DeFi Vs. Traditional Finance

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Banking is currently centered around corporate governance. A need for reform and innovation is much needed as our current system could be improved, via greater competition and less regulation, for certain ecosystems.

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As a result of the crypto community's need for financial reform, several stakeholders came with alternative financial models. The potential demonstrated by blockchain, and cryptocurrencies is undeniable, and drew the attention of an online community, inspired by this new business model, offering new opportunities to the financial industry. A shared economy has now evolved, and this new business model is helping to drive the democratization of new cryptocurrencies, in addition to current famous tokens.

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DeFi Explained

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Decentralization refers to any circumstance where a dedicated network is managed by a group of entities, rather than a central authority. Cryptocurrencies  are perfect uses cases of decentralization, creating a unique, yet decentralized environment. Decentralization must not be mistaken with distribution. Distribution emphasizes collaboration between multiple systems where numerous computers collaborate to complete a job by sharing resources and processing power. Decentralized Finance (DeFi) is a mechanism where financial transactions are not conducted without any middlemen (banks, or any other financial institution). Indeed, DeFi a eliminates central authority and provides innovative financial alternatives for consumers through the use blockchain technology, via cryptocurrencies. DeFi was initially created to provide a transparent ecosystem aiming to eliminate fees, to decentralize ownership and provide an effective alternative to the current banking system. In traditional finance, Transactions are recorded on a private ledger trough blockchain, and are maintained and overseen by third parties, also referred as validators once a transaction is completed.  Financial transactions in DeFi, on the other hand, are kept in computer code in a decentralized setting. This network remains constant for stakeholders, through DeFi platforms. Transactions through Decentralized Finance always remain encrypted, guaranteeing safety and ownership. In this instance, ownership is always certified through blockchain and cannot be amended, unlike regular financial systems.

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Major Differences

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Decentralized finance is largely focused on transparency in comparison to traditional finance. This results in infinite possibilities, especially for developers, who can contribute to this ecosystem without permission from third parties. Rules for DeFi are not clearly established, leading to some current inefficiencies that the traditional system does not currently face. In traditional systems, an entity is the core decision maker of processes. In the case of DeFi, a public blockchain is the core governance of processes, leading transactions through smart contracts. Such contracts cannot be amended by third parties, and can only be amended by key stakeholders. Lastly, traditional finance currently has many barriers to entry, and is highly regulated. DeFi on the other hand, is still in its infancy and strongly encourages innovation from stakeholders.

In essence, both industries are needed to establish a thorough and complete ecosystem. Both Traditional and Decentralized Finance will be needed to shape the financial world of tomorrow.

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