DeFi protocols are more resistant to censorship since they are uncontrollable by any single entity. This means that no single organization or government can control the flow of money on the network or shut it down.
These are a few ways in which DeFi differs from tradFi. It’s important to note that DeFi is a new and rapidly evolving field and new use cases and features are emerging frequently.