Wisdom Oparaocha On Effects of Decentralized Finance (DeFi) in Traditional Banking
Decentralized finance (DeFi) is a new financial system based on distributed ledgers similar to those used in cryptocurrencies. The system decentralizes authority over money, financial products, and financial services from banks and institutions. For the majority of users, the following are some of the main benefits of DeFi;
Perks of using DeFi
- It does away with the fees charged by banks and other financial institutions for using their services.
- Instead of depositing your money in a bank, you save it in a safe digital wallet.
- Anyone with an internet connection can use it without needing permission.
- You can transfer money in a matter of seconds or minutes.
By allowing people, merchants, and corporations to perform financial transactions using developing technologies, decentralized finance eliminates intermediaries.
Peer-to-peer financial networks that use security protocols, connectivity, software, and hardware developments achieve this. You can lend, trade, and borrow using technology that registers and validates financial transactions in distributed financial databases anywhere long as you have an internet connection.
No centralized authorities can block payments or deny you access to anything with DeFi because the markets are always open. In addition, services that were once slow and vulnerable to human error are now automated and safer, thanks to code that anyone can inspect and scrutinize.
Decentralized finance’s emergence has massively impacted the traditional financial landscape from operations to transaction processing and customer services. All aspects are of problems faced in the traditional financial industry are being disrupted. Some of these problems include;
- Lack of access to financial services might make it difficult for people to find work.
2. The ability of financial services to prevent people from using their services or being paid.
3. Personal data is a hidden cost of financial services, which is commercialised and sold to the highest bidders.
4. Markets can be shut down at any time by governments and centralized institutions.
5. Trading hours are frequently restricted to specific time zones’ business hours.
6. Internal human operations might cause money transfers to take days.
7. Financial services command a premium because intermediary institutions require a commission.
With Decentralized finance, these problems faced by the traditional financial industry are being provided with solutions due to the immense features accompanying DeFi.
Innovations built on DeFi, such as Yield Farming, which is the process of staking cryptocurrency to earn more as passive income, will likely continue driving the majority of DeFi’s development. Like other DeFi innovations, yield farming will continue to attract institutional investment and private investors looking to profit from their crypto holdings.
Beyond yield farming, DeFi-based technologies will change the financial landscape in the future.
Here are some of the major effects of DeFi on the traditional financial landscape;
Traditional Banking system: Traditional banking system’s primary business model is to receive deposits and make loans to customers. Because the funds’ holders have an incentive to provide liquidity to the markets, borrowing and lending are the pillars of effective traditional financial systems.
With DeFi, unknown parties can lend and borrow resources on a larger scale without intermediaries thanks to DeFi protocols, which connect lenders and borrowers and automatically calculate interest rates based on supply and demand.
Investment Banks: Investment banks’ business models often include financial transaction consulting. In addition, investment banks deal in trading and creating complicated financial instruments and asset management.
Similar items are all available through DeFi protocols. Also, Cryptocurrency asset management is becoming more decentralized. Yearn Finance, for example, is an autonomous protocol that explores the DeFi market for the best yields while also investing for its consumers.
Traditional Exchanges: The purpose of exchanges is to organize the trading of various assets. Stocks or foreign currency traded between two or more market players are examples.
Crypto holders no longer need to leave the crypto world to trade their tokens, thanks to the recent rise of decentralized exchanges (DEX), another important feature of DeFi.
Uniswap is a great example of a DEX. DEXs are smart contracts that store liquidity and operate according to predetermined pricing algorithms. The automated liquidity protocols are critical to developing a decentralized ecosystem independent of Centralized Finance intermediaries.
Insurance: The primary purpose of insurance is to mitigate risk and provide security to market participants. Similarly, in DeFi, Nexus Mutual, for example, is a decentralized insurance model which provides insurance coverage for smart contract bugs.
Contents distributed by Learn.Block6.tech
👉 Telegram — Fresh ideas
👉 Twitter — Latest articles
