Why is DeFi Set to Take Over From Traditional Finance?

11 November 2022, 11:00 GMT+0000
Updated by Petar Jovanovic
28 November 2022, 15:45 GMT+0000

Given the wider macroeconomic issues, it’s a little surprising that decentralized finance (DeFi) is not yet as widely accepted as it should be.

The issue is an educational one, as the benefits of DeFi are obvious for all to see. The future of economics lies in DeFi – it offers all the benefits of legacy finance with only a small number of the disadvantages, which can be ironed out as time goes by.  

Basic advantages of web3 finance

It needs to be understood that there is nothing that can be done in the traditional banking system that cannot be done more efficiently through distributed ledgers.

We are currently in a situation where a solution that is hundreds of times faster and much more flexible than the former banking system exists but is not being undertaken. 

The primary reason that there has been no migration is due to reluctance on behalf of financial institutions. And this industry has historically been very conservative, which makes sense in the context of large financial institutions with many moving parts. 

With traditional finance, depositors no longer earn any interest. In fact, they are charged a fee to use the service, which is a form of negative interest in itself, though not advertised as such.

Through crypto staking, users can earn around 4% – 8% for their assets at the click of a button. This is a relatively safe way of earning interest on crypto that is no longer available in the TradFi banking system. 

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DeFi is also orders of magnitude faster than the legacy banking system with drastically reduced fees. You store your funds for free and can send microtransactions without any red tape. Bureaucratic red tape is a major issue for commercial innovation.

Sophisticated advantages of web3 finance

Even complex financial transactions can be done via distributed ledgers. Smart contracts are notoriously versatile where transactions are executed based on specific criteria. Web3 infrastructure firm Ankr was one of the first pioneers of liquid staking. 

This means that users are given derivative tokens and still get rewards for their locked assets/deposits. They can benefit from yield farming, loans, diversification, liquidity pools, and more. It allows token holders to derive more value from their holdings than was previously possible.

Liquid staking also means that the derivative market can be taken to the world of crypto, as you get derivative products for tokens.

This increases liquidity and innovation, though has to be coupled with risk mitigation procedures. While many can suggest this would be the same thing, a major difference lies in the fact that there will be no bailouts for DeFi providers, in a non-interventionist market.  

Ankr further offers a complete suite of tools to access ‘Web3’, a vague term that simply denotes autonomous, non-centralized online interaction.

If nobody knows who you are, your data is safe and you cannot be commercially profiled. It provides an easy yet secure means of onboarding people to Web3, without the need for specialized knowledge

The removal of trust issues & privacy concerns

The banking model involves the tracking of individuals and the non-negotiable transfer of sensitive information in order to take part.

For most financial applications, a personal picture, a phone number, and a home address is now required. This is done in tandem with a wider KYC movement which is proving to be very invasive to clients. 

DeFi is built on the principles of autonomous activity, where you retain ownership of all assets without giving away sensitive information.

At present, US regulators are attempting to bring DeFi within the confines of the Bank Secrecy Act, a piece of legislation created over 50 years ago. The regulation has not been softened to include decentralized innovation. 

Inapplicable laws are coming into force to compel crypto holders to comply, even when the legislation does not make any sense. It’s practically impossible to correctly account for micro transactions and derivative tokens in the fast-paced crypto markets where prices are fluctuating wildly every day. 

DeFi to reduce global instability

The great irony is perhaps the fact that the actions of the financial model are assisting with the rise of cryptocurrency.

Because they are trying to shut down the markets, it means that compliance is impossible, meaning that more and more people will move away from the existing financial system. If it is not possible to comply with regulations, people will be forced to band together and create new systems.

This is essentially what we are seeing with the rise of all these new DeFi technologies in the face of systemic crises. The traditional financial model is broken.

This view is no longer contrarian, with wars, high energy prices, and general global instability. Financial mismanagement via government bureaucracy is also well documented in multiple studies. 

In sum, the cracks within the former financial model are apparent for all to see. The world of DeFi is taking off and regulators had the best work with the system instead of trying to get the new system to conform with outdated rules and regulations. 

DeFi is taking over from legacy finance and already has to a large degree. It’s thousands of times cheaper, faster, and more private than the legacy model.  

Bio

Filipe Gonçalves has been leading Ankr’s Liquid Staking offering and DeFi strategy since 2021. Prior to his involvement with Ankr, Filipe worked for eight years as a wealth manager at UBS, Credit Suisse, and BNP Paribas in Switzerland across several segments (Affluent, HNWI, and UHNWI) within both European and Emerging Markets clients.

Filipe has a deep understanding of the scope of financial product offerings for ultra-high-net-worth individuals. His experience working with developers and product managers in DeFi is an ideal set of skills to lead projects aiming to democratize access to products that involve a high level of financial complexity.  

Disclaimer

The information provided in independent research represents the author’s view and does not constitute investment, trading, or financial advice. BeinCrypto doesn’t recommend buying, selling, trading, holding, or investing in any cryptocurrencies