In the digital age, finance has evolved significantly and paved the way for a new way of operating and thinking about money. Decentralised Finance or DeFi has emerged as an alternative financial ecosystem, driven by blockchain technology and cryptocurrencies. In this context, decentralisation has become more important and has challenged the status quo of traditional finance. In this article, we will explore the key differences between DeFi and traditional finance and how these differences affect the end user. Let’s discover together how DeFi has changed the way people interact with money and what opportunities it provides for the future of finance.
It is important to mention some concrete examples of DeFi to get a better understanding of this new form of finance. One of the best known examples is Uniswap, a decentralised exchange (DEX) that allows users to exchange cryptocurrency tokens without the need for intermediaries. Another example is Aave, a lending and flash lending platform that uses smart contracts on the Ethereum blockchain to ensure the security and transparency of transactions. There is also MakerDAO, a protocol that allows users to generate DAI, an Ethereum-backed stablecoin, using cryptographic collateral. These are just a few examples of the many possibilities offered by the DeFi ecosystem.
Control and Centralisation
One of the main aspects in which decentralised finance (DeFi) differs from traditional finance is in the control and centralisation of data. In traditional finance, data is controlled and managed by a group of intermediaries, such as banks, insurers and other financial service providers. These intermediaries act as gatekeepers of financial data, keeping it in their possession and providing access to it only when necessary. This means that users’ financial data is highly centralised and can be vulnerable to security breaches and misuse.
In DeFi, on the other hand, blockchain technology is used to create a decentralised ecosystem in which financial data is distributed across a global network of nodes. Instead of being centralised in one place, financial data is stored in blocks of information that are verified and validated by a decentralised network of users in real time. This means that there are no intermediaries acting as data gatekeepers and that financial data is available to any user who has access to the network.
This decentralisation of financial data in DeFi has several important implications. First, it provides greater transparency and security. Since the data is distributed over a global network, any attempt to corrupt or alter the data is immediately detected. In addition, any user of the network has access to the same data, which means that there is greater transparency in the financial system as a whole.
Secondly, the decentralisation of financial data also means that users have greater control over their own data. In traditional finance, financial data is controlled by intermediaries and access to it is only provided when necessary. In DeFi, users have the ability to access their own financial data at any time, anywhere in the world. This means that users have greater control over their own finances and can make informed decisions based on the data that is available to them.
Transparency and security
In traditional finance, intermediaries are responsible for maintaining the security of financial assets and ensuring that transactions are safe and accurate. However, these intermediaries often charge commissions and fees for their services, which can significantly increase transaction costs for users.
At DeFi, blockchain technology enables the creation of decentralised financial applications that operate on a global network of distributed nodes, meaning that there are no intermediaries that charge fees for their services. In addition, the transparency and security of transactions are guaranteed by blockchain technology. All transactions made on DeFi are recorded on a blockchain that is immutable and verifiable by any user of the network.
In addition, blockchain technology enables the creation of smart contracts that automate financial processes. These contracts are computer programmes that are automatically executed when certain predefined conditions are met. This means that financial transactions can be executed securely and accurately without the need for intermediaries that can increase costs and delay the process.
Transparency is also an important aspect of DeFi. In traditional finance, transparency of transactions can be limited due to the number of intermediaries involved in the process. In DeFi, all transactions are public and can be verified by any user of the network in real time. This provides greater transparency in the financial system and allows users to make informed decisions about their finances.
Accessibility and openness
In traditional finance, there are often geographic or income barriers that limit access to basic financial services. For example, in many developing countries, large parts of the population do not have access to bank accounts, credit cards or loans, which can prevent them from accessing the financial resources they need to improve their lives.
However, at DeFi, anyone with internet access can enjoy a variety of financial services, regardless of their geographic location or income level. This is possible because DeFi applications are decentralised and not controlled by a single entity. Instead, they run on a global network of distributed nodes that are available to anyone with an internet connection.
