DeFi Lending & Yields: A Threat to the Banking Establishment
We have witnessed a massive event this year that many anticipated, but very few expected to witness on such a massive scale.
Decentralized Finance (or DeFi) in 2021, shook the foundations of the traditional financial establishment. DeFi growth initiated at the beginning of 2020 and while the Ethereum Community embraced it, it was difficult to predict such an explosive outcome.
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DeFi changed our perception of the crypto industry. We were hanging by narratives and extreme pressure about the inability of cryptocurrency to reach wide adoption levels, but once again cryptocurrency found a new definition and the digital financial revolution re-ignited.
Cryptocurrency Instead of "Fiat"
Image from Pixabay
Merchant adoption seems to be extremely difficult. It is up to the people to decide to change ways, but frankly, most of us don’t have any shop or merchant nearby accepting any form of cryptocurrency. It is cool when we find one and we take pictures and make videos when we pay, but how many crypto-customers do these shops have?
I’m up to change my consuming habits and use crypto instead of fiat, however, most people are not. And they will not change. They would not want to hold BTC, BCH, ETH, XRP but would prefer something more stable.
In countries where the national fiat currency has completely failed (Venezuela, Zimbabwe) people will decide to find a fresh approach. Even there though, just a tiny part of the population has adopted Crypto. There will be dollars available and other currencies from neighboring countries hidden under the mattress and help the families get by.
A better solution is some cryptocurrencies that are affordable in terms of fees and could help them run their business better. But, even then, there is a big question mark. Why haven’t Venezuelans massively adopted cryptocurrencies?
Maybe they tried with Bitcoin and Ethereum but found the fees they had to pay for one transaction account for a whole monthly wage. There had been attempts by Dash since 2017 to create an adoption wave inside the country. However, this endeavor was a failure and the bear market of 2018 led Dash’s price down by 95% (or even more).
I talk with friends from Venezuela, crypto enthusiasts, and they explained that Dash one day just stopped caring. The adoption experiment was over as funds also dried out.
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Today, there is an attempt for crypto adoption in Venezuela by Bitcoin Cash. A big part of the Bitcoin Cash community wants the BCH cryptocurrency to succeed as a payments method by mass adoption. I also wish the same, but maybe the Venezuelan consuming community is not ready for it, yet.
Inflation in Venezuela is unbearable and most people survive in unsanitary conditions. Of course, money can improve some conditions, but there are also some major issues that only a huge reform could ease.
I support moving out of the fiat economy and use crypto instead, but four years later, I still don’t see the required percentage of the population agreeing with this change. While some countries battle high inflation levels, 5% (official) inflation for the US and the EU is not extreme.
It is damaging bank deposits, so investing will be more practical. For payment methods, it will be burdensome to see such change in any Western or stable economy.
DeFi, An Enemy of Traditional Finance
DeFi, after its explosive growth, is now recognized as a threat to the traditional banking system.
It is a different field in the CryptoVerse, one that was unexplored and first appeared as a topic in 2018 (if I remember correctly). DeFi was born within the Ethereum community, and Ethereum still keeps most of the development in this field.
It first rose into prominence last summer, when the cryptocurrency markets were once again at the beginning of a boom cycle.
Compound, Balancer, Maker started growing rapidly, and thousands of DeFi projects appeared. It was a repeat of the ICO Craze, having the same amount of enthusiasm and the same speculators only with one difference. DeFi is about changing the financial system into something better.
The core concept is lending and yield, but with a much better approach than the banking system. There are no credit scores, no restrictions, no favoritism involved.
There is no need for trust or discussion of terms. Decentralized blockchains are, mostly, autonomous networks running on consensus. Although, sometimes in a blockchain, one particular force can take control of certain parts of the mechanism and impose its will. When this irregularity appears, then decentralization is gone.
The point is having nobody in control, no ruler, or no banker working under a regulatory framework. The consensus rules are the only regulations blockchain transactions follow.
DeFi is the modern financial revolution and gave more potential to the crypto industry. With DeFi, it challenged the banking establishment by providing similar lending services, only of a higher standard and with better interest rates.
There is a good reason ETH fees reached the ceiling. The amounts were not about micro-transactions but big money was moving in. This money doesn’t care for $200 in fees. These investors pay ten times more fees to their banks for a mere 2% APR. They wouldn’t care less if Ethereum blockchain fees were $200 or zero. Ethereum worked perfectly for this reason.
Autonomous Banking
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Banking takes lessons from DeFi. The smart contract mechanisms of liquidity, yield, lending, and liquidations offer innovation in finance. Banks have shown they can follow progress, especially with recent developments in their digital infrastructure. But they are lacking a basic understanding of decentralized systems. Algorithic services that take immediate action with the use of smart-contracts (or similar technology) are already under development.
The banks understand they can easily cut costs (and jobs though) by using systems that don’t require human presence. One of them is lending, and DeFi has proven that loans can be automated. I would expect the banks to automate at least 90% of their services.
Moreover, banks are testing the implementation of AI solution at least at the lower levels of financial management.
It can take time and governments could ban and regulate, although they can’t stop a decentralized network. Instead, there will be the same tactics of stalling innovation until the field of the economy that lags, catches up.
Conclusion - The Race for Modern Finance
Source: Pixabay
Crypto is a similar story to the P2P Torrent networks. The entertainment industry caught up with new technologies and offer its services to everyone online. Still used by a considerable amount of users, but not a definite threat to this sector anymore, so the regulators have stopped wasting resources on hunting down torrent networks.
Research and development is the core of every business in any sector. Banks were using the same systems from the 80s until lately. Their approach was anachronistic and investment banking was speculative and often fraudulent.
In a centralized environment, decisions come from the top and spread to the rest components. In a decentralized autonomous environment, decisions require the consensus of the overwhelming majority. Decentralization provides censorship-resistant transactions, and this is the vehicle to financial freedom. The ability to control our funds without a third party authorizing the transactions.
DeFi doesn’t yet offer finance for the unbanked, although it seems it won’t be long before everyone can lend or use these services. Those excluded from the banking system are accepted in the new economy. If banks keep their practices based on obsolete methods and underestimate progress, then they will be unable to follow.
As in fact, the banks are once again 10 years behind the most recent financial innovations, and as long as they don’t value decentralization, they will remain behind in the race of modern finance.
Originally published at Hive (via Leo.Finance)
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