Decentralized financing is a form of financing that does not require traditional intermediaries such as banks, brokers or stock exchanges. All the work that is normally done by these institutions is instead done by technological solutions, including smart contracts and blockchain.
The old banking system and DeFi are very different. While traditional finance has been slow to evolve and adapt, companies operating in the DeFi sector have built a parallel financial system from the ground up in just a few years. There are payment systems, credit protocols, exchanges, and more. There is also a growing market for stable coins with fiat-linked assets, including Tether (USDT) and USD Coin (USDC).
One of the key differences for DeFi is the potential return on investment / savings that retail users can expect. The average bank interest rate on a checking account in the United States today is only 0.06%, and the average savings account offers only a slightly improved interest rate of 0.09%. Compare that to keeping your money on a DeFi protocol like Yearn.finance vaults and you can expect to see an 11.4% annual percentage return on stable US dollar coins. From a financial return perspective, DeFi is beating traditional banking out of sight.
To innovate slowly
Another key factor that drives DeFi is its culture of innovation. The banking sector, on the other hand, is known to be slow to adapt. Think about the major improvements banks have made over the past few years and you will likely be drawing a void.
That doesn’t mean that the banks haven’t delivered innovations. Over the past half century, they have integrated card payment technology, internet banking services, phone banking and mobile apps. That’s not nothing, but it’s not a very long list either. You may think I forgot to include ATMs, but these date from 1967 and make this particular innovation more than half a century old.
One of the main differences between Altbanken and DeFi is how and where they lower barriers. Decentralized funding focuses on removing barriers for consumers, making banking more inclusive and accessible to all. At the same time, stationary banks are closing branches to save money. Over the past five years, 3,500 banks in the UK have closed their doors permanently, which is roughly 55 per month.
Since personal banking is being undermined by the banks themselves, they have balanced the competitive landscape for DeFi to compete. While DeFi seeks to remove the barriers to consumers, the existing banking system has inadvertently reduced the barriers to competition. As Bill Gates said in 1994, “Banking is necessary; Banks don’t. “Nobody took this to heart more than the old banking system.
More to do
While DeFi has made great strides in recent years – 2020 in particular is a standout feature of the sector – much remains to be done. One of the biggest sticking points for the industry is that it largely relies on the Ethereum blockchain. Last year as DeFi’s popularity grew, transaction speeds slowed to a crawl while transaction fees rose.
There are some aspiring players who, at the right moment, reach critical mass to offer an alternative. Polkadot, in particular, is often touted as a contender for the Ethereum crown. A large number of developers are currently working on products for the network. In the twelve months leading up to Q2 2020, Polkadot’s “Next Generation Network” saw active developers increase by 44%. With over 250 projects now building on Polkadot, chances are the upstart has made a significant contribution to the DeFi pie. At the same time, there are projects trying to alleviate the growing pains of Ethereum with sidechain solutions.
Distrust and resentment
Governments’ decision to use public money to bail out private banks may have kept banking institutions afloat after the financial crisis, but resentments against failure are still bubbling just below the surface. This crisis is also closely linked to the history of Bitcoin (BTC) and decentralized money, as Bitcoin’s Genesis block carried the inscription, “The Times Chancellor 03 / Jan / 2009 is about to undertake the second bailout for banks.”
A DeFi protocol is only as good as the person programming it. There have been a number of high-profile exploits and hacks of DeFi protocols that have exposed vulnerabilities in this sector. With growth showing no signs of slowing, it is clear that the future of banking and financial innovation lies in decentralization.
This article does not contain any investment recommendations or recommendations. Every step of investing and trading involves risk and readers should conduct their own research in making their decision.
The views, thoughts, and opinions expressed here are the sole rights of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Ilia Maksimenka is the founder and CEO of PlasmaPay, a global digital payments platform that enables a seamless entry into decentralized financing. Before founding the Plasma Alliance Group in 2017, Ilia founded Edster, one of Russia’s earliest e-learning platforms and an online portal for over 10,000 universities and schools. He later headed international business development at the online open educational platform Coursmos Ilia received a Master of Economics from Plekhanov Russian University of Economics and a Certificate in Business Management from McGill University.