DeFi vs Fintech: Is DeFi a New FinTech
In 1949, a gentleman named Frank McNamara was dining with his wife and clients at the Majors Cabin Grill restaurant in New York City. When the dinner was over, Frank had to go through the embarrassment of realizing he left his wallet in another suit. His wife had to cover the dinner tab. That night an embarrassment led to the creation of Diners Club, the first charge card Americans could use at restaurants to pay for dinner.
Soon, many other merchants were offering credit cards and, before long, the average American had an overwhelming amount of monthly bills that had to be tackled.
That is where FinTech stepped in.
What Is FinTech and Why Does It Exist
In September 1958, Bank of America issued BankAmericard — the first all-purpose credit card.
The idea caught on quickly and Bank of America began licensing the BankAmericard card system to other banks. Besides addressing the inconvenience the 1950s America was facing, BankAmericard introduced the all-purpose credit card model that modern credit cards use to date. BankAmericard, eventually, became the brand that we now know as Visa and its innovative approach forever changed the banking experience.
This is Financial Technology. FinTech is technology and innovation aimed at challenging and improving traditional banking and financial services.
Decades later, the key aim of Financial Technology (FinTech) remains unchanged. FinTech operates at a top layer in traditional finance. It deals with the inconveniences of brick-and-mortar banking and uses technological advancements to remove hurdles and modernize financial services.
In August 2019, for example, over 60 years after the launch of BankAmericard, Apple launched Apple Card — a credit card that is issued on smartphones and designed to be used with Apple Pay.
Unsurprisingly, Apple is only one of many tech companies dipping their toes into FinTech.
Facebook is a provider of financial services such as money transfer through its Messenger app. In fact, Facebook has nearly 50 licenses that enable it to provide financial services and, in essence, take on the role of banks in some of the most profitable services of the industry.
FinTech is not limited to big tech only. Unicorn companies like Stripe, Robinhood and Coinbase have all emerged to meet the market need where legacy banking was falling short.
However, while FinTech succeeds in reducing bureaucracy and making traditional services more user friendly, is user experience really the only aspect of banking that needs innovation?
Issues Running Deeper than User Experience
One of the major downsides of the traditional financial and banking systems is that they are centralized. Banks, payment providers or tech companies stepping into the field are all following the same mold and acting as intermediaries controlling financial operations and, to an extent, user finances. All these FinTech institutions operate within traditional centralized economy.
Centralized finance essentially enables the governing body to interfere with and regulate the free market as well as define value of labor, currencies and exchange rates.
Consequently, financial institutions have amassed large and very complex infrastructures to enable them to provide a wide range of financial services. Even simple money transfer operations are now flooded with intermediaries and at the very least require sender, sender bank, payment provider, recipient bank and recipient. To sustain these bloated infrastructures and cover operation costs, banks charge large fees from end users.
Unfortunately, because FinTech operates within the traditional economy it generally cannot influence such deeply rooted issues. So what is the solution?
What Is DeFi and Why Is It Important
Decentralized Finance (DeFi) is a relatively new concept that is getting a lot of traction in the world of finance. Leveraging Ethereum and the power of FinTech innovations such as blockchain, smart contracts and cryptocurrency, DeFi aims to reinvent traditional financial services and create a permissionless digital economy that is free from gatekeepers, intermediaries and governance of central authorities.
Put simply, DeFi enables free market trade where best trades win and prices are determined through supply and demand. DeFi also uses smart contracts, which are designed to automatically execute an operation once the contract terms are met. This allows DeFi to eliminate intermediaries and significantly cut down fees. In DeFi you are covering computing costs required to execute a smart contract, which, again, are determined based on supply and demand.
To summarize, the perspective of looking at FinTech and DeFi from the angle of a ‘versus’ is not a correct one. On one hand, FinTech is somewhat limited to the top layer of traditional banking and its aim is to deal with innovation in user experience. On the other, FinTech is responsible for blockchain and crypto, creating a solid foundation for DeFi, which simultaneously exist within the broad concept of FinTech and outside of traditional banking.
However, if decades of centralized economy have taught us anything, it is that the future is permissionless and that future may as well be here already.
