The offer of financial services through the internet is increasing in frequency every day. This has led to the emergence of various economic models, the objective of which is to provide users with multiple products that facilitate financial transactions, including technology aimed at acquiring or investing in cryptocurrencies. There are currently two different options for offering financial services through the internet: FinTech and Defi. In this article, we explain what each of them consists of and what their advantages and disadvantages are.
How are the two systems different?
Both models aim to improve user access to financial services. However, there are differences between each of the systems. Here we explain its different characteristics.
What is Fintech?
FinTech is the English abbreviation for financial technology and is applied to the digitization of traditional banking. The traditional financial model works with a centralized platform, controlled by government agencies. It mainly applies to online or mobile banking transactions, smartphone applications, algorithms, and software that traditional banking puts at the service of its customers.
What is DeFi?
DeFi is an abbreviation for decentralized finance. Its technology works without a central service that exercises control over the system. These financial applications use open-source Blockchain technology to protect transaction records rather than having a central watchdog. Most run on the Ethereum blockchain. It is mainly applied in the financial markets of cryptocurrencies and in all financial applications that use Blockchain technology.
Differences between DeFi and Fintech
The main difference between both systems is that in the DeFi environment, there is no type of intermediary or centralized control agent. Despite being a totally decentralized technology, it is also totally secure since it uses powerful cryptographic techniques that guarantee that only authorized persons use the platform.
This model offers users a tool that allows them to execute economic operations of all kinds without intermediaries in a direct, fast, secure and decentralized manner. Access to these platforms has no borders. Anyone can access their services regardless of where they are. As a result, it offers an opportunity to millions of people, who do not have access to traditional financial systems (for various reasons), to manage their finances and carry out transactions of all kinds, favoring equal opportunity and economic growth.
Fintech helps companies and consumers, and offers an array of financial services: payments, loans, investments, insurance, digital wallets, lending platforms, business-to-business services, business-to-consumer services, online banking, technologies such as Paypal, or payment services. Consumer-to-consumer services that allow consumers to send money directly to each other, instantly and without an additional charge.
DeFi allows users to make transactions and loans with cryptocurrencies and earn interest as a lender. Loans are among the most frequent use cases in this type of application since the interest rates are usually more attractive than those offered by traditional banks. In addition, the amount to request a loan is very low compared to that of traditional banking systems.
In most cases, the only requirement to obtain a loan in applications based on this type of technology is the ability to provide collateral with other crypto assets. Users can sometimes offer their NFTs, or non-fungible tokens, as collateral. But this technology also offers other uses, such as investments and exchanges in decentralized markets, payment systems through different Blockchains, smart contracts, or other services similar to those of traditional banking or insurance, as well as participation or investment in crowdlending platforms that use Blockchain technology, such as Ethichub.
Ethichub in DeFi
Ethichub is a Spanish crowdlending platform that has been awarded the international 'Blockchain4Humanity' award for the best Blockchain project in the Financial Inclusion category. Through this technology and the incorporation of DeFi tools, Ethichub solves the problems of financial exclusion of unbanked farmers and grants investors a higher return than that offered by traditional banking entities. Its operation is straightforward: investors contribute the amount depending on the project they choose, and, in return, they obtain an annual return of 8% when the loan is repaid. For farmers, it represents a new financing tool at extraordinarily competitive rates.
This creates an ecosystem where all actors benefit from mutual interaction and collaboration.
Ethichub has its own token, the Ethix, through which it manages to materialize trust because it acts as a guarantee for financing projects requested by small unbanked farmers. It also provides peace of mind to investors because it acts as collateral in case of a default within a compensation system created for this purpose. Thus, failed projects on the platform do not have a negative impact on investors.
Fintech advantages anddrawbacks
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DeFi advantages and drawbacks
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*The regulation or absence of regulation can be considered advantageous or disadvantageous in both systems
Conclusion
Both models aim to ensure user access to financial services of all kinds over the internet, including cryptocurrency transactions and trading. At the same time, both systems work differently.
Fintech guarantees the safety of funds and fair trading. Investors with conventional currency can also participate in cryptocurrency trading. In addition, transactions with this model also provide good customer service.
On the other hand, DeFi is much freer and more creative, to the point that it provides a space for investors to implement their own strategies without having to depend on an intermediary entity in a global ecosystem that knows no borders.
Both systems have their pros and cons. Choosing one model over another depends on the needs of each particular investor. If you prefer transparency and privacy, DeFi is the right model for you, but if security is your priority, Fintech could be a better choice.
