Traditional Finance vs Decentralized Finance
Gone are the days when people used financial institutions, banks and intermediaries to give them complete control of their cash. It is the era of smartphones and the connected world. In this digital world, people need more control over money, trustworthy services and transparency that were not available in traditional finance or TradFi.
Traditional finance is conventional, impervious and strongly controlled by centuries-old infrastructure. Although traditional finance was a popular method to lend, borrow, trade or invest money, still TradFi was not a user-friendly approach due to the following challenges;
1. It is not easy for everyone to open their bank account and acquire financial services
2. Traditional finance doesn’t give complete control over your money
3. Companies hold and monitor your hard-earned cash
4. People pay high fees to third-party authorities in TradFi
5. Bank and financial institutions work under the government law and legal policies
6. People can’t see prior loan history and records
7. Without human intervention, you can’t process your money
8. Banks and third-party authorities take days to complete business transactions
In order to cope with the traditional finance challenges, there was a great room for some revolutionary ideas to change the concept of the traditional financial systems by giving ownership and control over hard-earned money. Luckily revolution of blockchain and cryptocurrency has offered some out-of-the-box solutions to traditional financial problems. Ethereum is taking the lead by providing a solution to lending/borrowing challenges posed by traditional finance through the concept of DeFi (Decentralized Finance).
Ethereum, the second-largest cryptocurrency platform, introduced a new concept in the market to combat the challenges of traditional finance. Unlike Bitcoin, the purpose of Ethereum was to initiate smart contracts approach. Smart contracts change the entire game of digital money, enabling you to do more than just storing or sending coins.
Decentralized Finance (DeFi)
Financial applications that operate on smart contracts attached with programmable codes in blockchain are called Decentralized Finance or DeFi applications, in short. DeFi products aim to open financial markets and digital services for everyone across the globe. About 1.7 billion unbanked people can now access financial services through the DeFi platform.
With DeFi, people have complete control over their currency, and they can also find their currency alternatives in global markets. DeFi not only opens a financial world for people; it brings the digital economy at the palm of your hand.
Advantages of Decentralized Finance (DeFi)
Since DeFi removes the pressure from central authorities and third-party intermediaries, no one can block your payments, meaning that you can access the global market at any time to borrow, lend, invest and trade your money. Simply put, DeFi products make everything secure, smart and automatic which was not possible in traditional finance.
Some other key benefits of DeFi are as follows;
Existing financial services and banking systems are mutable; authorities can change or manipulate history and existing records. On the flip side, blockchain applications provide a true essence of immutability, i.e., no one can alter or manipulate prior financial records. DeFi, therefore, enhances security levels while protecting your accounts from insiders and fraudulent activities.
Authentication and verification of business transactions are central principles of the cryptographic platform. After verification, information is stored over the network and shared with everyone. It enables users to determine all the preceding activities that have been taken on the blockchain web. And being a transparent network, it lets users unveil scammers and deceitful attacks too.
Like traditional finance, decentralized finance does not require intermediaries. The framework of DeFi relies on the algorithm and programmable codes that resolves all the issues on their own. Consequently, users of DeFi applications will have confidence that their savings and wealth are protected.
Undoubtedly, decentralized finance is a permissionless or public blockchain network, giving access to anyone and making it easy for everyone to either build or use DeFi protocols, such as Liquity.
Let’s discuss the difference between traditional finance and decentralized finance in tabular form to understand which one has the potential to drive the world’s economy;
Use Cases and Applications of Decentralized Finance
In traditional finance, the idea to use crypto assets was vague. Applications like decentralized exchanges, high-yield assets management and flash loans demand financial protocols and programming languages while offering zero risk, high trust and self-custody benefits.
Decentralized finance protocols, however, open a world of monetary activities and leading opportunities, ranging from the management of synthetic assets to decentralized autonomous organizations. We have gathered a list of uses cases and applications of DeFi protocols to understand its demand;
The DeFi protocols enable you to become your own boss of digital assets and crypto funds. You can transfer, sell, buy and earn interest rates from your digital assets through DeFi protocols. In the DeFi space, users have crypto wallets or bitcoin wallets, e.g., MetaMask, which work as a physical medium for cryptocurrency transactions. MetaMask empowers you to store both public and private keys vital to buy, sell, invest, trade or swap tokens.
Decentralized Autonomous Organization (DAO)
A decentralized autonomous organization (DAO) or decentralized autonomous corporation (DAC) offers a self-governing vehicle for funding purposes. Since it is automated, it works without traditional funding managers. Particularly, DAC is integrated with software codes occupying a transparent nature and measured by corporation members.
Decentralized exchanges or DEXs, in short, execute without human intervention, middleman, or any central arbitrates. The absence of central authority facilitates you to conduct peer-to-peer transactions and control over funds. Most importantly, there is no need to worry about hacking and cyber-attacks, which were common in traditional finance systems.
It is estimated that over 200 stablecoins have been released in the cryptocurrency market. The purpose of these stablecoins is to bring or improve stability in the pool. DeFi platforms employ stablecoins for transmittal payment, lending & borrowing and reward purposes. Typical examples include Tether (USDT), Paxos Standard (PAX), USD Coin (USDC), Liquity USD (LUSD) and many more.
Lending and Borrowing
The majority of DeFi protocols are used for lending and borrowing services. The working of these borrowing and lending protocols is somehow similar to the traditional financial markets. If you have assets and you want to earn interest against these assets, lend your crypto funds into the liquidity pool. Funds, however, are not locked. You can withdraw them at any time. Borrowers, on the other side, jump into the liquidity pool to bring out loans.
Maker and Liquity are the most leading examples of DeFi lending & borrowing protocols. Nonetheless, Liquity follows a more intellectual and brisk approach than Maker. Liquity is a decentralized, immutable, governance-free borrowing protocol, based on a hard pack mechanism that facilitates users to borrow interest-free loans against Ether.
But Liquity team doesn’t operate its own frontend operator as they want to intensify censorship resistance, amplify decentralization and bootstrap distributed ecosystem.
Liquity, therefore, has multiple frontend operators essential to connect end-users to the Liquity protocols and receive LQTY rewards in exchange. Among them, freely. finance is a Liquity frontend operator supporting a kickback rate of 99.9%. It offers steadfast, trustworthy and never-failing Liquity protocol to its users.
Being a top-tier gateway for Liquity Protocol, it entitles you to open Trove to borrow $LUSD (stablecoin) against your ETH coin. You can also deposit $LUSD stablecoins into the stability pool to avoid liquidation and then receive rewards like $LQTY in return. Finally, stake this $LQTY to acquire protocol fees in both $LUSD and $ETH.
Decentralized finance (DeFi) is the leading trend in 2021. The DeFi applications are changing the working principle of today’s financial institutions and banking services. DeFi is crucial to reducing the pain points and incompetence of decades-old infrastructure and processes. In contrast to traditional finance, DeFi doesn’t depend on central authorities. Anyone with a stable internet connection, smartphone and laptop can access digital currency and stablecoins.
All in all, the DeFi application will change the face of the global economy meanwhile automating the functionalities of the current financial system. Keeping the applications of DeFi in mind, it is the right time to invest your valuable money into Ethereum as the majority of DeFi applications operate over here. Likewise, decentralized finance protocols and frontend operators are also gaining immense momentum in this field.
Disclaimer: The content of this article is not investment advice and does not constitute an offer or solicitation to offer or recommendation of any investment product.