InvestorQ : What is the difference between Defi(decentralized finance) and traditional finance?
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What is the difference between Defi(decentralized finance) and traditional finance?

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1 year ago
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Defi, short for decentralized finance, is the latest step in the financial technological revolution. Defi is powered by blockchain technology and essentially runs on a global network of nodes. These nodes can mathematically verify transactions and record them on the blockchain. Defi encompasses anything that provides loans, borrowing, staking, or some reward to the user for putting in capital to the system. Unlike traditional banks, it removes all the layers of intermediaries and middlemen that would normally be involved through the use of smart contracts. This also removes all the high costs associated with this legacy system – and these benefits are transferred to the end-user. In today’s modern world, approximately 1 in 3 people are unbanked.

Furthermore, around two-thirds of this group have access to a smartphone and the internet. This means that millions and millions of people, for the first time, will have access to financial tools and instruments all from their handheld devices. Defi can help struggling economies, and protect people from their local inflationary currencies.

This does not mean that system is foolproof. Money laundering can still happen (though, arguably, less frequently or easily) under decentralized financial systems. An improperly programmed algorithm can still result in disparate impacts against creditworthy minority loan applicants (though it presumably can’t engage in disparate treatment discrimination).

And many Defi protocols are tightly integrated with their native token, whose value may be more volatile than other assets investors are accustomed to dealing with—meaning that risk disclosures are especially important. But the fact remains that these technologies, when carefully and properly used, can help to solve many financial-system risks in one leap of technology, especially in underdeveloped and emerging economies.


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