A Closer Look at DeFi and How it Will Change Traditional Banks
The financial industry is changing. As the global economy becomes more and more digital, we are seeing a trend towards decentralized finance. Blockchain technology is making it easier than ever to invest money without needing to trust in third parties like banks or other institutions, which can be slow and corruptible.
This article will explore decentralization, blockchain, and how it will change traditional banks, and how DeFi can relate to RegTech.
Entering Decentralization and DeFi Benefits
All over the world, there are countries that have experienced economic turmoil due to unstable currencies devaluing rapidly or governments seizing assets. The volatility and insecurity caused by centralized systems have led people to invest their money into more stable assets like real estate and gold. However, even those investments can be risky if you're not sure where it was mined or if it was even obtained legally.
Blockchain technology allows value to be transferred between parties without the need for a centralized system that has the potential to become compromised at any given time, leaving those assets vulnerable to seizure or devaluation. In fact, this is precisely how most cryptocurrencies and tokens function—at least for now.
There are some obvious benefits of decentralized finance (DeFi) that you may already be aware of. One is the transaction time, which is significantly faster than if you were to wait for a centralized payment system to process it.
Another great benefit is that DeFi allows anyone in the world access to blockchain-based currency or assets no matter what country they reside in or what bank they use.
DeFi also has a much lower transaction cost than traditional payment methods, which can range anywhere from 5-30% depending on what network you're using and the type of transfer you're conducting. Lastly, DF is decentralized so no single individual or governing body can control it.
Disadvantages of DeFi
The benefits are certainly clear, but there are a few disadvantages to DF that are worth mentioning as well. One is the use of cryptocurrency/token volatility which can create an unstable market with fluctuating prices. Another disadvantage would be its lack of universal accessibility and usability, due to retailers or businesses not accepting cryptocurrencies or tokens just yet.
But don't worry, these problems will get ironed out in due time. There are several projects like Crypto Debit cards that allow you to use cryptocurrencies (or other assets) as a traditional debit card for payment purposes, and there are even some retailers starting to accept cryptocurrency payments now.
In the meantime, you may be wondering what the point is of using blockchain technology if it's not being used for a specific purpose. The truth is that blockchain technology, cryptocurrencies, and tokens are still in their infancy and will continue to become more mainstream as time goes on.
Decentralization simply allows for transparency and fairness—and that's something that the world can definitely get behind. It will create new opportunities for businesses and individuals alike through its efficient transfer of value and international cooperation. If you're looking to get involved in this new economy, make sure to check out the different projects starting up all over the world.
How DeFi will Change Traditional Banks
Traditional banks have played a pivotal role in the economy for decades, but there are new possibilities on the horizon. Decentralized finance has the potential to change the face of banking as we know it and is predicted to be worth $800 billion in 2022.
DeFi works on a peer-to-peer basis, meaning that individuals create their own assets and borrow from other people in return for interest. Peer-to-peer finance has been around for centuries but with DeFi technology it offers greater security and efficiency than ever before.
As traditional banks deal with more bureaucratic processes, there are many areas that could be making use of DeFi's advantages. The blockchain network itself already offers transparency and distributed ledgers which is less costly than traditional systems, as well as being able to store personal data more securely.
However, the growing popularity of DeFi has led to some concerns within the industry about how they will be regulated and what risks are involved with their new technology.
DeFi apps such as dYdX, which offers derivatives on cryptocurrencies like Bitcoin and Ethereum, allow individuals to hedge against fluctuations in crypto prices without having to transfer back into fiat currencies.
Companies such as MakerDAO have already developed working applications that aim to reduce volatility issues through decentralized finance mechanisms, with others following soon afterward.
There is still much work that needs to be done before DeFi can begin to rival traditional banking services, but the industry is growing at an impressive rate and could offer a viable alternative for those dissatisfied with current institutions.
DeFi and RegTech Working Together
Defi and RegTech are not interchangeable because there are enough significant differences to consider. Defi is a process that is used to register information about financial instruments in a company's securities books. Regtech is the application of technology to automate regulatory compliance and reporting.
Both Defi and Regtech play key roles in mitigating risk for a range of companies by enforcing transparency across their supply chains. There are key differences between the two, however, with Defi generally related to the pre-trade phase of transactions while Regtech focuses on post-trade compliance.
A company can mandate that all suppliers must undergo an automated audit trail process before committing any trade or transaction with them if they are to do business. This process is called Defi and it creates a digital record of all transactions in the form of a legal contract that cannot be changed. It can also work for individuals, but these kinds of contracts have been slow to take off due to their cost and complicated nature.
Regtech companies automate reporting and compliance processes instead of creating contracts. These kinds of companies focus on automation to ease the administrative burden and create a more efficient way of doing things.
Both Defi and Regtech refer to automated processes, but it's important to be aware that they are distinct from one another. Both have become increasingly pertinent in modern financial markets due to the rise of data breaches and personalization in financial products, and both serve to reduce costs as well as improve standards for regulatory compliance.
The world is changing and so should the way we think about finance. Decentralized finance powered by blockchain technology has made it possible to invest money without needing a third party like banks or other institutions, which can be slow and corruptible.
Blockchain is already disrupting industries outside of financial services as well, but there are still some risks that need to be mitigated before decentralized finance can take off on a large scale.
Defi and Regtech play key roles in mitigating risk for companies across their supply chains with different focuses - pre-trade vs post-trade phases respectively. What do you see as the future of banking?