According to a publication by fintechfutures, there were recently up to 1.7 billion unbanked people in the world, including 7.1 million people in the U.S. This says a lot about the traditional banking system that has been in place since time immemorial. Several irregularities within the traditional banking system make it difficult to provide financial services to the unbanked population. Interestingly, most of these irregularities stem from the fact that the traditional banking system is centralized, and that centralization occurs through the hierarchical administration of the bank.
Centralized Banking Vs Decentralized Infrastructure
Basically, for one transaction to get authorized and verified, it has to go through different processes, with different people appending their signatures to the process. In addition to exorbitant fees being imposed by centralized banks, endless hours are spent on everyday tasks due to technology barriers. Even for banked individuals, obtaining a loan these days is a dreadful and tedious process. The traditional banking system is becoming less encouraged, and the market is seeing more people flock to decentralized financial services.
Blockchain And Decentralization
Blockchain came as the underlying technology to drive the functionalities of digital currencies, and one of the features it brought to the mix is decentralization. It takes the power away from the central authority and gives it to everyone involved in the network, and thus it makes it easy for everyone to perform transactions on a person-to-person (P2P) basis. The advantages of decentralization are many, and it has paved the way for the creation of a plethora of use cases and endless possibilities.
Over the years, cryptocurrency & blockchain have paved the way for decentralized systems like decentralized exchanges (DEX), decentralized applications (DApps), and decentralized finance (DeFi). It is amazing to see how DeFi is taking over the finance scene at an unprecedented rate. With the introductions of related startups, platforms, and features, traditional finance systems have begun to adopt DeFi principles. According to DeFi pulse, more than $39 billion is locked into DeFi protocols. This was just a $2M market a few years ago..
DeFi ( Decentralized Finance )
DeFi was designed to bring financial solutions to everyone, howbeit in a digitalized and decentralized manner. Many companies have begun to integrate DeFi into their business models and operations. One major reason why there has been an increase in the demand for DeFi, can be attributed to the outbreak of Covid-19, a pandemic that rocked the world and sent the traditional finance system into a state of uncertainty. Countries were locked down, economies halted and dwindled, and traditional banking became difficult since banks were closed. Many countries have not recovered from the devastation caused by the pandemic, and others are still coming to terms with the losses.
Now more than ever, it has become clear that digital banking is the future of finance. DeFi and FinTech are already building protocols that monetize the banking infrastructure in a decentralized manner. A perfect example is lending. In traditional finance, nobody is earning an attractive yield on their cash anymore. With DeFi having the ability to cut costs affiliated with centralized entities, they have been able to offer lucrative yields. DeFi lending markets have gone parabolic, with many investors earning 5-10% in a 0% interest rate environment…
Coincidentally, the 4th industrial revolution is already here, and it is characterized majorly by cyber-physical systems. Blockchain, cryptocurrency, machine learning, artificial intelligence, etc. are all systems of the 4th industrial revolution and are components of future systems, including Fintech. However, the future is not tomorrow, as we were told, or perhaps we have gotten to the future. Either way, the future is here, and DeFi is the way forward for the future of traditional banking and finance.
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