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Blockchain beats banks with 12% interest: DeFi VS CeFi



DeFi stands for Decentralized Finance, such as peer-to-peer (P2P) networks on the blockchain connecting borrowers directly to lenders. CeFi stands for Centralized Finance, such as traditional banks, which have many middlemen and layers between lenders and borrowers.


DeFi provides similar financial services to traditional banking, such as insuring, trading, and borrowing or lending without any third party involvement. Using a direct P2P model means less costs, and lower chances of fraud, mismanagement, and theft. DeFi provides complete custody of your own assets, complete control of your own assets, and allows you to get more return on your own money, as there is no profit-taking middleman.


DeFi builds on the blockchain, assets, protocols, and applications. Bitcoin is the grandfather of DeFi as without Bitcoin there would be no DeFi. Bitcoin settlements can be slow and not very useful in DeFi but networks that run on the faster Ethereum are more capable.


Blockchain is the core layer for DeFi to be decentralized, with no central third party required. Blockchain allows a system of finance and P2P communication, like the internet, where no single person controls the database. The blockchain database shows everyone's transaction histories and state of accounts, making things very transparent, and no one can lock you in or lock you out of the system so it is almost unstoppable and permissionless.


DeFi has 2 types of assets to provide stability:

Fiat Collateralized: eg. USDC or USDT, which are coins or tokens that are 1:1 backed by the US Dollar.

Crypto Collaterized: eg. DAI is over-collateralized with cryptocurrencies to smooth out the volatility of cryptocurrencies by including this buffer.


You can use these stable coins to sell and buy products, make interest-bearing deposits or take out loans in the DeFi system.


The third tool of DeFi are protocols; a smart contract that governs all the possibilities in the system just like a programming language in your computer to make the application work.


Another great thing about DeFi is you do not always need to surrender your personal details or do any KYC; the P2P parties can be unknown to each other and this speeds up the process whilst protecting your own personal details


There is a disadvantage for DeFi compared to traditional banks, because everything is 100% your own responsibility. This means there is no room for mistakes: if you send the wrong funds to the wrong account, it is not reversible. If you forget passwords or digital keys to access your own digital funds, you can not reclaim your account.


Whilst traditional banks do have some advantages such as a staffed helpdesk, ATM's or local branches, all of these things do come at a large cost. At the time of writing, many traditional banks around the world pay interest rates on deposited cash of less than 1%, whilst DeFi will pay up to 6% interest on BTC deposits and up to 12% interest on stable coins such as digital versions of the USD, AUD, HKD and CAD.


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