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What is the difference between transformation and transfection? How do both of these methods work?

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If you are interested in the history of molecular biology this is an interesting question.

Basically transformation came to be used to describe experiments in which the phenotype of an organism was changed by the uptake of DNA, and because of the way this developed in bacterial systems this DNA was usually a plasmid. Then it became possible to use purified phage DNA to infect cells, whereupon the 'transformed' cells produced phage particles - for obvious reasons this was called transfection.

When efforts turned to getting the same techniques working with cultured animal cells many of the vectors were based on viral genomes (e.g. SV40) and these workers referred to this as transfection. At this point the distinction between the two terms became meaningless, and usage tends to be for historical reasons. Interestingly in molecular manipulations of yeast, where there are no viruses, the transfection word is rarely used.

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To add on with how the words are currently used, bacteria undergo transformation, while introducing plasmids to cell lines is called transfection (often incorrectly, since most people don't use live virus for infection, but use cationic lipids instead). –  leonardo May 5 at 12:05
    
@ leonardo, but I have met many scientists who work wth animal cells who refer to introducing plasmids into bacteria as transfection –  Alan Boyd May 5 at 12:21
    
Alan, it just proves how confused the two terms have become. The proper term in that case is transformation -- naked uptake of DNA, just as it would be for liposome-mediated "transfection" –  leonardo May 5 at 13:06
    
@leonardo: well, in case of animal cells electroporation is also called transfection (or new words such as nucleofection). We routinely use the term transfection for animal cells but retain the use of transformation for bacteria. The usage, as Alan said, is purely due to historical reasons –  WYSIWYG May 5 at 13:27
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As far as I know (and I haven't found no evidence against it) this is mostly a semantic difference. Both processes describe the addition of genetic material into cells using various techniques.

Transformation is here mostly used for bacterial work (transforming plasmids for example), while transfection is almost exclusively used for eukaryotic cells. The reason may be, that the term transformation is used in eukaryotic cells as well to describe the progresion of cells into cancer cells.

The techniques are not very different and there are a lot of them. Transfections often use transfection agents, which form pores in the cell membrane through which the DNA can enter the cell. This can also be done by using a short electropulse. A lot of transformations are done using "chemically treated" cells, where the cells are brought into a state in which they take up DNA which adheres to their outside.

The Wikipedia articles on Transfection and Transformation gives you more details on the methods.

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