Why is DeFi Taking Over Conventional Banking?
Various cryptocurrency emblems
Decentralized Finance, or DeFi, is a term you might have heard recently. You might have dismissed it as another buzzword people are casually throwing around, but that’s not the case. DeFi is something completely revolutionary, and if you were to learn more about it, you might understand the hype around it. More importantly, you would notice the disruption it’s causing to the banking industry.
Conventional banking has been around for centuries. It’s one of the oldest sectors we know that began as early as 2000 BC. Of course, banking wasn’t as refined or seamless back then as today. Given that banking has been around for so long, you might be wondering why people would want to switch away from it. Well, the answer is straightforward.
If you’ve visited a bank recently or performed a banking transaction, you’ll know the inefficiencies of the banking system. For instance, let’s assume you want to transfer money to a relative living abroad. First, you’ll need your bank’s approval for the transfer. Then, your bank will slap transaction fees on you, leaving you no choice but to pay unless you don’t want your relative receiving the money. In addition, the banking process is slow. While you might transfer the money immediately, it is likely your relative won’t receive the money until a few days elapse. In some cases, they might even have to wait a week or two before accessing the money. Furthermore, banks follow the regular working day schedule, meaning if you transfer the money after the business day ends, you’ll likely not receive authorization until the following day.
As a result, the conventional banking systems’ inefficiencies are becoming more apparent in today’s digitalized world, where everything is one click away. You can have a video meeting with someone across the Atlantic within seconds. So why should you have to wait to receive and send funds, pending approval and authentication?
That’s where decentralized finance becomes a game-changer. It’s emerging as a revolutionary ecosystem that could end banking as we know it forever. According to statistics, decentralized finance has already captured over 5 percent of the crypto market space. Research shows approximately $93 billion of DeFi assets were part of the crypto sphere in 2021.
Crypto emblem
What is DeFi, and How Does it Work?
Decentralized finance is a blockchain-based technology that eliminates the need for financial intermediaries like banks, brokerages, and exchanges. Instead, users can perform user-to-user financial transactions over the blockchain almost instantly. More importantly, they can do so without any service or transaction fees. Most decentralized finance applications currently operate on the Ethereum or Solana blockchain.
Essentially, decentralized finance refers to a transparent and open financial system solely dependent on technology. It enables you to view and control your assets on the blockchain without third-party intervention. That’s why DeFi has become so popular in recent years, threatening the hegemony of the conventional banking system.
Why DeFi is Overtaking the Banking Industry
DeFi is overtaking the banking industry due to several reasons, including the following:
Low-Interest Loans
It’s no secret that governments and central banks control and dictate every aspect of the conventional banking system. For instance, the central bank sets the base interest rates for commercial banks to follow. Financial intermediaries and regulatory authorities like the SEC and the Federal Reserve oversee every part of the banking system.
One of the issues with financial intermediaries is that their rules are subject to change, and as a result, interest rates are always unstable. Unstable interest rates create problems for small businesses and individuals seeking loans. However, DeFi remedies that situation. Since there are no financial intermediaries in DeFi, you don’t have to worry about high-interest rates because no brokerages and banks are taking their cut on financial transactions. Instead, DeFi redirects you directly to on-chain financial services. As a result, individuals and small businesses can acquire loans with low-interest rates.
Return on Investment
DeFi also provides financial incentives to users. Let’s use staking as an example. Staking refers to users lending their digital assets to proof-of-stake platforms. In exchange, users receive substantial rewards with high returns on investments. In addition, DeFi platforms also give businesses access to funds globally with varying interest rates. As a result, many individuals and businesses use DeFi applications for lending while earning interest on their digital assets.
Ethereum emblem
Transparency
DeFi uses smart contracts to record transactions on the blockchain. As a result, no one can alter or delete records from the blockchain, meaning they’re etched on it forever. Therefore, DeFi users have greater control over their assets and can view where digital assets are stored and how they’re used.
Open Access to Financial Services
Bill Gates once stated, “banking is necessary, but banks aren’t.” DeFi embodies this statement to the fullest by providing open access to financial services for people globally. According to the World Economic Forum, some smaller businesses in developing markets are already using DeFi applications to fulfill needs unserved by the conventional banking sector.
Not only does DeFi provide open access to financial services for everyone, but it also lowers the barriers to accessing loans. Banks, lenders, and brokerages are often hesitant to provide loans to people or businesses not meeting their financial criteria. DeFi opens the doors for everyone to be part of a transparent and independent financial system.
Environmental Sustainability
Have you ever considered the environmental impact of physical currency? According to the US Mint, over 40,000 tons of metal are used to make coins annually. Now, imagine the number of trees chopped down to make dollar bills. The number shoots astronomically through the roof. Decentralized finance thrives because it moves away from physical currency to digital currency.
Detractors will point to how DeFi activities on blockchain contribute to carbon emissions. While that might be true, several solutions are underway to reduce DeFi’s environmental impact. Let’s take Popcorn as an example. It’s a carbon-neutral decentralized finance platform that’s socially responsible. It encourages investors to make carbon-neutral transactions by incentivizing them with high investment returns.
Autonomy
When you remove financial intermediaries from the mix, you have ownership and control of your funds and assets. As a result, you can choose to invest, lend, borrow, or save your assets and funds as you please. For instance, several DeFi staking platforms exist that enable you to earn passive interest by investing your cryptocurrency in them. Likewise, other similar DeFi applications might also pique your interest.
A blockchain illustration
Trade Cryptocurrency to Join the DeFi Revolution with Crystal Ball Markets
Decentralized finance continues to become more popular. Many experts argue decentralized finance will eliminate the conventional banking sector as we know it. As a result, you might want to consider getting into the DeFi space yourself. However, you’ll need crypto assets to do so.
Crystal Ball Markets is a cryptocurrency trading platform. If you’re looking to start trading cryptocurrencies, you’ll need an online trading platform. You’re unlikely to find a better online crypto broker than Crystal Ball Markets. Visit our website today for more information. Alternatively, you can register with us today to get started.