The Battle for Your Money! DEFI vs. Traditional Banking

Introduction

Decentralized Finance (Defi) is an open and global financial system built for the Internet age. It offers access to global markets and provides alternatives to local currency and traditional banking options. Defi is accessible to anyone with an internet connection and operates transparently.

But wtf is even DEFI?

Defi is a collective term for financial services and products available to anyone using Ethereum. Unlike traditional finance, there are no middle parties that can block or deny transactions. While fintech companies often display beautiful interfaces that make transactions appear instant, they can take days to process behind the scenes. Furthermore, the backbone of the traditional financial system has seen little evolution since the 1920s. Defi leverages cryptography, decentralization, and blockchain technology to create a new financial system, enabling borrowing, lending, and trading more openly and efficiently, without geographical restrictions or the need for anyone's permission. Any single entity cannot alter the rules of this system.

Some scary numbers of DEFI

• Total Value Locked (TVL) surged from $1 billion in April 2020 to an astonishing $32 billion by February 2021.

• Trading volume on Decentralized Exchanges (DEX) increased from $0.5 billion to $50 billion.

• Notably, the total volume settled reached $1 trillion in just a year, surpassing even PayPal's volume.

• Stablecoins have experienced remarkable growth, with the market cap of USDC jumping from $1 billion in April 2020 to $6 billion in 2021, and another stablecoin, DAI, growing from $0.1 billion to $2 billion in February 2021.

Problems in Traditional Finance that DEFI Solves

In traditional finance, decision-making happens behind closed doors, often by centralized authorities, which can affect the entire market. Defi, on the other hand, democratizes trading, offering users more control and transparency. For international transactions, where fees can reach 10% to 30%, Defi enables transactions at a fraction of the cost and in a matter of seconds. Automation in accounting further saves financial capital.

Challenges in DEFI

While Defi brings numerous advantages, it also imposes new responsibilities on users who own their assets without hand-holding. Regulatory risks, such as Know Your Customer (KYC) requirements, enforced by regulators, are a concern. Scaling is another challenge, as the increasing demand for block space can raise transaction costs. However, these issues are being addressed with the introduction of Layer 2 solutions and Ethereum 2.0. Security is another concern, with hacks posing risks, prompting the exploration of new governance models. Implementing uncollateralized loans and mortgages in Defi is challenging, but protocols like AAVE are actively exploring solutions, such as credit delegation and tokenized mortgages

Conclusion

In conclusion, Defi represents a transformative force in the financial world. Its rapid growth and innovation offer a glimpse into the future of finance. However, it comes with both promises and challenges. Users must navigate this exciting landscape with a clear understanding of the risks and opportunities it presents.