Is it time to say goodbye, bid farewell, and utter sayonara to the banking industry? The traditional financial system has come under threat by a new force in the global economy, which has developed into a juggernaut in recent years.
Decentralized finance, also known as DeFi, has skyrocketed in unprecedented popularity that shows no signs of stopping.
DeFi has transformed into an international alternative to the banking system that many people have lost trust in since the Great Recession. It is estimated that if DeFi were a standalone bank, it would be the 38th largest financial institution in the United States today. The success is attributed to its numerous benefits, including fast transactions and greater autonomy.
While it is unlikely that a major financial institution like JPMorgan Chase or TD Bank would concede an entire industry to armchair entities, DeFi will likely expand its reach, power, and value. Every day, the general public loses faith in the conventional banking system. Perhaps it will take one more collapse, much like what happened in 2007-2009, that eviscerates the last bit of trust.
Does this mean everything we know about the banking system is collapsing, and a DeFi platform, app, or company will take its place? Of course, anything can happen. Here are five reasons why DeFi is the future of banking:
1. Spontaneous Order
In economics, a popular term tossed around is “spontaneous order.” This economic supposition states that an order forms due to the voluntary activities of individuals rather than the edicts of governments or centralized outfits. This is a crucial term in both economics and social theory.
If any industry is the personification of this economic term, it would be DeFi. Millions of people freely interact, produce their own platforms and apps, and engage in peer-to-peer transactions without a centralized authority.
Put simply, there is not a centralized body tapping into its fatal conceit of establishing rules and regulations. DeFi is not trying to tell everyone what to do. Freedom reigns supreme in this digital world.
Indeed, cryptocurrency is going through an intense correction in the markets. This rebalancing is part of its maturity process. The sector is overrun by meme coins and joke tokens, which have been pervasive for the last two years.
That said, cryptocurrency is critical to the utility and advancement of DeFi. Be it Ethereum or Cardano, decentralized finance transitions away from fiat money and employs virtual tokens. Crypto and DeFi are interconnected, sharing similar objectives and characteristics. The successes of cryptocurrency played an influential role in shaping DeFi’s current landscape.
3. The Unbanked Have a Home
It is estimated that approximately 10 and 20 million Americans do not have a bank account. This statistic is unheard of in today’s economy. But there are plenty of reasons for this decision.
Whatever the case, DeFi is the future of banking because it has no barriers to entry. Anyone can participate in the DeFi economy as long as they have an internet connection and a computer or mobile device. You do not need to comb through extensive paperwork in front of a bank clerk, pretending you just read a 35-page document with tiny font in three minutes.
Instead, you can partake in finance without many rules and regulations. However, it is only a matter of time before federal regulators intervene and slap various regulatory burdens on DeFi.
4. Greater Competition
If there is one thing that the conventional banking system needs, it is competition. Traditional finance has dominated the landscape for decades without facing significant competitors until now. In the past, banks had the luxury of being sheltered from the realities of competition. There are mountains of rules newcomers need to follow or special privileges granted by governments.
Fortunately, DeFi brings a refreshing change to the current structure. This revolutionary sector welcomes, embraces, and desires competition internally and externally. Competition, which breeds innovation, is what makes DeFi go around. Without competition, this system would fall behind the curve. Many people are hopeful about DeFi because of its ambitious nature. A DeFi platform carries much promise and potential to redefine future financial systems.
5. Regulators Behind the Curve
DeFi is exciting because it is constantly improving. This sector has quickly adapted to the environment and adopted the latest technologies. The industry is largely unregulated at the moment. It will perhaps maintain that way for many years to come.
Regulatory agencies are behind the curve when it comes to DeFi. By the time they catch up, these same outfits will struggle to contain the phenomenon. DeFi systems will become so efficient and prevalent in our society that regulators cannot impose too many restrictions.
That means DeFi will still be unfazed by strict regulations. Ultimately, DeFi’s success fosters a better ecosystem for consumers, businesses, depositors, and lenders.