Banks and financial exchanges are black boxes. We know what utility they have but have NO clue what happens in the backend.

DeFi’s goal is to create a more accessible and transparent financial system that puts control back in the hands of regular people.

So, let’s compare DeFi (Decentralized Finance) and TradFi (Traditional Finance).

DeFi vs. TradFi

When it comes to finance, the biggest difference between traditional finance (TradFi) and decentralized finance (DeFi) is who controls the financial system.

With traditional finance, central authorities such as governments and central banks control the financial system.

On the other hand, with decentralized finance, there is no central authority. DeFi relies on code. You can send money, earn interest, and get a loan from users directly through smart contracts that enforce the rules.

Let’s compare TradFi to DeFi in more detail:

Trust

• TradFi: Middlemen like banks hold your money.
• DeFi: You hold your money and trust smart contracts to handle it.

Transparency

• TradFi: Financial transactions are often opaque.
• DeFi: Many DeFi protocols are open source.

Identity and access

• TradFi: You must apply for a bank account with your identity and credentials. Banks and markets are only open during business hours.
• DeFi: You can use DeFi protocols without revealing your identity as long as you have a crypto wallet. DeFi protocols work 24/7.

Returns

• TradFi: Middlemen take a large cut of your returns (e.g., banks only offer 0.5% savings).
• DeFi: Returns are often higher due to more risk and fewer middlemen taking a cut.

Risk

• TradFi: Banks are federally insured and heavily regulated.
• DeFi: DeFi protocols are usually not insured or regulated (for now). Risks include volatile token prices, smart contract bugs, and scam projects.

As you can see, while DeFi has considerable advantages, it also has disadvantages:

• Advantages include more transparency, greater access, and higher potential returns.
• Disadvantages include higher risk associated with a nascent, unregulated industry.

It’s important to understand what you’re dealing with here. As investors, you need to understand the risk-reward equation. Always think carefully about the money you’re going to put to use.

The best approach right now is to use both systems for things they’re better suited for. Use TradFi for everyday money dealings and use DeFi for sending money internationally or earning interest on your cryptocurrencies by lending them.

Next week, we’ll understand how can you make your Crypto earn interest for you.

Till then, keep learning, keep building.

Zelta out.