What will banking look like in the very near future? Here’s a hint: it probably will be completely different than it is today. The advent of blockchain technology promises disruption in just about every industry, and the banking world will certainly not be immune to it.
Why? Because when you create an open-source financial services ecosystem that is permission less, fully transparent, immutable, without any central authority, and where users have complete control over their assets, you’ve built a platform just about anyone can get behind. The term is “Decentralized Banking” (or “Decentralized Finance”) and they are terms you should make yourself very familiar with.
The main difference between Decentralized Finance (DeFi) and the traditional banking systems you see today is that traditional financial institutions are managed by a centralized governing entity. Instead, DeFi uses “smart contracts” which are called “distributed applications” (or dApps) which run without any human involvement. These dApps are completely transparent and available for everyone to see, where everyone can contribute to making these seamless applications bug-free and permanent in their entry.
And because a public blockchain is permission-less, the entire ecosystem has no central authority in charge – meaning anyone can create or use these DeFi dApps on decentralized exchanges to create what’s known as “stablecoins” and/or “tokens” in a process called “tokenization”.
“Smart Contracts” are what drives the entire DeFi universe. These contracts are self-executing and do not need a third-party or human to oversee the process – and THAT is the game-changer! It allows two parties of a transaction to interact directly without going through an intermediary. This opens the floodgates in terms of applications that can be developed with respect to monetary banking services, decentralized marketplaces, and even the simple act of borrowing and lending,
With DeFi in terms of decentralized borrowing and lending, blockchain technology combined with smart contracts provides instant transaction settlements, no need for credit checks, and has the ability to collateralize digital assets, making borrowing and lending cheaper, faster, less risky, and more available to all.
DeFi has serious implications in the monetary banking industry as well. The issuance of stablecoins (and even mortgages and insurance products) can be completely uprooted with DeFi. Because the prices of cryptocurrencies fluctuate greatly, many investors have been slow to adopt crypto as a means of investment. However, Stablecoins have the ability to solve this problem. There are 3 types: Fiat Collateralized, Crypto Collateralized, and Non-Collateralized. Whether you’ve ever heard of stablecoins yet, you almost certainly will. By removing intermediaries (and human interaction and the errors that go with it), the entire transaction of monetary banking becomes faster and less expensive.
But decentralized exchanges is where you’re really going to see change. In today’s marketplace, you have to trust an intermediary (an exchange) to hold your funds for you. With decentralization, you have the ability to connect with others directly on a peer-to-peer environment – in a safe and secure manner. As a result of this drastically reduced maintenance, you’ll get lower transaction fees and much faster settlements.
Because DeFi dApps do not require third-party intervention, this lack of intermediaries makes the entire process much more streamlined and more accessible worldwide. And because DeFi are not controlled by a centralized entity or authority, all points of failure are removed and the entire transaction is totally immutable and resistant to any forms of censorship.
The underlying framework of blockchain has already been established and gaining traction. Traditional banking structures should be afraid – very afraid. The world’s about to change as the DeFi developer community are constantly innovating new ideas on the Ethereum blockchain (the same one being used at the World Token Market). And guess what? It’s happening right before your eyes whether you realize it or not!