DeFiChain

<p>What makes decentralized finance (DeFi) different to traditional finance (TradFi)? The obvious answer is “decentralization.” DeFi removes the need for intermediaries and centralized points of control.</p><p>The truth, however, is more nuanced. DeFi isn’t leaderless, or entirely devoid of centralized levers; after all, the industry is still run by people who have the power to publish code, update smart contracts, and refine strategy through governance adjustments.</p><p>The greatest difference between DeFi and TradFi in fact isn’t decentralization – it’s trust minimization. Understanding this distinction calls for a quick primer on how we got to now.</p><h3 id="from-tradfi-to-fintech">From TradFi to Fintech</h3><p>Fintech revolutionized the way we do banking, replacing the physical with the digital. Goodbye drafty banking halls. Hello user-friendly mobile applications. However, this shift did not solve the fundamental problem of trust-based transactions between consumers and financial institutions.</p><p>Financial systems have always been a work in progress. Never static, they constantly evolve and change to meet the needs of society. New inventions rarely replace old ones, but rather layer upon them.</p><p>Consider how the internet has affected our lives since its advent in the early ‘90s and how it has been integrated into almost every aspect of society. The web is a giant layer cake built upon the foundation of traditional communication methods that came before it: post office mail, telegraph wires, telephone lines and even radio waves.</p><p>There was no sudden transition from one to another; rather each technology was added over time to create a more complete picture of what we now know as the internet – an amalgamation of technologies that have been folded together for our convenience as consumers and producers alike.</p><p>When you look at the process through that lens, decentralized finance can be thought of as a new technology layer superimposed upon traditional finance.</p><h3 id="from-fintech-to-defi">From Fintech to DeFi</h3><p>Fintech may have revolutionized the way we do banking. However, it didn’t solve the fundamental problem of trust-based transactions between consumers and financial institutions. This is because fintech still requires faith between consumers and financial institutions. For example, when you make an online payment via a credit card or PayPal, you are trusting that these platforms are secure and fair enough to keep your money safe.</p><p>The consumer must trust the institution to keep their money safe, as well as honor all transactions without fail. This results in an expensive process for both parties: consumers pay high fees for security measures, while financial institutions have to incur costs to verify transactions and keep their systems running smoothly.</p><p>Thanks to the emergence of blockchain, it’s now possible to remove intermediaries from transactions altogether so that two parties can directly exchange value without needing to go through a trusted third party such as PayPal or Visa.</p><h3 id="maintaining-trust-in-a-trustless-setting">Maintaining Trust in a Trustless Setting</h3><p>Decentralized finance solves this problem of trustlessness by using trust-minimized software. This type of software makes it possible to build systems that function without the need for a trusted third party – provided the right algorithms and design principles are utilized.</p><p>DeFi minimizes trust between consumers and financial institutions because every step taken during a transaction can easily be audited by observers. The word “minimizes” is crucial here, as DeFi does not eliminate the need for trust altogether.</p><p>There is still scope for human error when using decentralized systems like Ethereum due to coding errors or misconfigurations by developers who don&#39;t understand how things work under-the-hood. Overall, however, DeFi reduces risk significantly compared with TradFi which mandates trusting institutions with your money.</p><h3 id="defi-in-action">DeFi in Action</h3><p>The fintech revolution can be thought of as a software-based era that has defined what we now know as web2: mobile-centric, designed for digital natives, and clean UX forming the “face” of the business. Behind the slick facade, however, it’s still essentially the same processes at work. Less bureaucrats and more engineers, but in every other respect, the new boss is the same as the old one.</p><p>With DeFi, code is the final arbiter. Creditworthiness; reputation; debt; it can all be gauged and meted out on-chain using transparent algorithms that are not cloaked by closed-source systems. Many of the products and services that can be built on decentralized networks have analogs with those available in TradFi.</p><p>Lending, borrowing, stablecoins, payments, and equity markets are all recognized financial instruments. What DeFi does is place these mechanisms within the reach of anyone with an internet connection. Location, nationality, age, gender, and income are immaterial. It’s a level playing field where anyone can play. Paradoxically, DeFi’s trust-minimized design is what enables millions to maintain trust in its ability to work faithfully, day in, day out.</p>

DeFi: The Trust-minimized Finance in a Post-fintech World

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