Imagine a world with a system of open finance, where each one of us can access credit or invest our funds anywhere, anytime, from anyone. This is known as decentralized finance, AKA DeFi, and it’s the new frontier of banking, with US$6.7 billion already locked into DeFi protocols according to DeFi Pulse.
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Why are so many people investing so much money into DeFi? According to Alex Pack, former Managing Partner of crypto fund Dragonfly Capital Partners, who told Jeff Kauflin last year, “The goal of DeFi is to reconstruct the banking system for the whole world in this open, permissionless way … You only get that shot every 50 years.”
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The finance industry has typically always been slow to embrace new technology, perhaps because it consists of some of the oldest and biggest institutions in the world. However, the birth of cryptocurrencies and blockchain technology has brought a new way of banking that is slowly coming to life.
DeFi is a fairly new experimental ecosystem, and many people still don’t know how it works or if they can trust it, even though it’s been around for a few years. Today, right now, the challenge is the technology is tough to get into, it’s tough to use, and it isn’t easy for non-crypto-savvy people to get involved in yet, but when it does it will be huge. It’s now about educating consumers, building trust and creating solid and easy-to-use platforms, so DeFi can be implemented on a wider scale to improve our banking system.
Traditional banks are under threat by DeFi and could lose market share due to the endless opportunities open financing can provide. Unless banks adapt to the rapidly changing consumer trends and incorporate today’s innovative technology into their business models, I anticipate that in about 10 years from now, traditional banking will start to die off if it doesn’t evolve.
A New Frontier
So, how is DeFi the new frontier of banking? This new system of decentralized finance is creating an ecosystem of people who all connect together via technology to borrow and invest their assets. The middlemen are removed by technology – there is no need for someone to check and approve transactions because DeFi uses blockchain technology. That means there is no added cost that traditional banking includes. And because they are built using blockchain technology and digital currencies (most on the ethereum blockchain), they are innovating and able to do things differently.
I love the disruption and evolution of what DeFi is bringing to banking and the risks these companies are taking to experiment and innovate. It’s a huge step for fintech and the future is certainly exciting. But you need to be careful. There is still volatility, scammers and with no regulating body and potentially lower banking standards, you need to do your research before transferring your crypto onto a platform. In fact, none of these tokens used in DeFi have as much basis as the previous ICO boom. This DeFi boom has given rise to a staking ponzi scheme. Read about the latest DeFi tokens and what to be aware of on Finder.