How Banks and DeFi "make money"

How banks make money

  • Banks make money on fractional reserve banking / net interest margins.

  • They pay for infra managing costs and then distributes profits to shareholders.

What fintech/TradFi is about

  1. Create better products

  2. Allow for new products to be built on top - This is now called embedded finance

How DeFi "makes money"

  • You deposit assets / lend into a liquidity pool

  • Essentially earn interest as the algorithm / DeFi protocol lends those assets to borrowers (quite often very suspiciously)

  • What it pays to deposit wallets - borrow wallets = what you get

  • Almost no fixed costs and no profits as it distributes most of it to depositors and returns some to a treasury

  • Treasury funds are used to fund contributors and maintain / upgrade the protocol

  • Protocol has no shareholders but rather has token holders.

  • DeFi protocols do NOT hold the funds themselves like a bank.

    • They set the price based on perceived risk of borrowers / depositors aka lenders.

      • P2P lending at its finest.

  • No middleman