The industry could now be disrupted by cryptocurrencies, especially by Ethereum 2.0. Decentralized finance (DeFi) is the keyword here. Can DeFi turn the financial world upside down?
What is DeFi?
Decentralized finance is an eco-system of blockchain technology that enables financial applications. Decentralized financial services can be offered via the blockchain (e.g. Ethereum). The system acts independently of banks or other intermediaries that make the current financial system more inefficient.
What can DeFi do?
The functions of DeFi are versatile. Of course, the technology allows you to transfer money without a middleman. In fact, it is even possible to take out loans (in cryptocurrencies) via DeFi. The advantage: No credit ratings or collateral are required. DeFi providers are now even trying to attack the great Wall Street. Decentralized exchanges such as Uniswap are increasingly entering the market and want their part of the pie. It is even possible to buy stocks, commodities, currencies, or indices using derivatives.
Smart Contracts
Smart contracts are another innovation from decentralized financial service providers. Smart contracts are digital blockchain-based contracts that can map real assets such as land or real estate. No notaries or other intermediaries are required for transactions with smart contracts, but the contracts are still valid.
Advantages of DeFi
The advantages that DeFi can offer are considerable. You could resolve the existing inefficiencies in the financial sector. DeFi not only offers (temporally) unrestricted access and is more cost-effective, it also offers completely new financial services that were previously impossible. In addition, the technology is completely transparent.
Will DeFi prevail?
So far, most market inefficiencies have been resolved by a free market. In the banking industry, they could hold up for a long time. But is it necessary to pay penalty interest on assets or fees for transactions? Do I need a middleman for a person A to person B transaction? So far, yes, but DeFi will sooner or later resolve existing inefficiencies, albeit through traditional providers. The big players in the industry, JPMorgan, Wells Fargo, and Co, will have already joined the blockchain and are probably already tinkering with their own DeFi products. It is only a question of time when you will also carry out decentralized transactions - it would already be possible now.
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