You may be puzzled by the many terms used if you’re new to cryptocurrency trading and investment. In this post, we’ll look at DeFi vs. FinTech, what they are, their benefits and drawbacks, and where the two techniques diverge. This is a critical discussion since worldwide FinTech investments grew by more than 2,200 percent between 2008 and 2015, from $930 million to more than $22 billion.
FinTech and DeFi are striving towards the same goal in many aspects: increased access to financial services. Furthermore, both businesses contribute to the growing endeavor to make financial transactions more convenient, error-free, and efficient. There are a few distinctions to be made since DeFi is unconventionally doing this.
Take a look at the table below to understand how DeFi is providing answers in a new way that even FinTech can’t match:
What is FinTech?
Financial technology is abbreviated as FinTech. FinTech refers to technology that supports and enhances financial transactions and procedures, as the name implies. FinTech is utilized in online banking and mobile banking transactions. Smartphone applications, algorithms, and software are all examples of FinTech. Cryptocurrencies like Bitcoin, Ether, and altcoins, which are digital currencies produced by software and code yet have monetary value, are now falling under the FinTech category.
What is DeFi?
Decentralized finance is abbreviated as DeFi. This term is used to describe cryptocurrency financial markets or financial applications that leverage blockchain technology. The decentralized aspect stems from the use of blockchain technology to safeguard transaction records rather than relying on a single central authority. Consider the blockchain to be a digital database where anyone may input and log transactions. Smart contracts, which are computer codes on the blockchain, are used to process and authorize agreements by all network nodes.
How Does DeFi Work?
Decentralized financial transactions can’t happen without a financial platform — borrowers need to go somewhere to get funds, and these funds are obtained from people who deposit cash in accounts. As a result, there are decentralized lending systems that link borrowers and lenders, which come under the category of decentralized apps (dApps).
In this sense, a DeFi functions similarly to a bank in that the dApp lends funds to borrowers. People who establish an account on the site and put money into it and provide funds. Deposit accounts, like those at financial institutions, earn interest on the balance in the account.
Why is Defi Important?
The distinction is that there is no middleman between the borrower and the lender in a DeFi setting. Borrowers and lenders are in direct contact yet anonymous. Lenders have complete visibility and command over the movement of their cash. So they can examine how borrowers on the lending portal have managed their capital.
Lenders can also choose the proportion of their money that can be borrowed and the duration of the loan. There are no minimum deposit dates; the lender can retain the cash in their account for as long as they like without accruing any fines.
Lenders can also choose what kind of collateral they’re prepared to take as security for the loan. Other cryptocurrencies and digital assets can be used as digital collateral. The latter is a tokenized representation of any digital asset. Online gaming elements, artwork, pictures, movies, and papers such as ownership are just a few examples.
Stakers are those that contribute funds to a dApp for lending. Stakers are paid with native tokens in most DeFi systems for maintaining their cash on the network, to provide liquidity for other users. Being a staker and acquiring network tokens has the advantage of turning these assets into a ticket for platform governance. As a result, stakeholders have a say in how the DeFi platform is run.
The interest rate on borrowing, the level of reward for token holders who supply liquidity, and what other dApps may be built utilizing the platform’s blockchain are all items that stakeholders can potentially vote on. This gives everybody in the platform’s ecosystem authority over their wealth and how it’s invested. As a result, DeFi returns control and management of funds to the fund’s owners.
DeFi uses cryptographic security and blockchain technologies to create trustless systems based on algorithm logic. The automation of Ethereum-based smart contracts is critical to reducing bureaucratic clutter.
A DeFi platform can help those who need money fast but don’t fulfill the strict standards of traditional banking institutions. For example, someone could not have the necessary collateral or credit history, or they might not even have a bank account because they don’t have the resources to fund one. As a result, dApps are beneficial to those who lack the financial resources to get funding via current systems.