Banking and finance are notoriously complex to navigate. After the global financial crisis and the many bank runs around the world, people everywhere are skeptical of the bank’s ability to safeguard their wealth.
Up until the recent arrival of cryptocurrencies, there were no alternatives to fiat currencies. Also, the services that are currently being offered by the commercial and investment banks cannot be provided by anyone else. With crypto and DeFi, people now have alternatives to traditional banks. Cryptocurrencies have the potential to transform banking as it exists today.
Implications
In traditional finance, individuals deposit their savings with banks. Banks keep the fractional reserve and invest the rest via lending or via investments in other financial instruments. The individual takes on the risks of credit defaults by the borrowers, as happened during the crisis of 2008. Money in the banks can also be devalued through inflation and currency devaluation.
In contrast, with DeFi, people retain complete control over their money. The money is available for investments across options such as BTC. BTC is not pegged against the dollar and is hence insulated from inflation. Users can also open anonymous accounts to invest or store their money.
Adoption of DeFi
The advantages provided by DeFi are posing a challenge for traditional banks. Banks might soon be forced to add cryptocurrencies to the portfolio of services offered by them. Some financial and lending institutions have already started accepting bitcoins against regular and mortgage payments. ETF is set to further accelerate DeFi’s adoption among traditional banks.
The rate of adoption is, however, still slow. The size of the addressable market in filling the gap between DeFi and the banking system is large. Crypto is slowly also gaining regulatory acceptance, and this is helping the cause of DeFi adoption.
Several countries have accorded licensing legitimacy for crypto. This emboldens investors to carry out transactions using crypto. Also, new tools enable regulation-compliant crypto usage. Clearly, this is giving individual investors greater power to control their finances.
