Why decentralised finance has the upper hand over traditional banking?
The advent of DeFi has brought a phenomenal alternative that was disruptive to the monetary system as the world knows it — the traditional banking system. This article examines DeFi apps (dapps) and functionalities, which provides an in-depth examination of the present issues they confront and the possible remedies. The article also seeks to provide pointers of how the monetary system will function in the not-so-far future.
Accelerating loopholes in Traditional Banking Structures:
As we all are aware, commercial banks’ core business strategy is to collect deposits and lend money to customers. An effective financial system relies on borrowing and lending as a fundamental cornerstone because holders of funds are given an incentive to offer liquidity to the market and in return get value for even unproductive assets.
Essentially, the money in your bank account is owed to you by the bank. Transactions take too long and currencies keep inflating. To put it another way, customers are now paying banks to keep their money. Consistent KYC paperwork is necessary for large transactions.
It has taken a long time for conventional banking institutions to adapt to the digital age. While they do have some necessary facilities like deposits, transfers, and loan agreements available, this is about the extent of their internet presence. As a consequence, banks have been unable to fully take advantage of next-generation IT technologies.
There have been a series of financial crises because centrally controlled institutions have had an unfair advantage in accumulating wealth. Low interest rates and regulatory demands have been the weak links providing a foothold for wrongdoing, as is evident from the high-profile collapses and controversies at many major banks across the world, which functioned as canaries in the coal mine. As a result, people have lost faith in banks.
Banking solutions that meet the demands of individuals and businesses alike are in high demand as a result of competition and shifting business strategies. When it comes to banking, both investors and borrowers today have a far higher level of knowledge than ever before, and they want more from their financial institutions than ever before.
Addressing lack of autonomy and accountability is the key. Fair and sustainable banking is expected by investors, start-ups, organisations and institutions today, rather than only relying on corporate social responsibility. Banking solutions that meet the demands of individuals and businesses alike are in high demand as a result of competition and shifting business strategies.
DeFi— A system that needs no lesson on self-governing:
Using programmable, immutable, and verifiable code to store money and only distribute it if the conditions agreed upon are met, DeFi dramatically decreases counter-party risk. Peer-to-peer exchanges without relying on a third party are quick and simple. It functions on a trustless ecosystem that is capable of delivering a fair playing ground for all its participants and not just the creamy layer.
DeFi protocols are giving a new dynamic to a financial system allowing the lending and borrowing of huge amounts of money between strangers without the need of intermediaries. A number of apps are already available that connect borrowers and lenders and automatically establish interest rates based on supply and demand.
Creating a “trustless” environment: In a DeFi ecosystem, financial services can be provided in a totally trustless, transnational and transparent manner through DeFi apps.
Since its conception, blockchain has been accompanied by the hope of a future financial system. A new monetary system has been an idealistic ambition for the cryptocurrency world for some time now, but it has taken significant steps toward becoming reality.
Millions of dollars have been pumped into the DeFi ecosystem since 2020. The Ethereum blockchain-based apps (also known as protocols) are driving the rise.
‘Decentralised’ is a synonym for ‘Fair Play’: The lack of a central authority assures that no one can impose outrageous fees, keep your finances captive, or prohibit access to crucial activities on a desire. One of the biggest threats to the existing status quo in the traditional sector and investment institutions is the democratising effect of crypto, which has the potential to disrupt the status quo.
No government licenses required: Decentralization extends beyond only the technology and pervades the whole bitcoin and blockchain business. There is no requirement for a government-issued license to begin a cryptocurrency, as they are software-based. With smart-contract platforms like Ethereum (ETH), the operational difficulty of establishing a new token is also greatly decreased.
DeFi — The credible successor:
An alternative to traditional financial services is provided by the DeFi protocols. While innovation has centred on crypto natives, the future of financial inclusion may be pushed farther. Thus, as you look at it from a common man’s perspective or from an investor’s point of view, DeFi contends that commercial organisations and developers, along with public sector entities, bear the burden of developing. Digital currency is a private sector endeavour, whilst policymakers and government central banks act as guardrails for consumers. This study indicates, however, that the decentralised nature of DeFi holds us all responsible. Most significant financial issues cannot be solved by intermediaries alone. That’s why we’re all responsible for creating new frameworks and apps that improve financial access for everyone.
There will undoubtedly be a slew of other iterations. Decentralized finance, on the other hand, has a good chance of outperforming conventional banking in terms of efficiency, use, and security. Because of DeFi’s impact on the conventional banking industry, it will be fascinating how the various players react.
The only viable remedy to the old financial architecture is a rapid modernization. Aside from redesigning their current innovation methods, banks must also welcome new technologies with open arms in order to stay competitive. In order to create a truly independent financial structure, DeFi ecosystems must be conceptualised, developed, and implemented holistically. It will be interesting to watch how DeFi unfolds and ushers in a fair, transparent financial environment where everybody wins.