DeFi Is A Frightening Prospect For The Banking Industry, But It Doesn't Have To Be
At its dawn, internet skeptics were overtly critical, highlighting their distaste for the technology. Acclaimed astronomer Clifford Stoll asserted the idea that ‘commerce and business will shift from offices and malls to networks and modems’ was ‘baloney’, and the potential for the internet was nothing more than a hype train traveling too fast for its own good. Obviously, he was wrong. Right now, Decentralized Finance (DeFi) is experiencing a similar phase of growth. Regardless of those opposed to the idea, the technology is booming, reaching a market cap of $133.34 Billion in 2021, and a system that opens up access to finance for millions of people around the world is certainly not 'baloney.'
Just as the likes of Google and Amazon have become the customer-facing representatives of the internet, brands that offer DeFi products, such as EQIFI, Nexo and Celsius, will be the consumer-facing representation of the technology, which is geared towards disrupting financial intermediaries. Currently, we are focused on what DeFi is and how it works, which is of course, necessary and follows the progressive path previously travelled by the World Wide Web. Soon, however, we will begin to see the focus shift to actual products and services as more people begin to understand the tech.
DeFi’s role in finance will soon expand
Yield farming, the process of staking cryptocurrencies to earn more as passive income, will likely continue to drive the majority of DeFi’s growth. Though yield farming is currently mainly on the Ethereum network blockchain, cross-chain bridges and interoperability solutions will soon close the gap between blockchains Yield farming will draw continued institutional investment to the space as well as attracting retail investors hoping to turn a profit on their crypto portfolio.
Beyond yield farming, innovations built using DeFi will alter the financial landscape of the future. Trustless liquidity protocols and other DeFi products are at the cutting edge of finance and cryptoeconomics. By eliminating intermediaries from these financial processes, DeFi money markets can help create a more accessible, fair, and open financial system available to anyone with connection to the internet.
DeFi is poised to transform traditional financial systems that have existed for thousands of years into decentralized models. For example, prior to the introduction of DeFi, yield farming was only available via centralized sources to institutions lending funds to individuals and businesses. Opening processes like this up to retail consumers and to the world’s 1.7 billion unbanked people through decentralization will deliver the financial opportunities enjoyed by the privileged few to the masses.
Created to be a trustless alternative to the traditional financial structure, DeFi enabled smart contracts already have already begun to filter into mainstream industries. In sectors like insurance and real estate, DeFi can facilitate the implementation and management of derivatives much more so than current technology and people power. Trustless communities will begin forming around industries, aiding the creation of democratized financial economies through newly established parameters. In this sense, DeFi holds the ability to transform the procedures associated with almost every aspect of society, which it will begin doing should regulators allow it.
The CeFi (Centralized Finance) - DeFi hybrid model
DeFi’s role in the future economy, many years down the line, will be one of absolutes. The likelihood is that in half a century, traditional banking structures will be abolished, and decentralized structures will reign supreme. In fact, according to Gartner, the next decade will see 80% of financial firms go out of business or be rendered irrelevant by new competition, changing customer behavior and advancements in technology. This, however, will be a slow and arduous process, rife with opportunities for banks and centralized players to adapt and innovate for new profitability.
The disruption of the world of finance will involve a hybrid financial model interconnecting the revolutionary technology enabled by DeFi with the long established structures of traditional banks. Central banks, clearinghouses, regulators, and overseers of the economy will have vital roles to play in the digitization and decentralization of the financial system. Although traditional and decentralized practices are often pitted against each other, few seem to visualize the advantages associated with combining the best of both worlds.
Fintechs like Revolut are actively participating in crypto finance, having facilitated crypto trading for their users as early as 2017 and now holding over half a billion dollars of cryptocurrency on behalf of customers. As a centralized business model offering consumers access to crypto, Revolut hints at a future where digital assets and CeFi co-exist. It also shows us that consumers need a comfortable crypto experience. We will soon see crypto and DeFi offerings being made more accessible to the masses. This is already happening with the likes of EQIBank, the digital bank offering regulated access to crypto.
With DeFi offering improvements to digital identity, the ability to tokenize derivatives, and the facilitation of payment solutions for the underbanked, it seems like a win-win for all involved. So what is holding us back?
Regulation and reputation
Regulatory agencies such as the Office of the Comptroller of the Currency (OCC) are working to change banks’ perception of digital currencies, believing digital assets could positively drive financial institutions to a new era of innovation and efficiency. Although a promising start, more initiatives like these are needed in order to shift perceptions of crypto. Traditional banks are continuously defending their territory in believing that the inherent risks associated with digital assets and DeFi outweigh the myriad of benefits associated with adoption, stifling innovation and progress for both the DeFi and CeFi worlds.
Currently, there is no regulatory framework or standard-setting body focused on the continuation of DeFi’s growth and its integration into the world of mainstream finance. In traditional financial markets, bonds and stocks are verified and ranked through long-established systems. Until similar regulatory principles are used to categorize DeFi enabled products, the industry will be suffocated and prevented from scaling to its full potential. Without immediate regulatory clarity, DeFi will be forced to remain on the fringes of innovation along with other blockchain based developments, progressing slower than it should.
A large concern for regulators is that DeFi could replace the bankers and brokers that are enforcing laws against money laundering, creating an unknown economic environment that the regulators would have to traverse. Without being armed and understanding of the benefits of adoption and the potential for CeFi-DeFi collaboration, one cannot really blame regulators for their reluctance to change the processes to which they are so accustomed.
It falls to the crypto community to continually advise and guide regulators and governments in the right direction. Initiatives such as DeFi for the People can help industries identify how to integrate DeFi into their existing business models. Education and action such as this will help traditional bankers and regulators to become familiar with blockchain technology. Coupled with DeFi’s continued boom, with the industry's total assets under management in the sector growing 936% in one year, initiatives like this will work to generate continued investment and growth.
Following this period of education and growth, DeFi is set to change the financial processes of the economy for the better. Much like the rise of the internet, there will be several speed bumps along the way. Whether you’re on board or you’re calling ‘baloney’ on the rise of DeFi, it is clear to see that the revolution is well underway.
