Whether or not decentralized finance (Defi) will supplant the traditional financial system recently has been a conversation on the lips of a good number of people. As the decentralized finance (DeFi) industry grows steadily, the total value locked in DeFi platforms has exceeded $ 50 billion. The massive growth experienced in the transactions taking place on the Defi system is why the question is being asked.
With more projects and services developed in decentralized finance that can rival traditional finance, can DeFi replace banks? Recently, Messari, one of the leading crypto money research institutions, in a report published, claimed “DeFi Will Eat JPMorgan”, a financial institution operating within the scope of the traditional financial system.
Defi, which is a blockchain technology-based phenomenon, has the potential to disrupt traditional finance because of its ability to be a financial tool that is outside of government and regulatory control. The creation of entirely decentralized and independent economic systems has since continued to gather pace in the finance sector. Both the DeFi and traditional financial systems possess their unique features, and if both cannot coexist in the finance world, one will have to outlive the other.
This crypto space is an open financial system that operates on protocols developed on top of a public blockchain. It involves developing financial products and services exchanged through a blockchain to promote or enhance the development of an open financial system.
Current products and services that constitute the decentralized finance ecosystem are not different from what traditional financial systems and other institutions can provide. Having access to loans, lending, savings accounts, interest-bearing accounts, and other products is not new nor revolutionary.
What makes DeFi unique, however, is the elimination of intermediaries. Rather than transacting through a central authority or its personnel, individuals can gain direct access to the products and services they need. Users transact with other users directly with the help of blockchain technology and smart contracts.
DeFi seeks to transform the financial sector by acting as an alternative to traditional financial institutions, such as banks, that act as financial intermediaries and are centrally governed. DeFi leverages a set of advanced, agile tools to give control to users. The fact that the new platform possesses extra functionality and reduces operational risks makes it an ideal replacement for the current financial system.
Despite the absence of a central authority, DeFi projects still put a strong focus on security, both for the user and their funds. An unrestricted approach does not indicate a lack of security or transparency. Instead, with tons of ways to buy crypto, DeFi projects aim to achieve the complete opposite goal. The primary purpose of decentralized finance is to become an alternative to the banking sector and replace the traditional technologies of the current financial system.
Interestingly, the sector is an emerging industry that promises to revolutionise the traditional finance sector. The need for an open, transparent, and secure financial system is the critical driver behind decentralized finance; therefore, it is not surprising that it is gradually becoming an alternative to today’s traditional financial system.
DeFi is Revolutionizing Finance as we Know it
Defi stands out as an alternative to conventional finance because it can do away with today’s economic bureaucracy, which is a burden of today’s financial system. The use of digital ledger technologies has made it possible for people to gain complete control of their assets and their financial data when transacting in the global financial sector.
The use of open source code and developer tools presents a unique opportunity, as developers would now be able to experiment with more financial instruments as decentralized finance continues to gather pace. Developers will work around the clock without restrictions, upgrading financial products and tools in the financial sector.
Another notable feature of Defi is that it allows developers to develop financial instruments capable of operating digital assets without limitations. Tokenization of pretty much everything from loans to collateral or debt obligations could also become a reality. The fact that blockchain technologies are accessible and transparent can make loans, repayments, and loan terms easily readable by machines and humans.
Conclusively, as promising as DeFi seems, there are still hurdles to overcome. Replacing traditional finance with a decentralized system will not happen overnight. Both options may have to co-exist for the foreseeable future as that will lead to more innovation and competition, ultimately benefiting the users.
The fact that DeFi could result in so many people gaining access to banking services in areas where traditional finance has failed underscores its massive potential. Also, decentralized finance will first have to address several issues about scalability, security, liquidity, and regulations if it is to replace the traditional financial system.