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If you’re at all familiar with cryptocurrency, you’ve likely heard of decentralized finance (DeFi). During 2020 and the beginning of 2021, users invested nearly $21 billion in various protocols.
Decentralized finance is growing fast, and the trend shows no signs of stopping. Here, we’ll discuss DeFi and how it may change the banking system as we know it.
What Is DeFi, Anyway?
Decentralized finance is based on the blockchain, which underpins Ethereum Price CAD, Bitcoin, and other cryptocurrencies.
The technology allows users to access financial services independently without brokerages, exchanges, and banks. For example, it’s possible to borrow and lend, protect yourself from risks, earn interest, and trade cryptocurrencies.
DeFi users are exposed to the wider market, so they can access currencies other than those of their native countries. Bankers are afraid of decentralized finance simply because of its openness and the fact that it presents a viable alternative to the monopolistic, slow, and bureaucratic system we use today.
Offering Loans at Competitive Rates
As most of us already know, the government and other powerful entities control nearly every part of the modern banking system.
To trade bonds and stocks or access loans, mortgages, and other kinds of funds, one must pass through multiple intermediaries. Because there are no go-betweens on the blockchain and it’s not regulated by the Federal Reserve or the Securities and Exchange Commission, users can access loans at lower interest rates.
Greater Returns for Investors = Lower Profits for Bankers
Decentralized finance provides users with an incentive to utilize the system, unlike the meager returns provided by traditional banks. Staking is a good example. Here, users invest their cryptocurrency in proof-of-stake platforms, earning significant rewards that would otherwise go to the brokerage or bank.
Making the Financial System More Transparent
Bankers also fear DeFi because it brings transparency into the financial system. Users of these services generally want greater oversight and control over their transactions, and DeFi gives it to them. Upon the deployment of a smart contract, transactions are entered into the blockchain, becoming unalterable.
Helping the Unbanked
DeFi is disrupting the banking world because it allows everyone to access the financial system, regardless of their class, location, credit history, or net worth. With DeFi, you’ll be able to get the help you need, even if you’re turned down by traditional lenders.
While traditional institutions are closing as a cost-cutting measure, decentralized finance is growing by the day.
To paraphrase Bill Gates, banking is a necessity, but banks aren’t—and that fact is making bankers very uneasy.
Sustainability
As paper money is minted around the world, more and more trees are cut down, and the atmosphere has become saturated with greenhouse gases.
According to figures from the US Mint, more than 80 million pounds of metal are used to make coins each year. DeFi represents a shift away from traditional currencies, which will change the world for those in the finance business.
While decentralized finance activity still puts some carbon into the atmosphere, there are ways to mitigate its impact.
Change is Coming: Are the Banks Ready?
We’ve discussed how DeFi is disrupting the banking system with technology, and more changes are coming. Bankers are afraid, and they have good reason to be.
From high returns and easier access to services to competitive interest rates, people are employing the blockchain for various reasons, and most will never go back to traditional banks.
