Decentralized vs Traditional Finance

Decentralized Finance (DeFi)

• DeFi is an emerging financial technology based on secure distributed ledgers, similar to cryptocurrencies.
• DeFi aims to recreate and improve traditional financial systems using blockchain-based protocols and smart contracts.
• Key features of DeFi include decentralization, open access, transparency, programmability, trustlessness, interoperability, and immutability.

Traditional Finance (TradFi)

• TradFi refers to the existing financial system, including banks, governments, and other financial institutions.
• Main features of TradFi include centralized institutions, regulation, intermediaries, access limitations, physical infrastructure, and cost structures.
• TradFi strengths include established infrastructure, wide acceptance, existing legal frameworks, deposit insurance, and professional support.
• TradFi weaknesses include high fees, slow transaction speeds, lack of full control for users, and extensive documentation requirements.

DeFi vs TradFi

• DeFi excels in self-custody, self-execution, and interoperability across blockchains, while TradFi often relies on third-party custodians, intermediaries and limited interoperability.
• DeFi users typically benefit from low fees, full control, and potentially high interest rates, but also higher risks.
• TradFi users typically have established support systems, established rules, and ease of use through existing infrastructure.

DeFi Services

• DeFi platforms offer services such as lending/borrowing, automated market makers (AMMs), yield farming, decentralized exchanges, derivative trading, synthetic assets, and staking.

Lending and Borrowing in DeFi

• Crypto lending involves depositing crypto to receive interest payments.
• Borrowers often need to provide over-collateralization to mitigate the risk of price volatility.

Risks in Lending and Borrowing

• DeFi lending risks for lenders include borrower default, collateral volatility, and platform risks.
• DeFi lending risks for borrowers include over-collateralization and collateral liquidation.

Decentralized Exchanges (DEXs)

• DEXs are peer-to-peer marketplaces where users trade cryptocurrencies without intermediaries.
• DEXs often offer incentives for participation, like trading fees and liquidity rewards.

Automated Market Makers (AMMs)

• AMMs are decentralized exchanges that use algorithms to provide liquidity and price assets.
• AMMs aim to balance asset ratios and minimize pricing discrepancies.

Decentralized Exchange (DEX) Business Models

• Trading fees are often used to provide liquidity to DEXs.
• Trading fees earned go towards incentives for liquidity providers (LPs), protocol stakers, and the protocol itself.

Impermanent Loss

• Impermanent loss occurs when the profit from staking tokens in a liquidity pool is less than the profit of simply holding the asset.
• The profit or loss can change as the market prices of the crypto change.

Staking in DeFi

• Staking is a way of earning rewards by holding onto certain cryptocurrencies.
• Staking involves using deposited cryptocurrencies to validate blocks in a blockchain network.

Accessing DeFi Platforms

• Users can access DeFi platforms through Web3 wallets such as MetaMask, Trust Wallet, and Ledger Live.

Centralized Finance (CeFi)

• CeFi refers to centralized crypto-related services and is similar to conventional financial institutions; or, it can refer to financial activity in which individuals earn interest or obtain loans through centralized exchanges.
• TradFi refers to the traditional financial system.

What are CBDCs?

• CBDCs are Central Bank Digital Currencies, issued and managed by central banks.
• Mechanisms include interest rates, currency intervention, open market operations, and money printing.

Explore the key differences between Decentralized Finance (DeFi) and Traditional Finance (TradFi) in this quiz. Learn about the innovative features of DeFi that aim to disrupt the conventional financial landscape and compare them with the strengths and weaknesses of TradFi. Test your understanding of these two significant financial systems.