DeFi: The Banks Are Cooked
It may seem hard to see at the moment, but the banks are cooked. Most of them will not withstand the onslaught that is about to befall them.
This is a concept that is becoming clearer each day. Over the next 10 years, we will see the eradication of the existing banking system as we know it. In its place will become one that is built upon DeFi.
DeFi is obviously the story of 2020 in cryptocurrency. Right now it is the Wild West with a great deal of insanity taking place. Yield Farming is the rage which as crossed over, in many instances, into the absurd.
That said, this is likely to be a passing trend. The Yield Farming craze will eventually die down. The same will not be said for DeFi.
Decentralized finance is going to be the basis for a new financial system. Simply put, it offers too many advantages over what we have now. This means that the incumbent institutions, those enormous entities that control trillions of dollars, will have to adapt or die. Unfortunately for them, their very existence is not really required.
To start, Facebook announcing the release of Libra is a major blow to the banking world. One of the biggest advantages to this is that it instantly allows anyone with an Internet connection and a Facebook account to start banking, in the equivalent of USD.
This one project could bring billions in, ones who are presently missing from the existing banking realm. Since most people use banks to send, receive, and store money, this will facilitate much of their needs. Here is where we see many of the traditional banks affected.
Naturally, the commercial banks are a different story. Do not be mistaken into believing they are on secure ground. Much of the banking industry was already affected by technological developments. In fact, few realize that in the United States, the majority of mortgages originate outside the banking industry. Companies like Quicken loans has basically taken over that sector.
Therefore, none of this is novel.
Where DeFi is lacking, at the moment, is with infrastructure. This is what is preventing larger money to enter the market. As more is built out, we will likely see a lot of money enter the space.
For example, part of the basics of banking is the paying of interest on loans. This is a fundamental of the banking process. Banks earn money on loans they make, which comes from the deposits they receive. Of course, the interest paid to the depositors is a lot less than what they loan it out at. Here is where their profit comes in.
The challenge is that banks are paying near zero in interest. Most short-term interesting bearing mechanisms are netting well under 1%.
Here is where a company like Cresco Fin is stepping up. Based in Switzerland, it offers interest bearing accounts that are insured. The company uses blockchain for the contracting apparatus. Any funds placed on deposit will receive an interest rate of, I believe 3%.
An interesting aspect to this project is that there is no debt involved. Instead of generating loans, it simply goes out and buys receivables. These receivable are placed in a smart contract and executed when paid. Here we see the cashflow the entity needs to pay the depositors.
All of this is runs through Lloyds of London.
Presently the company accepts USD, EUR, and CHF. There are plans to accept more forms of deposit including stablecoins. Do not be surprised that, if the Libra takes off, a company like this begins to utilize it.
These are just a couple of examples that are disrupting a large segment of the banking system. As we know, there are already some fundamental pieces forming around other aspects of the financial arena.
Here is where we see the infancy of the industry starting to evolve. Wall Street type firms will not switch to a decentralized system until their are the mechanisms in place. For example, a lot is made about the Yield Curve in traditional finance. This is a major part of banking. Essentially, many players will be on the sidelines until a DeFi yield curve is generated.
Tokenization offers many different opportunities that are non-existent in the banking world. The ability to easily collateralize almost any asset means this practice becomes mainstream. Most anyone can participate.
Decentralized entities form the perfect basis. Ultimately, we will likely see sites that do this for us. Just like Quicken digitized the mortgage process, making it easy for anyone to apply, #defi buildout will allow for anyone to tokenize whatever they want.
This means that we will see a time where assets with little financial use suddenly become collateral. It can be used for down payments on loans or even funding for different projects to increase wealth and productivity.
At the end of the day, the banking system is nothing more than a 3rd party facilitator. It was established as a means to operate between two different parties. In fact, the same is true for much of Wall Street. These entities bring the people with money and merge then with people who want money. That ultimately what the much of the financial sector is built upon.
At the same time, Wall Street serves the roll of providing the counter-risk to many offerings. After all, someone has to step in on the other side to maintain equilibrium. Here is where trust comes in. Of course, as a company like AIG proved, this is fallible.
We will ultimately see the banking system replaced by code. It is true that sounds like crypto-geek utopia but that is exactly what is happening. Tokenization and smart contracts form the basis for codifying a large portion of our financial system.
As more of this happens, there is less of a need for banks to operate as intermediaries in the financial process. We already starting to see larger institutions step into the crypto world. This is just the beginning.
Within a decade, much of the financial system will be decentralized. There is simply no way for the present establishment to stop this.
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gif by @doze
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