Blurring the lines between Traditional and Decentralized Finance

Cryptocurrencies and blockchain technology are driving innovation through decentralizing financial solutions, changing the way people manage their money. Decentralized finance (DeFi) utilizes blockchain technology to improve the efficacy of financial markets. These innovations will have a transformative impact on how we invest, lend, borrow, and transfer our money.

What is Centralized Finance?

Centralized finance refers to the traditional model of managing money and investing. It is a model that evolved over hundreds of years, with a centralized banking system as the main intermediary between individuals and their money. Centralized finance requires a third party, such as a bank, to be an intermediary in financial transactions between two parties. For example, when transferring money overseas, the bank of the transferer must first approve the transaction before it can be sent, to the recipient, and charges a fee for the transaction.

In centralized finance, all transactions are monitored and regulated, including loans, wire transfers, credit card payments, and more.

What is Decentralized Finance?

Decentralization is a key trend impacting how we manage our money. The word “decentralization” might bring to mind images of a computer with its various units separated and functioning autonomously. The internet, for example, is decentralized because no single computer has control over the whole thing. Instead, the system is composed of many autonomous computers or nodes.

If we apply this concept to finance, we would see many individuals with their own money, investing and borrowing using peer-to-peer models with decentralized exchanges.

Decentralized finance allows financial transactions to occur without an intermediary, utilizing peer-to-peer networks. Users can connect to a network, trade, lend, or borrow, without the need of a third party to approve or monitor any of these transactions. Furthermore, all these transactions are recorded and verified on distributed databases, which is accessible across numerous locations. DeFi applications (dApps) allow users to have far more control over their own assets via wallets and financial products which are highly accessible.

Blurring the lines

Although cryptocurrency is an extremely new asset class, institutional and retail investment into blockchain technology and DeFi is growing at an outstanding pace.

Crypto projects such as Circle and MakerDAO have enabled the use of the USD within the crypto ecosystem by providing tokenized stablecoins USDC and DAI, respectively.

The lines between traditional finance and decentralized finance are now being blurred. Retail adoption is increasing while the world’s top institutions are investing heavily into the space. With social media’s significant impact on the crypto market, alternative data outside financial markets has been increasingly important to analyze.

At Chain of Demand, we aim to leverage the value of traditional assets with the emerging potential of cryptocurrencies by being the first AI powered, predictive multi-asset investment platform, utilizing alternative data to democratize powerful investments for all.

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