How does DeFi differ from TradFi (traditional finance) and what is the difference for the user?

DeFi (decentralized finance) aims to disrupt the finance market by cutting out the middleman, for example, your bank. It focuses on borrowing, lending an market making and allows investors to directly interact with each other on a peer-to-peer (P2P) basis by providing loans or liquidity for trading and assume those roles/functions in return for generating fees. Marc Bernegger,  tech entrepreneur and AltAlpha Digital crypto hedge fund co-founder, describes what has happened, “The disruption of the banking sector, which we have seen in the recent years driven by FinTech players, has now escalated to the next level with DeFi laying the groundwork for a peer-to-peer ecosystem.” 

There are four ‘tools’ that have enabled DeFi to grow. They are:

• Artificial intelligence
• Big data
• Cloud
• Distributed ledger technology (smart contracts & blockchain)

What is the problem with TradFi?

The TradFi space, while well established, presents some significant barriers to entry for portions of the population. For example, in emerging economies there are large portions of the population (50-70%) that have no access to banking.

By contrast, DeFi is a digital assets space that can be accessed 24/7/365, with services and global network coverage being constantly expanded and improved. Its accessibility has drastically increased with the spread of Internet coverage and cheap smartphones in all economies.

However, while DeFi sounds great in theory and has been shown to work in practice, there is still a long way to go. The topic remains complex and hard to grasp for many potential users. User interfaces and processes still have plenty of room for improvement and simplification, fees can vary, resulting in unreasonably high charges for smaller transaction amounts.

How you can make money with DeFi

There are two ways: you can either invest in the DeFi projects/protocols by buying the respective tokens while expecting capital gains through price increase based on a superior platform offering, user and asset growth. Or, you can actually use these platforms as an “operator” and generate income from the various activities available. These are:

• Staking
• Lending
• Liquidity provision
• Yield farming

What you should look for in a DeFi project

When doing your due diligence on any DeFi platform, the key things to look at are:

• Team
• Technical
• Tokenomics
• Insurance
• Pools

This is a new industry that is growing in front of us, and while it still has to mature, it is changing the face of finance, especially if you want to obtain a loan, or want to make money by lending yours. No TradFi service offers you this with such ease.

One of the compelling reasons the world needs decentralized finance (DeFi) is the corruption in the financial system. I have just been reading an opinion piece by RTR Crypto in Cointelegraph, which highlights the issue of remittances. Around the world there are a considerable number of people who work in another country in order to send money home. This is a finance sector known as ‘remittances’. The issue for these people is that those companies known as ‘remittance providers’ take a chunk of the workers’ hard earned money, and it could be as much as ten percent, or even 20%.

When migrants send home part of their earnings in the form of remittances, they represent a large source of foreign income for many developing economies. They can represent as much as 4% of the GDP in a low-income country, and 1.5% for middle-income countries. Furthermore, remittances are important because they tend to be stable, and instead of decreasing during economic downturns or after a natural disaster. They actually increase, while private capital in-flows decline at these times.

DeFi solves the remittance pain

As RTR points out, credit card companies and personal loan services charge high fees, as do remittance services. By contrast, a DeFi platform could radically cut the fees workers pay to send money to their home country. Workers pay the high fees because they have no choice – their families depend on this money to keep them out of poverty. The amount sent annually is in the hundreds of billions of dollars, which makes it an appealing sector for DeFi platforms.

DeFi platforms offer everyone, not just the world’s migrant workers, a way to have greater control of their money. In addition to paying much lower transfer fees, users would have access to borrowing, lending, trading on margin and so much more. Plus, DeFi coupled with stablecoins is a powerful combination, especially for the unbanked. And those who receive the remittances can also take advantage of the products offered by DeFi, such as reward systems like liquidity pools or staking. It’s a win-win solution – and that is why the world needs DeFi.