Will DeFi Eat Traditional Finance?
Over the past decade, we have seen significant growth in crypto and Decentralized Finance (DeFi). Therefore, the firm of traditional finance like central banks and hedge funds are seeking more exposure to the Decentralized Finance space. Central banks across the globe have started adopting the phenomenon of Central Bank Digital Currencies (CDBCs) and stablecoins. Other than this If you want to invest in bit coins then you can visit online trading platforms like ImmediateGP. Because of tokenization, the basic principles of Decentralized Finance are gaining more popularity and acceptance in traditional financial institutions.
For years there was Centralized Finance, and it still exists in most of the markets where major banking parties collected all the prices because they were the regulatory authorities for all the transactions. Like other blockchain apps, DeFi will eliminate the involvement of intermediaries. The mechanism of blockchain applications developed on the blockchain networks would theoretically disperse this value and promote economic growth. It will primarily affect small and medium-sized businesses and emerging economies as the creation of new products, services, and financial markets takes place.
Comparison of DeFi with Open Banking
We cannot avoid the comparison, but they are not the same. Open banking indicates a mechanism in which third parties can access data through APIs, which enables the networking of data and accounts between banks and other financial institutions, and they can easily enter various other products and services into the traditional financial system. DeFi on the other hand, is based on the latest and autonomous financial mechanism that needs no permission to reach the economic infrastructure.
There is an example that clarifies the difference between both: collecting data from open banking banks and entities allows the management of all traditional financial equipment in the same application. Decentralized Finance, anyhow, manages new tools and ways to employ them.
The Benefits of DeFi over Traditional Financial Systems
DeFi requires no intermediary party to operate because the code explains the resolution of all possible conflicts, which not only reduces the product supply and usage costs but also enables a direct and smooth financial system. Therefore, it is extremely pertinent to identify the impact of these solutions. Traditional markets depend on intermediary parties to earn profit resulting in services that often neglect communities with lower incomes. Without the need for a lucrative intermediary, individuals with DeFi can also gain from a wider range of financial services.
Another component that is usually a difficult task for those coming into the market as their structure is made on an obsolete heritage mechanism that is often developed on various networks is the application deployment whether it be the latest products or services. These participants face a tough time, and the deployment phase often contains bugs & errors. It is not applicable with DeFi because frameworks are already built, and they are kept in the same blockchain network.
Besides this, in the reality of DeFi, users will deal with a part of the risks if we talk about money laundering. In this way, you will not rely on any bank to secure your funds, but you will be the one to keep your money and make it secure. Crypto wallets - which are usually considered safer than your two-step verification, make it possible for you to do anything with those funds. You can use them for buying, selling, transferring, and receiving cryptocurrencies such as Bitcoin the most valuable cryptocurrency in terms of market cap and effortlessly tradable via Bitcoin Trading Software and Ethereum.
In the case of traditional finance, the conformity around the AML relies on KYC guidelines in which the identity, practicality, and involved risks are validated. While in the universe of Decentralized Finance (DeFi), the independent and autonomous infrastructure allows advanced compliance analysis around the contributing address behavior instead of identifying someone. Instead of paying attention to an individual, DeFi concentrates on the transactions, evaluating the potential risks and safeguarding them from fraud and other monetary crimes.
Wrap Up
Decentralized Finance (DeFi) will gain more popularity in both developed & emerging markets. In former markets, DeFi will offer maximum choice to consumers and decrease the costs of outdated financial systems. As a result, financial markets will become more liquid, and there will be more product innovation. While in the case of emerging markets, DeFi would provide a safer reservoir of the price with the emergence of Stable Coins and offer services to the billions of people who cannot access the current financial system.