Decentralised finance, known as DeFi (Decentralised Finance), is a rapidly growing part of the crypto industry that offers an alternative to the traditional financial system. DeFi is based on smart contracts and blockchain technology, allowing people to manage their assets, obtain loans, make exchanges and earn interest without the involvement of banks, brokers or other intermediaries. This new financial mechanism has the potential to completely change the way banking is done, making it more accessible, cheaper and transparent. This article will examine how DeFi affects the banking system, what benefits and risks it brings, and what prospects await this industry in the future.
1. What is DeFi?
Decentralised finance is an ecosystem of financial applications and services that run on blockchain, predominantly Ethereum. Unlike traditional financial systems that depend on banks and regulators, DeFi operates on decentralised applications (dApps) and smart contracts. This allows users to control their assets without intermediaries and all transactions are recorded in a distributed ledger, making them transparent and verifiable.
2. How DeFi is changing traditional financial services
DeFi offers an alternative to many traditional banking services such as lending, deposits, currency exchange and insurance. Let’s look at a few key aspects of how DeFi is transforming the financial sector:
(a) Decentralised credit and loans
In the traditional banking system, getting a loan requires multiple checks, guarantees and the involvement of intermediaries. In DeFi, loans can be obtained and issued directly, using crypto-assets as collateral. Smart contracts automatically fulfil the terms of the loan, eliminating the need for banks and reducing fees. Meanwhile, users can access loans from anywhere in the world.
(b) Interest-bearing accounts and yields
DeFi platforms allow users to earn interest on their assets by providing them as liquidity to other users. This is similar to bank deposits, but with higher interest rates and without the need to interact with a bank. Users can participate in the liquidity pool by earning interest for providing assets for trading or lending.
(c) Tokenised assets and exchanges
DeFi platforms allow users to exchange tokens or other crypto-assets directly, without the involvement of exchanges or banks. Decentralised exchanges (DEX) run on smart contracts that automatically execute transactions, making the process faster and cheaper compared to traditional exchanges and exchanges.
3. Advantages of DeFi over traditional banking system
DeFi has a number of advantages that make it attractive to users looking for alternatives to traditional financial services:
(a) Accessibility
Anyone with an internet connection can access DeFi services regardless of location and banking history. This is especially relevant for people in developing countries where banking services may not be available.
(b) Transparency
All transactions in DeFi are recorded on the blockchain and can be verified by any user, providing a high level of transparency and trust. Unlike banks that may hide information about their activities, in DeFi all processes are open and available for verification.
(c) Automation and speed
Smart contracts allow the terms of a transaction or loan agreement to be automatically enforced, reducing processing costs and speeding up transactions. Users can instantly receive loans, make exchanges or receive revenue without the need for additional verifications.
(d) Reduced costs
The absence of intermediaries such as banks and brokers reduces service fees. Users can make financial transactions at much lower rates than in the traditional system.
4. Risks and Challenges of DeFi
Despite its many benefits, DeFi is still in its development stage and faces a number of challenges that may limit its mass adoption:
(a) Cryptoasset volatility
Most DeFi platforms deal with cryptocurrencies, which can fluctuate wildly in value. This poses risks to both borrowers and lenders as the value of assets can plummet, leading to losses.
(b) Lack of regulation
DeFi operates outside the legal and regulatory environment, which can create risks for users. In case of loss of funds or hacking of the platform, users cannot rely on government protection or insurance payouts.
(c) Security of smart contracts
Despite automation, smart contracts may contain bugs or vulnerabilities that can be exploited by attackers. There have already been instances of hacker attacks on DeFi platforms in the past, resulting in the loss of significant sums.
(d) Lack of liquidity
Some DeFi protocols may face liquidity issues, which limits the ability to lend and exchange assets. Without sufficient liquidity, DeFi services may be less efficient than traditional banks.
5. The future of DeFi and its impact on the banking system
Despite the risks, DeFi continues to grow rapidly and attract billions of dollars of investment. Its further development could lead to significant changes in the global financial system. Here are some possible scenarios:
(a) Integration with traditional banks
Some experts believe that DeFi and traditional banks may start co-operating in the future. Banks may use DeFi technology to improve their services by offering faster and cheaper financial solutions to customers. This could lead to hybrid financial systems combining decentralised and centralised elements.
(b) Mass adoption of cryptocurrencies
DeFi promotes wider adoption of cryptocurrencies and digital assets. Should cryptocurrencies become more stable and accessible, this could spur mass adoption and make them an important part of the global economy.
(c) Regulatory changes
As DeFi grows in popularity, regulatory issues will inevitably arise. States and international organisations will be forced to develop laws and regulations that will protect users without destroying the innovative potential of DeFi.
Conclusion
Decentralised finance is already changing the way we manage money and receive financial services. DeFi offers a new level of freedom, transparency and accessibility, but comes with certain risks. In the future, DeFi may both become an important part of the traditional financial system and develop in parallel, creating alternative solutions for users around the world.