Web3 emerged with great features that entice everyone to keep trending web3. The adoption rate of web3 is growing large; every existing and new startup is looking to build their business on or adopt web3 technologies.
This stage of the web is based on a decentralized system of internet governance. This has shown the power behind all these technologies like Blockchain, Cryptocurrency, Smart Contracts, NFTs, etc. As businesses stand on growth and deliverables, they will always generate revenue and transact with these technologies. That's why this decentralized system also has decentralized finance.
Businesses transact through the traditional finance system before the emergence of web3. Traditional finance is a centralized system controlled by the government, sole proprietorships, and a single individual lay down the system. You only have the power to your ownership, but the system is controlled by the authorities in charge.
But with the help of a decentralized financial system, we have full control over every single transaction with full knowledge of how it's been distributed. This decentralized finance system in web3 is known as DiFi. So what's DiFi?
DiFi is a short form for "Decentralized Finance" decentralized finance is a system of finance with open end-to-end financial service that runs on a decentralized system called Blockchain. This means you can create a financial product that gives open financial information and services that works on the blockchain network.
DiFi stands to give a decentralized system of finance governing where it also serves as a financial transaction intermediary like a traditional bank but not in a centralized system which has been the adapted system for decades.
DeFi works with the protocol that has been programmed decentralized on blockchain. This system has also made it easy for equality promotion, where anybody with an internet connection can transact easily with no natural restrictions on the Blockchain. According to the world bank: "Globally, 1.7 billion adults remain unbanked, yet two-thirds of them own a mobile phone that could help them access financial services."
Imagine this from the adult side, not to talk of teen and young builders who need to transact but have been held down due to the restrictions. But with the help of DiFi, equality is promoted, making it easy for anyone to enjoy the full fledge of internet decentralized financial banking system.
The traditional financial system is a system run by banks and financial institutions, and they're held to be the main working zone for a traditional operation.
You probably would have at least one, two or more bank accounts which gave you access to be entitled to some financial services like fund transactions, credit card payments, ATM withdrawals etc. It's rarely possible not to see a bank in any region of the globe, this system has been the first adopted for financial welfares. But every one of these banks works with a centralized system, which gives you less control.
What are the differences and similarities between them?
DiFi (Decentralized Finance) Vs. Traditional Finance
DiFi is based on a decentralized system with full user control, while traditional finance is based on a centralized system with little or less access control. But both work to execute the financial transaction, fund movement, distributing entities, and providing capital funding and liquidity but with a different financial system.
DeFi is built to ensure an unlimited and timeless flow of financial transactions and fund movement, and this made it more efficient compared to our well-known traditional system.
With the traditional system, banking institutions serve a crucial role as an intermediary between two parties trying to transact. Still, with DiFi, there are no intermediaries involved or third-party interference, so DiFi has made it possible for two users or parties to transact with each other on a peer-to-peer system.
The awaited open-ended, secured, and transparent financial system is among the key difference between decentralized finance and traditional finance. The blockchain network in which the decentralized system works is transparent and secured with immutable attributes. This means nothing can be done only with the permission of the owner, unlike the traditional system with less security and with many unclear transactions registered.
It's easy to corrupt and breach through a traditional finance system, but it's not for a decentralized system. According to fortune: "The cost of cyberattacks in the banking industry reached $18.3 million annually per company". And this has only been possible through the centralized system of finance.
Also, with the 2008 Financial Crisis, many people lost their fortunes due to the down crash of many banks. But the decentralized system has set a face-off for any unforeseen circumstances or any future crisis because it's decentralized.
Bans as restrictions imposed by the centralized system, which lead to inequality, have been overridden and bypassed by the decentralized finance system. This system made it possible for people to transact easily from anywhere without been to worry about bans or restrictions from the centralized region or any privacy violations.
In contrast, cumbersome barriers to entry have made it improbable for the traditional finance system to embrace the emerging trend. The fact that one must obtain proper licenses and authorization from regulators has limited innovation around traditional finance systems.
The decentralized system has limited the innovative ideas of financial creativities. Many businesses have closed up or have never started due to entry rules and requirements from the traditional system. But this decentralized system has enhanced innovations and ideas of businesses and even early startups. In 2021 only more than 1 million companies increased their capitalization rate to over 300%, up to $700B summed up. All has been made possible with the power of the decentralized system.
DiFi has been an alternative to traditional finance because it made it possible for users to be less concerned about today’s financial bureaucracy, which has been a heavy burden and significant restrictions of today’s financial system. With decentralized digital ledger technologies, users have gained full control of their fortunes, assets, and personal financial data with fully secured transaction activities.
DiFi is also built of open-source code. With interactive developer options, developers can now use these tools to build and experiment with decentralized finance and also enhance their productivity. Developers don't need to worry about the fore restrictions they've been trying to go within traditional settings. They will also give them full knowledge of executing flexible financial products and maintenance.
The decentralized finance system (DiFi) is still in the early stage. It will soon gain a global presence that every single business will want to adopt and use this digital ledger technoogy. DiFi has the ultimate potential to bring a revolution to the financial market and make it grow with complete security and a personalized system.
With an online presence and an internet connection, you can also make use of this decentralized finance system anywhere and no matter who you're.