TradFi, or traditional finance, is basically the classic financial system that doesn’t involve cryptocurrencies or decentralized finance. It’s something we deal with every day. The financial institutions and systems that make up TradFi have been around for a long time.
How does TradFi work?
Traditional finance remains completely centralized, even with the adoption of various digital tools. Transactions and loans are still managed by specific entities and services.
In the TradFi world, peer-to-peer transactions are absent; instead, users have to rely on intermediaries, giving up control over their money and assets. The biggest downside? These institutions and intermediaries have to follow regulations set by governments, which adds another layer of oversight that many see as a major drawback of TradFi.
Pros
Only certain entities are allowed to offer services in the traditional finance world, and they have to have the right licenses and accreditations. This whole bureaucratic process is designed to make it tougher for fraudsters to get in and operate in the TradFi market.
On top of that, TradFi can work with central authorities to track down illegal activities more effectively. In decentralized finance (DeFi), this tracking is trickier because of the anonymous nature of transactions, but it’s not completely out of reach.
Cons
Regulations and laws that keep shifting are holding back growth and innovation in this industry. These rules make it tough for many users to tap into the financial services offered by traditional finance. Take bank loans, for instance; not everyone can afford them.
Conclusion
In a perfect scenario, blockchain, cryptocurrencies, and traditional finance (TradFi) would team up. This could lead to a financial system that works for everyone. Will it actually happen? Only time will reveal that.
Right now, TradFi is everywhere, handling our everyday transactions. Centralized finance (CeFi) and decentralized finance (DeFi) are the gateways to a fresh world of opportunities, but they still have a long journey ahead before they become mainstream.