(DeFi) is altering how people think and handle financial transactions. In simple words, we are entering into a new era where people wield direct control over their finances with little or no limitations from centralized authorities. It is a seismic shift of power from banks and governments to the people. The emergence of the COVID-19 epidemic that made governments lock their boundaries and close businesses accelerated the adoption of DeFi, and now it is emerging as one of the best options.
This blog digs deeper into DeFi to answer the big question, “Is DeFi the future of banking financial services?”
Banks are one of the oldest institutions in the world; they’ve been around for over 200 years, from the time we humans used gold bars as a currency. However, these banking institutions are obsolete, and their ways and methods haven’t scaled well with time. More often than not, they fall short of the modern world’s needs. But it is 2022, and we are on the verge of a technological breakthrough powered by the blockchain. We’ve seen Cryptocurrencies, Metaverse, and NFTs, and now we have something called DeFi, which aims to replace the banking infrastructure. But what is DeFi, and why do we need it?
What is DeFi?
DeFi is the shorthand notation for “Decentralised Finance”, and it is used to describe autonomous financial apps built on top of blockchain technology. DeFi makes use of Smart Contracts to transfer funds, process investments, and build financial protocols that emulate our real-world banking systems on the blockchain.
A Blockchain is a public database that stores records of all the existing transactions that have ever occurred. It stores data in encrypted blocks that are interconnected. So, is DeFi just an automated digitized bank? Yes, but No, DeFi is a lot more than just an automated digitized bank. But to understand the importance of DeFi, we need to understand the problems that our banks face today.
DeFi vs Traditional Banks
Our banking systems are ancient, and there are several ways in which DeFi is better than our current banking systems. To give you a better perspective, below is the list of factors that give DeFi an edge over traditional banks.
DeFi is Fast
DeFi is built on top of blockchain technology, which is a robust, self-managing, and secure database. On a modern blockchain, a transaction takes a fraction of a second to complete. With DeFi, we can test and implement new methods, policies, and protocols within seconds. Our banking institutions, on the other hand, are very old and their process to accept new methods and policies, or transfer funds are sluggish at best. Even with the help of modern technology the financial services still remain pretty much the same.
Complete Transparency and Security
The blockchain is a completely transparent autonomous database. That means data is not stored on any centralized server owned by a particular authority. Instead, the data is decentralized, and the user has absolute ownership of the data.
But our banks are a whole different story. Banks are centralized institutions and have the purpose of making a monopoly. They are operated by humans and not machines, and so they generally lack trust. We’ve seen dozens of banking scams, organized failures, as well as scandals.
They’re Well Connected Systems
DeFi apps are written using smart contracts and they are well connected using libraries and interfaces. On DeFi apps, we can navigate to any point within our account from any place. This is a fundamental flaw that the banking system struggles to deal with, a bank has different areas for handling different problems, and no common information is shared amongst them. This makes the user experience and customer service really bad.
Crypto is changing almost everything. E-commerce is one of the best examples of this. You can literally buy almost anything with a cryptocurrency. There is no doubt that DeFi is the future of finance. Our banking systems have delivered for us for the longest time, and it is time to finally let them go.
The modern world deserves a transparent, fast, and secure autonomous banking service, and DeFi is the best possible answer to that. As global crypto adoption is increasing day by day, there are a lot of changes happening across the globe. Let’s hope for the best and see what the world will achieve in the upcoming years.