< Back to Blog

TradFi vs. DeFi, Who Wins?

Blockchain technology is beginning to filter into everyday life. Whether it be brief mentions of Solana adoption in the news, the growing number of investors, or simply the unanimously piqued interest of the general population - the capabilities of blockchain is finally receiving more mainstream recognition. Like any emergent technology, blockchain presents a new proposition to the mainstream, as its technology readies itself to unleash a storm of innovation and positive socioeconomic change.

Blockchain presents alternatives to the current traditional finance (“TradFi”) system, which we as a society have grown to accept as the norm. Retail banks, commercial banks, investment banks, the rising number of FinTechs - the list of TradFi institutions extends well beyond the confines of one article. The historical centralization of finance, governed by regulators and nations, has long shaped the way in which we view finance, privacy, and accessibility.  

Traditional finance has long reigned over the financial space and dictated how regular people utilize their finances. Whilst the centralized TradFi system has its benefits, the introduction of dApps (“decentralized applications”) is beginning to remap the way in which the modern financial system operates and presents itself as a worthy contender to the financial world we currently know as the “norm”.

Yet with still so much apprehension surrounding the surge of digital finance, you may be wondering -  what does DeFi offer that TradFi does not?

What Is A dApp?

dApps (a decentralized application or program) refer to an application built upon a decentralized and distributed network based upon nodes. These nodes serve the purpose of structuring and powering the network and thus remove the centralized and singularly managed aspect seen in the current financial system. Whereas TradFi is operated from a centralized authoritative body or nation, DeFi dApps reject the hegemony of traditional infrastructures and are entirely free of the dictatorship of one official body.

dApps have yet to reach their full potential. The cutting edge technology seen in DeFi dApps  is growing in prevalence, particularly as different dApps have begun to facilitate a range of blockchain technology, as well as translate pre-existing systems (gaming, TradFi, etc) into a blockchain format.

Unlike tradfi systems, dApps are their own autonomous ecosystems. Instead of being governed by a board of directors or a sole entity, dApps are often governed by their community, native tokens, or smart contracts. Typically, native tokens and token delegation is the primary form of governance.

dApps governed by their native tokens utilize cryptocurrencies (of which their users can hold and utilize in the application) as a means of performing functions within the ecosystem. Encompassing governance, transactions, and staking, amongst many others, these native tokens dictate the activity of the application and how it is managed. Often within this structure, users are subject to a 1-1 system, where one token equates to one vote. Therefore, those with higher volumes of tokens and willing to stake more, often have more of a say in the overall decision making process.

dApps with decentralized governance are able to self-regulate their code and operations through Decentralized Autonomous Organizations, otherwise called DAO’s. Proposals in DAO’s can be voted upon by an appointed committee or users willing to participate. The ultimate verdict reached determines whether parameters will be changed, disregarded, or approved. 

What Does DeFi Bring To The Table?

Most people in the world who are banked are used to interactions with TradFi. TradFi technology is useful on a broad scale and it has become integrated within many of our daily lives - yet DeFi offers exciting new opportunities to expose more equitable participation in these systems. 

Autonomy

Within the world of TradFi, autonomy over funds is often limited. Whether it be a bank dictating when you can remove your funds or how you choose to spend, centralisation is at the core of TradFi. However, DeFi rejects this, instead opting for a fundamentally decentralized and autonomous operational model, whereby users can move their funds, purchase, and sell, and interact with dApps without the interference of a third party. 

Yet, concerns may be raised in regards to DeFi’s ‘no interference’ ethos, particularly in regards to transparency. However, due to the foundations of blockchain being transparent and accessible blocks, all transactions are visible on the blockchain and marked by your individual wallet address - ultimately combining personal anonymity with financial transparency.

Yield and Borrowing Transparency

Due to global economic and political fluctuations, TradFi often bears the brunt of these changes. Whether it be through plummeting saving account interest rates or rising repayment rates, consumers are often limited when it comes to viewing a proportionate return on their funds under the custody of an institution. As of 2021, in America alone, the average interest rates on savings accounts have slipped to 0.06%, with interest checking averaging at 0.03%.

Yet, DeFi has remapped this landscape. With several applications offering users the opportunity to convert their fiat into stablecoins or to stake their investments to uphold a network, users can tap into significant returns of several percent - as opposed to less than 0.1%. Through the provision of these opportunities, users of DeFi can access a roster of financial options that can provide a worthy alternative to entrusting their funds to accounts that yield them very little returns.

Accessibility

Financial opportunities have long remained difficult to access for a vast portion of the world population, with a reported 34% of Americans having no funds in a savings account at all as of 2016. Yet the diverse offerings of the DeFi ecosystem, faster rate of innovation, increased processing speeds, and general affordability can open doors for people across the globe financially.

Many financial institutions require minimum deposits or contributions for accounts or lack the ability to digitally move funds, which can hinder many from accessing different financial products. Yet due to the permissionless basis of DeFi, these restrictions aren’t in place, thus granting further financial freedom to investors of all calibers. 

With Goldman Sachs reporting on the benefit of DeFi accessibility for ‘underbanked’ populations, the continual growth of the DeFi industry could encourage more people to access this new branch of finance.

The Role Of Decentralization

The integrity of the decentralization of dApps is fundamental. With a majority of finance centralized by the government or regulatory bodies, seldom do individuals have privacy and control over their funds due to the consistent monitoring of their activity and the regulatory impositions implemented by higher powers, so to speak.

dApps reject this operational structure, instead providing a financial tool to individuals across the globe - without the hindrance of centralized businesses. Without having to place trust in an external authority, individuals can tap into a pool of financial tools that are founded upon an undying ethos of individual autonomy, equity and accessibility. 

Unlike the typical TradFi “transparency” whereby differing privacy laws and regulations dictate the way in which your data is used, dApps store all information on its respective blockchain. This promotes a culture of transparency in which transaction information can easily be accessed, thus proving immensely valuable in scenarios where funds are mis-sent to the incorrect address, as locating the individual can become a more streamlined process. DeFi’s transparency evidently differs based on the application or protocol. Yet, the fundamental basis of decentralization is to offer a wealth of publicly accessible information as a means of building user trust and demonstrating credibility as a predominantly unregulated business.

Corresponding with decentralized transparency is privacy. As with many technologies, privacy is not inherent within the world of DeFi - yet it can often play an integral role. Within the world of TradFi, in order to access your own funds you often need to visit a local branch and meet with managers and so forth to ascertain the reasons for utilizing your funds. Yet, DeFi’s permissionless and immoveable technology means that you can use your funds for whatever you choose - without answering to an authority. In doing so, this blockchain data is unchangeable and marked simply by an address that consolidates the activity occurring - therefore removing the divulgence of individuals’ personal information.

The Bottom Line

As the blockchain revolution ensues further, it is only a matter of time before dApps begin to integrate within typical operational systems that we currently utilize on a day-to-day basis. As one of the most malleable industry sectors, the financial world is gradually witnessing a global reformation, in which decentralized finance (or DeFi) is striving to prolong.

Drawing together the essential aspects of traditional finance and layering it with refined security, transparency, and efficiency - dApps are reimagining the financial system we know today, with no end in sight. Whilst ç is significant in offering scalability, security, and traditionally centralized options that are present in most of our lives - the transition towards DeFi is emerging. 

Here at Jet Protocol, we aim to combine the elements of DeFi and TradFi that are integral to your user experience and seamlessly bridge between the two - so you can seek an alternative to the financial system we currently know.

< Back to Blog