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
- 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:
- 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:
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.