Fintech 101: What is DeFi (Decentralized Finance)?

Fintoism DeFi Decentralized Finance

Innovative technologies often lead to unconventional services and business models. Decentralized finance, or DeFi, has become a very hot trend in recent months. All of this is fueled by the ongoing developments in the blockchain technology industry. 

Traditional Finance is Outdated

All over the world, companies are trying to disrupt finance. In most cases, this is done by taking existing business models and modernizing their approach or underpinning technology. The rise of challenger banks and neobanks are just two examples of what is in store for traditional financial institutions in the years to come. 

This ongoing tug-of-war will only intensify even further in the years ahead. Existing inefficiencies in the financial industry not only allow for disruptors to make their mark, but consumers have also voiced their dissatisfaction with the current status-quo. Far too many financial intermediaries are involved in financial processes, resulting in a bogged-down and inefficient financial system. 

Making matters worse are the mounting number of security risks. As more third parties gain access to consumers’ financial details, there is a higher chance of having that information misused or stolen.  A recent report by PWC only confirms these concerns. Nearly half of all financial intermediaries suffer from cyber incidents ever single year.

The Rise of DeFi

In this modern era of disruptive technologies, tackling inefficiencies is far less cumbersome than before. Decentralized finance, or DeFi, makes full use of blockchain technology and its future potential. It removes the need to rely on intermediaries altogether. More importantly, it can improve financial inclusion on a global scale.

While some people may think Bitcoin and Ethereum are DeFi networks, there is still plenty of work to be done. Both ecosystems are capable of supporting decentralized finance solutions. They are both permissionless, decentralized, transparent, and global. Those are important aspects of decentralized finance.

Storing financial information and records creates numerous headaches for traditional finance providers. With blockchain technology, there is no need for a central storage solution or authority controlling the network. Information is shared and distributed across thousands of devices around the globe, preventing a single point of failure. 

Existing Companies Will Diversify

Competition in the financial sector will often lead to unique use cases, products, and services. Rather than trying to put banks out of business, DeFi aims to be globally inclusive. That means that even traditional institutions can become part of the decentralized finance movement, should they opt to do so.

It is crucial for existing service providers to embrace new technologies. It will take a while until this effectively happens, however. Companies are looking on from the sidelines to see who will take the plunge first. 

Similar to other business models involving new technologies, there is a first mover advantage where DeFi is concerned. Those who do not jump on this opportunity in time could risk being left out.

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