What is TradFi?
TradFi, short for Traditional Finance, refers to the conventional financial system that includes banks, stock exchanges, insurance companies and other legacy financial institutions. In contrast to crypto, it operates under centralized control, with governments, regulators and financial institutions overseeing and controlling transactions and investments.
Key Features of TradFi
TradFi differentiates itself from crypto and its de facto financial equivalent, DeFi (Decentralized Finance), in several key ways.
TradFi is centralized — all activities are permissioned and under the control of a central authority. Users can transact according to arbitrary rules laid out by that authority, and unlike with Bitcoin network consensus rules, for example, these can change at any time at the authority’s discretion. This also means that in many cases, a TradFi structure contains a single point of weakness, and if compromised, the entire structure and its users are impacted.
Crypto regulation is an ongoing attempt to apply TradFi rules to decentralized entities, but TradFi itself contains various layers of rigid regulatory infrastructure. Governments set requirements for financial institutions which in turn set out the rules by which users may interact with TradFi entities. Trust is required at every level — a key difference between TradFi and public blockchains such as Bitcoin.
TradFi Vs. DeFi
TradFi is often contrasted with its crypto counterpart, Decentralized Finance (DeFi), which uses blockchain technology to eliminate intermediaries, giving users direct control over their assets.
While DeFi products and services vary greatly, users generally do not need to provide ID to transact and there are no intermediaries processing (or refusing to process) transactions. DeFi networks are always operational, and transactions can achieve finality in seconds — there are no trading hours as with banks or stock markets.
DeFi is a new phenomenon, and governments continue to attempt to regulate it by applying some iteration of the same rules used in TradFi, with mixed results. DeFi has its drawbacks, and there is no legally-binding user protection in the event that something goes wrong, for instance while using a decentralized exchange (DEX).
