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How DeFi will disrupt the financial system

by Concerns of the Future 29 days ago in economy

Essentially, DeFi is replacing the banking system with lines of code. With that, people will become their own bank.

How DeFi will disrupt the financial system
Photo by Ryan Born on Unsplash

In one of my previous articles, I talked about how central banks could put banks out of business. Then, I introduced DeFi in my most recent article.

As I mentioned in my previous article and in the subtitle, DeFi essentially does the functions of the banking system through code rather than through many offices, many people, etc. In the process, the way we do banking becomes simpler, more efficient, and we won't have a need to do business with banks when we're essentially becoming our own bank.

Insurance giant ING took a deep dive into the impacts of DeFi on banks and found that DeFi will be more disruptive than Bitcoin for banks. Because DeFi is borderless by nature, it won't have to deal with the many regulations that come with having a physical operation. There are opportunities for banks to help support a DeFi ecosystem, but the article notes it as "uncharted territory."

If DeFi does become the new norm, we no longer will have bank branches, ATMs, vaults to hold physical currency, etc. Rather, all of our banking will be done virtually. It's mind-blowing to think that lines of code and smart contracts can replace the financial intermediaries of today, and DeFi is making that a reality.

Besides making the financial system more efficient, DeFi is also environmentally friendly. Today, our financial system has:

  • The need to mine metals and produce the paper to produce the paper currency
  • Banks having many branches and occupying many floors of a skyscraper and using electricity for a long time while using a lot of paper to do paperwork
  • (adding on to my previous point) Employees will have to commute to the office and that too creates many tons of CO2
  • ATMs operating all the time for people's convenience when they want to withdraw cash from their bank accounts
  • A lot of energy to transport and store the physical currency safely as well as run the data centers that store the data and info for customers

And there are many more ways in which the financial system of today isn't great for the environment. With DeFi, while there will be fewer jobs in finance, at least we won't be having many of those energy and resource-intensive activities happening in our financial system.

Like any innovation in the financial system, there will always be fears about dirty money. While many don't want to give financial resources to criminals, one of the things that attract people to DeFi is that anyone can use it. Especially now, where cancel culture is part of mainstream society, DeFi will continue to allow "canceled" people to continue participating in the DeFi system. In the meantime, banks are choosing not to do business with people that have been "canceled" by society.

While DeFi is efficient with its lines of code and smart contracts, there are risks that come with doing banking on a DeFi ecosystem. Firstly, there rarely is any customer service in the world of DeFi, since everything is automated. Because of this, it will be difficult to dispute transactions if anything bad happens. Thankfully, there will still be a couple of CeFi firms that will continue to contribute to the DeFi ecosystem. These CeFi firms are where people can dispute their transactions.

Plus, without CeFi firms, who else will help people convert their fiat money into cryptocurrency?

Conclusion

Banks are in big danger when it comes to the growth of DeFi. Unlike Coinbase, who has already started buying DeFi tokens and profits off of its users buying & selling DeFi tokens, banks are far from being able to benefit from DeFi since they're not the ones buying the DeFi tokens.

At the same time, rather than having consumers transfer their savings into central bank accounts, consumers will be converting their fiat money into cryptocurrency and keeping those tokens in their wallets. After that, consumers will no longer be getting their financial services from banks and instead get them from the DeFi ecosystem.

The future looks to be bright for the common person. Meanwhile, for those looking to get into the banking industry, things might be great now due to the boom in investment banking activity and higher loan demand due to lower interest rates. But, for the future, DeFi is making the prospects for aspiring bankers to be bleak.

economy

Concerns of the Future

The future is concerning. But at the same time, there are many things to be optimistic about.

*All views expressed in my articles are my own. Please do your own research and talk to a financial advisor before making any decisions.

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