What is TradFi
TradFi (traditional finance) are financial ecosystems that rely on middlemen such as banks, to send money, earn interest, and get a loan. Banks make money by charging borrowers higher rates for their loans, and by keeping interest rates for your savings low.
What is DeFi
DeFi are financial ecosystems that rely on code instead. You can send money, earn interest, and get a loan – directly from users, through smart contracts that enforce the rules.
Many DeFi protocols are owned by users. This means that the users who hold the protocol’s tokens get the perks. In TradFi, bankers get the perks instead.
Essentially, users get rewarded for using the protocol – earning a “company’s stock” as they use the product.
TradFi vs DeFi
Trust
- TradFi: Users trust middlemen like banks to securely hold their money.
- DeFi: Users trust smart contracts to handle their money.
Transparency
- TradFi: Users are not privy to the inner workings of banks or other middlemen.
- DeFi: DeFi protocols tend to be open-source.
Identity and access
- TradFi: Users must apply for a bank account with their identity and credentials. Moreover, banks and markets are usually only open during business hours.
- DeFi: Users can use DeFi protocols without revealing their identity – as long as they have a crypto wallet. Since DeFi protocols rely on smart contracts aka technology, users can use it 24/7.
Returns
- TradFi: They are middlemen that take a large cut of your returns. For example, banks usually only offer 0.5% or lower returns for your savings.
- DeFi: Returns for DeFi are often higher due to higher risk and fewer middlemen taking a cut.
Risk
- TradFi: Banks are insured and regulated by the government. They have less risk, but because of regulations, they move much slower.
- DeFi: For now, DeFi protocols are typically not insured or regulated. There might be risks like price fluctuations, smart contract bugs, and scams.
Conclusion
DeFi has its pros and cons compared to TradFi:
- Pros: Is more transparent, offers greater access, and higher potential returns.
- Cons: Higher risk since the industry is still pretty young and unregulated.