The accessibility and openness of decentralised finance is also due to the fact that there are no minimum income or wealth requirements to access financial services in DeFi. In contrast, in traditional finance, it is common to require a certain level of income or wealth to access financial services such as credit cards or loans, which can exclude people with low income or wealth.
At DeFi, users can access a wide range of financial services, from loans and savings to trading and insurance, regardless of their income or wealth. In addition, users can use cryptocurrencies such as Bitcoin or Ethereum to access these financial services, allowing people without access to traditional financial systems to participate in the global financial ecosystem.
Fees
In traditional finance, intermediaries such as banks, brokers and financial advisors often charge high fees for their services. These fees can include transaction charges, account management fees, withdrawal fees and more. These fees can significantly reduce investment returns and diminish the value of financial services.
On the other hand, many DeFi services are free or have much lower fees compared to traditional financial services. This is because DeFi applications are designed to be run on a decentralised blockchain network, which eliminates the need for costly intermediaries and reduces operational costs.
For example, in the case of DeFi loans, borrowers can access loans at lower interest rates than in traditional finance. This is because DeFi loans do not rely on costly intermediaries, such as banks or credit card companies, and loans are provided directly by the DeFi platform’s community of users.
In addition, on DeFi, many financial services, such as cryptocurrency trading, are performed without the need for intermediaries. Users can exchange cryptocurrencies directly on a decentralised blockchain network, eliminating the need for costly intermediaries and reducing transaction fees.
Flexibility
In traditional finance, choices of financial products and services are often restricted by the structure and policies of financial institutions. Customers may have limited options and be subject to specific requirements, such as a minimum deposit or a strong credit history, which limits the accessibility of financial services.
On the other hand, in DeFi, users can access a wide range of financial products and customise them to their needs. Because DeFi applications run on a decentralised blockchain network, users have access to a wider range of services and can customise them to suit their individual needs.
For example, DeFi loans are offered in a variety of options and users can customise the term and interest rate to suit their needs. In addition, users can access a variety of investment options, such as mutual funds and stability tokens, and customise their investment portfolios to suit their preferences. Additionally, on DeFi, users have the ability to create and issue their own tokens and financial assets, giving them even more flexibility and customisation in their financial options. This allows them to adapt quickly to market needs and changes.
Transaction speed
One of the main differences between DeFi and traditional finance is transaction speed. In traditional finance, transactions can be slow due to the need for approval and verification processes. For example, transferring money from one bank account to another usually requires approval from a third party, such as a bank or credit card company, which can take business days.
In contrast, on DeFi, transactions can be faster and more efficient due to automation and the lack of intermediaries. DeFi transactions are processed by a decentralised network of nodes, which means there is no third party that has to verify the transaction before it is completed. This allows users to send and receive payments instantly, which is especially useful in situations where a quick response is required, such as in cryptocurrency trading.
In addition to being faster, DeFi transactions can also be more cost-efficient. In traditional finance, intermediaries may charge a fee for processing a transaction, which increases the overall cost of the transaction. In DeFi, transactions are processed by network nodes that receive a small fee for their services. As a result, transaction fees are generally much lower in DeFi than in traditional finance.
Conclusions
In conclusion, Decentralised Finance (DeFi) has emerged as a disruptive and challenging alternative to Traditional Finance. DeFi offers greater accessibility and openness, lower fees, greater transparency and security thanks to blockchain technology, and a wide range of financial services. In addition, DeFi can provide faster and more efficient transactions due to automation and the lack of intermediaries.
However, traditional finance remains the dominant form of financial services worldwide, and many users may prefer its more established and trusted approach. In addition, traditional finance offers legal and regulatory protections that have not yet been fully developed in the DeFi arena.
Ultimately, both forms of finance have their advantages and disadvantages, and it is important that users carefully consider their financial needs and personal preferences when deciding which type of financial services to use. Over time, we may see greater integration and collaboration between traditional finance and DeFi, creating a more balanced and complete financial ecosystem for end-users.
