Traditional Finance VS DeFi Finance

Traditional financial services are carried out by third-party financial institutions such as banks. The process is complex, the service chain is long, and the cost of financial services is high. Most of the traditional finance is currently based on Internet technology and uses centralized servers to maintain the transactions, settlements and storage of the entire system. There are four problems:

(1) Centralization problem

The operation of traditional financial institutions is often centralized. Behind these technologically enabled payment methods, banks and other financial institutions always act as intermediaries to ensure that all transactions are carried out in an orderly manner. In fact, transactions centered on third-party institutions such as banks, especially in cross-border payments, third-party institutions will charge high fees and service fees.

(2) Privacy leakage problem

User funds and information are controlled by an omnipotent third party. In other words, most of the crypto projects that help us manage funds are operated by non-transparent "another third party" companies, which inevitably leads to the leakage of personal information.

(3) Information opacity

Our financial system is also far from fair, transparent and perfect. In the traditional financial system, processes such as bank ledgers and clearing and settlement are not completely transparent. Therefore, during the 2008 financial crisis, many traditional financial institutions went bankrupt, and creditors could not be held accountable, which also resulted in a large amount of intermediary resources being wasted.

(4) Limited service outlets

Traditional financial institutions seek profits and economic benefits. Generally, their business outlets are located in economically developed and densely populated areas. For many remote areas with poor economic and commercial forms, it is difficult for institutions to provide services, which in turn leads to poverty and backwardness in some areas. People in these areas find it difficult to enjoy financial services conveniently due to the limitations of outlets. The problems of traditional finance are becoming increasingly limited in today's information age. Modern society urgently needs a financial form that can reduce trust, is highly inclusive, and can be participated in by most ordinary people. Distributed DeFi finance based on blockchain technology has the potential to solve the problems of traditional finance.

Before introducing DeFi finance in detail, let's first look back at the three historical stages of blockchain development:

• Blockchain 1.0, the era of programmable currency, represented by Bitcoin, has built a new, decentralized digital payment system, which has strongly impacted the traditional financial system.

• Blockchain 2.0, the era of programmable finance, represented by Ethereum, has added "smart contracts" to expand the application scope of blockchain from a single currency field to other financial fields, such as financial instruments such as lending.

• Blockchain 3.0, the era of programmable society, represented by DeFi, has gone beyond the financial field and expanded its application scope to the entire society. Blockchain technology may become a bottom-level protocol for "Internet of Everything" and improve the operating efficiency of the entire social system.

It can be seen that blockchain technology was born to solve the trust problem of traditional finance; the emergence of DeFi has evolved on the basis of the development of blockchain technology and digital currency. Therefore, DeFi decentralized finance is the only way to solve traditional financial problems and is also the inevitable result of the development of the financial market.

DeFi is like a financial business with digital currency as the main body, where you have your own private key, and this is another future in the parallel world of finance. DeFi hopes to establish a transparent, accessible and inclusive peer-to-peer financial system through distributed open source protocols, minimize trust risks, and allow everyone to participate in it equally and without discrimination. These initiatives will redefine the functions of currency, credit and payment, and restore the essence of finance.