Blockchain is more than just the technology behind cryptocurrency. It also powers many apps that can transform industries. For instance, decentralised finance (DeFi) has been making waves in the finance sector. In fact, experts predict that it will disrupt traditional banking in the coming years. Top blockchain technology providers explain how in this guide.
DeFi vs. Traditional Banking
DeFi vs. traditional banking is a controversial topic. Blockchain technology providers reveal that they differ in these aspects:
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Regulation
DeFi is a peer-to-peer system that runs on blockchain technology. That is to say, no centralised institution like a bank has control over it. So it lets investors transact with other people directly. In traditional banking, a governing body regulates all transactions.
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Qualifications
Anyone with programming skills can contribute or use a DeFi system. But only those who meet certain requirements can take part in traditional banking. These may include everything from having a steady source of income to passing a loan interview.
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Transparency
Every user in a blockchain platform can see the data, codes, and deals in the system. This helps everyone understand the kinds of transactions happening in the network. It also prevents fraudulent activities. On the other hand, traditional banking is subject to strict confidentiality.
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Innovations
Traditional banking runs on a rigid system. More often than not, users must get authorisation from the governing body to change or enhance their ventures. This limits innovations—which is not a concern in DeFi. In fact, blockchain technology providers often develop new apps.
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How Can DeFi Disrupt Traditional Banking?
Given DeFi’s advantages over traditional banking, it is no wonder it has been making waves. After all, DeFi does not just challenge the current system. It also offers potential solutions to the issues inherent to the traditional infrastructure. For instance, it does not rely on centralised institutions. So it helps raise deposit rates and make loans more affordable.
DeFi can also open round-the-clock investment periods. Stock markets today are typically open from 9:30 a.m. to 4:00 p.m. EST. They do not operate on weekends and holidays. A DeFi app can extend this period and keep the market open 24/7.
DeFi runs on blockchain technology. So it lets developers create systems for digital assets without limitations. It can make it possible to tokenise everything from loans to collateral obligations.
Traditional Banks Consider DeFi
Recent cryptocurrency news shows that many banks are thinking of adding DeFi to their operations. Many consider blockchain-based systems to catch up to challenger banks.
Challenger banks are small, new banks that use modern practices to compete against traditional banks. They usually only operate online or through an app. The pandemic proved a fertile period for them, as many people turned to digital banking.
Around 23% of banking, trading, and insurance companies have tested DeFi-based apps. Meanwhile, over 55% are evaluating DeFi and its services. And recent bank news attests to these figures. For instance, VISA started accepting cryptocurrency for transactions in March 2021.
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