DeFi vs TradeFi: The future of finance is in your hands

“At their core, banks sell the utility of resources and the stewardship of resources.”

― Hendrith Vanlon Smith Jr, CEO of Mayflower-Plymouth

The top two goals of DeFi are to reduce transaction times and increase access to financial services.?

In this aftermath, the fundamental concept of banking evolves. Instead of solely selling utility and stewardship of resources in an unequal social fabric, DeFi empowers individuals to access, manage, and trade resources with greater control, transparency, and efficiency in financial transactions.?

For banks, the only way forward is to embrace their new role as facilitators, offering guardrails of support within this decentralized ecosystem with robust infrastructure, secure tech, and reliable ecosystem partners. This redefines the purpose of banks and how resources are handled. It also harnesses open-source code allowing anyone to build on pre-existing applications in a permissionless, composable manner.

The key characteristics of DeFi include

• Decentralization: While there is no central authority or third party, this is not only a dispersal of power but also a dispersal of risk. If a company holds customer data in one spot, a hacker only needs to access that site for a vast amount of data. Storing data across several locations or removing a singular point of vulnerability improves security.
• Open & permissionless: Anyone with a decent internet connection can have entry into the DeFi ecosystem without discrimination, censorship, or permissions from monetary authorities.
• Interoperability: DeFi protocols can be designed to be interoperable for seamless processes and integrations both on-chain and off-chain from fiat to crypto and vice versa. The use cases pan out into more sophisticated financial applications to tackle complex socio-economic issues. While maximizing efficiency and utility for everyone.
• Programmability: As the legos of DeFi, smart contracts are predefined rules of code on the chain that allow automation of financial processes, and instant feedback from users across lending, borrowing, and trading with disintermediation and without complete redeployment.
• Transparency & Auditability: DeFi transactions are transparent and recorded on a public blockchain. Anyone can verify and audit transactions and smart contracts, boosting trust, loyalty, and accountability within the ecosystem.
• Financial Inclusion: This opens financial services to unbanked and underbanked populations who very well add value to the economy via services, products, or experiences. They can tokenize their assets both tangible and intangible, access loans, earn interest, and engage in multiple financial activities regardless of geography or socio-economic band.
• Trustless & non-custodial: No need for a chief and center entity with custody of funds. All users retain full autonomy of their assets and transactions occur directly between participants via smart contracts minimizing counterparty risks.

How DeFi differs from TradeFi

“The banking system today still largely runs on legacy rails. Money doesn’t flow in real-time. With the advent of stablecoins money became programmable, settling in seconds around the clock, and providing transparency into transaction ledgers.”

– Peter Grosskopf, Unstoppable Finance’s co-founder and CTO

Traditional finance orgs like commercial banks have long-winding processes and a track record of decent performance. They offer insurance and security mechanisms to ward off theft or derailment. They also require specific customer details and identification documents for participation.?

On the other hand, DeFi has no nine-to-fives or business working day thresholds or bureaucratic greenlighting processes. Without the involvement of banks, the DeFi market doesn’t sleep or slumber, transactions can happen 24/7 in real-time with no gatekeeping. Crypto can be stored on computers or wallets and remain accessible at all times. This primarily happens because of the technology that powers it.

The science behind DeFi?

DeFi is built on the blockchain technology, which was invented by more than one innovator. But the first DeFi apps appeared on top of the Ethereum chain invented by Vitalik Buterin. Since, they have expanded to other networks that use smart contracts and automate transactions. Solana, Binance, Polygon, Algorand, to name a few. They all use cryptographic techniques to ensure immutability, transparency, and consensus among participants.?

Components of DeFi

Smart Contracts

As the backbone of DeFi, smart contracts are programmable code that execute predefined actions when specific conditions are met.?

DApps

Decentralized applications (dApps) are applications built on top of blockchain networks. They deploy smart contracts for multiple financial services like lending, payments, decentralized exchanges or marketplaces, or yield farming protocols.

Tokens & Token standards

Anything real-world or digital, tangible or intangible can be tokenized to create value in the economy. They can be transferred, traded, and stored just like traditional assets but with the added edge of being programmable and verifiable on chain. Token standards are rules and protocols that adhere to respective blocjains (Ethereum based ERC-20 for instance). This mechanism helps convert real-world assets like real-estate, financial & insurance instruments, art, precious metals, carbon credits, company shares,? or digital collectibles into digital tokens. They can be owned, fractionalized, monetized, with better liquidity and broader access across demographics as compared to traditionally illiquid assets.

Liquidity Pools & Automated Market Makers

Liquidity pools are pools of funds contributed by users for trading on decentralized exchanges (DEXs). These tokens can be redeemed allowing you to earn fees from trading activity. Intelligent market agents, also known as Automated Market Makers are the DeFi counterparts of traditional order books. Only, they leverage math formulas and algorithms to fix optimal asset prices and execute trades.

Oracles

Oracles provide external data to smart contracts and act as bridges between blockchain and real-world data allowing DeFi applications to access information like price feeds or weather data accurately for secure DeFi operations.

Summing up

DeFi combines cryptography, distributed systems, game theory, and economics to create an open financial infrastructure. As a result, it revolutionizes TradeFi with increased accessibility, transparency, and efficiency.

And kreatorverse.com is happy to help you join the future the economy. Get in touch!