DeFi vs Fintech : Are They the Same Thing?
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Decentralized finance (Defi) and fintech are both the new cool kids on the block. But due to being so recent, not many people understand the difference between the two concepts.
It seems as if we are rapidly adopting innovative technologies every single day. From Web3 to Cryptocurrency to Smart Contracts, the tech world can seem to move too fast.
While you don’t need to know about every new technology out there, both Defi and fintech are important ones to keep an eye on. What’s even more important is to know the differences between the two.
They might sound similar but have core principles that differ from each other. That may or may not affect your decision-making when you decide to use one of these technologies.
Therefore, to clear out the confusion in your head, I’m going in-depth into what Defi is and how it differs from financial technology or fintech.
Table of Contents
What is Decentralized Finance (DeFi)?
Decentralized finance (Defi) is a financial technology that works on distributed ledgers. These are known as Blockchains.
Blockchain makes the backbone of Defi operations. It allows transactions under various rules and assumptions. You may have heard of blockchain technology being mentioned alongside cryptocurrencies.
Undoubtedly, cryptocurrencies are the most popular application of Blockchain.
Another crucial part of Defi is a Smart Contracts platform. These platforms go beyond the simple payment network, such as Bitcoin. They allow the creation of rules for any type of transaction.
One can transfer many of the clauses of a traditional agreement to a smart contract. The contract would then apply these clauses algorithmically.
These components come together to make Defi work. But what truly sets DeFi apart is its decentralized nature.
Decentralized Vs Centralized Finance
The biggest selling point of Defi is its decentralization. It takes traditional finance and transforms it into a transparent set of protocols via smart contracts and tokens.
Totaling over $16 billion in digital assets, DeFi’s appeal is pretty clear: It gives you access to a borderless and open alternative to every other financial service imaginable.
Whether it is savings, insurance, trading, or loans, Defi essentially foregoes the need for a central authority. This is very different from the traditional finance model including fintech.
Consequently, this quality makes people trust Defi more.
The removal of government or third-party institutions from the equation is one that many people like. Defi is unregulated and managed publicly by blockchain software. It is also open and transparent, unlike banks and traditional financial institutions.
Centralized finance also brings with it higher barriers. In contrast to that, Defi has low barriers to involvement. Anyone with programming skills can build their financial services on top of the blockchain network.
Additionally, the centralized nature of banks also comes with a ton of bureaucracy. Needless to say, we can all do without unnecessary bureaucracy.
In short, traditional finance involves others when handling your money. On the other hand, only two people handle Defi: the sender and receiver. Defi
Types of Defi
These are the most common types of Defi:
- Liquidity mining
- Lending platforms
- Stable Coins
- Decentralized exchanges
- Yield farming
- Prediction markets
Further reading: Your Ultimate Guide to Crypto Mining
What can DeFi Do? How does DeFi work?
Defi is still an emerging technology. Thanks to this, it is experiencing new and innovative changes every single day. Therefore, the full potential of Defi is still something that we have to discover.
Even then, there are some possible use cases for this technology today.
1) Helping Small Businesses
Defi involves person-to-person transactions. This way, it removes the transactional barriers that many small businesses and startups deal with. Business owners can set up their businesses with less investment. This allows them to launch their products faster. This leads to them earning more profit.
Additionally, if you are an entrepreneur, you know the pains of lending money from banks. Many banks are reducing their lending allowance to small businesses.
This makes it difficult for all the entrepreneurs out there to get things off the ground quickly. Defi allows you to bypass these problems as you no longer have to rely on these institutions.
2) More Accessibility and Inclusion
Centralized finance relies on investing and profiting from the customer’s money. As a result, they are reluctant to offer their services to communities with poorer infrastructure. Or lower wages.
This leaves finance institutions out of reach for many people. Even now, $1.7 billion people lack access to basic financial services.
Defi, however, does not profit in the same manner. Moreover, Defi is very dependent on technology rather than a brick-and-mortar building. This means any area with internet access and smartphones can give its residents a chance at Defi.
Communities that are neglected by traditional institutions can participate in global financial services. They can trade in stocks and bonds and secure their financial futures. Even better, they can control their money the way a centralized institution won’t let them.
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What is the Difference Between DeFi and Fintech?
Fintech is a great alternative to traditional financial institutions. There is no doubt about that. It provides ease, convenience, and cheaper rates. Even if it isn’t as prevalent and doesn’t offer as many services, fintech is still a game changer.
Moreover, accessibility has been at the heart of the fintech model since the very beginning. This is the same goal that Defi sets out to achieve.
So, you may ask, “Well, how are these two any different?”
The biggest difference between Defi and fintech is that of decentralization itself. Although it provides relatively better access, fintech is still centralized. It still requires us to rely on a third party for our transactions.
Companies like PayPal and Robinhood have certainly made our online payments easier. They have also helped make investing and trading more accessible. They have even succeeded at making money transfers across borders a piece of cake.
However, even with that, they have not fundamentally changed how financial institutions work. The hierarchy system and the core barriers are still very much there. Fintech does not inherently solve the structural issues of financial institutions.
So, How is DeFi Overcoming the Shortcomings of Fintech?
The way Defi is built achieves two very important things:
- It decreases the cost of distribution of financial instruments.
- It removes barriers to entry for all types of financial services.
Think about how the internet has disrupted just about every industry out there. From buying albums to Spotify-ing our songs. From walking into physical stores to shopping on Amazon. From needing a university degree to studying on Coursera.
Behind these huge changes, there is one primary reason: technology. Technology decreased the distribution cost of the product or service. This created a new wave of supply.
The same principle applies in the case of finances. Supply and distribution of financial services have become easier. Anyone can create a new app with almost zero costs. When it comes to DeFi, since it’s based on technology, consumers have no problem accessing it. In most cases, all they need is a digital wallet.
While this accessibility also exists in fintech, it doesn’t do so to the same extent. Plus, DeFi’s accessibility comes with ironclad security. This is thanks to the removal of third parties to facilitate transactions coupled with blockchain technology.
There are no gatekeepers in Defi as well. There are still some of them in fintech.
As if that wasn’t enough, Defi is also interoperable. That means different apps can be built on top of each other and customized in innovative ways. There is no limit to what one can create when it comes to Defi, a limitation that exists in fintech.
All in all, Defi projects are tackling long-standing problems that exist with the current financial system.
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The Bottom Line
The potential for Defi and fintech to change the world is enormous. But Defi goes a step further and provides capabilities that fintech is just not ready for.
Conclusively, though, both sides of finance provide great benefits to users.
Further reading: How to Build a Sustainable Decentralized Financial Systems
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