The digital asset and cryptocurrency industry has rapidly developed in recent years. Many traditional financial institutions have begun to offer cryptocurrency trading and custody services, and many more are investigating how they may join the decentralized finance movement (DeFi). Individuals, digital native businesses, and venture capitalists are driving the current expansion of DeFi. Adopting DeFi by traditional institutions will mark a major milestone in the industry’s maturation and progress toward widespread adoption. It will impact the entire financial system and existing methods of financial intermediation.
DeFi intends to transform the current centralized global financial infrastructure by introducing a decentralized internet-based model that relies on open-source protocols rather than traditional financial intermediaries.
DeFi provides traditional financial institutions with growth opportunities that can enhance existing operations and services, but it also threatens contemporary financial services and their fundamental business model.
Why Is DeFi So Important?
The current global financial system and intermediaries could be significantly impacted if this decentralized peer-to-peer model were applied globally to the various forms of economic transactions that require an intermediary today (such as collateralized lending, interest-bearing deposits, and investment portfolio management).
DeFi removes the need for a middleman, allowing individuals to keep more control over their assets than under the current financial system. This doesn’t mean people won’t need help managing their money, or banks will become extinct. Still, it suggests how people and organizations engage with the financial system and make decisions about their financial futures may change significantly.
DeFi will also affect corporate communication. Decentralized applications based on smart contracts may emerge as middlemen between institutions as more and more organizations join the blockchain ecosystem and tokenize financial assets like derivatives and equities.As an alternative to clearing trades through the Depository Trust & Clearing Corporation (DTCC), institutions could instantly trade tokenized securities on an open market enabled by internet-based smart contracts.
Tokenizing physical assets on public blockchains is another game-changer. Representing formerly illiquid assets, including commercial real estate, on a public blockchain as fractionalized, tradable tokens will boost a company’s liquidity. These coins can then be used as collateral or added to investment pools on DeFi protocols. This will be true for new and existing supply chains, as DeFi smart contract development paves the way for a more decentralized market where entities may deal securely and anonymously on a public blockchain and where prices are set by supply and demand.
What Opportunities Exist In DeFi?
The ecosystem for DeFi innovation, which is only beginning, will be largely established by institutions. Leveraging the current DeFi ecosystem and infrastructure can lead to lucrative opportunities, such as creating new services and products and streamlined operations. The institutions that can adjust to and take advantage of the new conditions in the financial sector will prosper.
The following are examples of how a decentralized finance application could alter the standard procedure and involved parties:
- Exchanging digital assets, such as Bitcoin, for another digital asset, on an open Internet marketplace by translating and automating typical bank and payment service processes into contract language.
- Smart contracts handle deposits, interest payments, and lending in line with established market parameters, taking the place of traditional banking services that use savings to invest and lend.
- In an open market, smart contracts can manage derivatives that require a clearing house or intermediary to settle.
- Tokenizing real-world assets in the supply chain or monetary transactions to create more precise, efficient, and transparent markets.
- As the number of participants and the total amount of capital locked in these protocols increases, institutional interest in DeFi will climb accordingly. Every financial institution must pay attention to the developing digital economy, even though institutions’ interactions with DeFi applications will vary greatly depending on the level of risk they are willing to take and their current level of technological sophistication.
Also read: How Much Does it Cost to Build a Defi-Based Exchange App?
Conclusion
Among the many developments in the history of digital assets and internet-based finance, DeFi is one of the most recent and impactful. The participants in this decentralized ecosystem will eventually meet up with the seasoned institutions that have long served as the trusted gatekeepers of the conventional financial system. Whether institutions are prepared to fight against or welcome this new technology and form of intermediation will majorly impact their operations and long-term success in the developing digital economy.
