We’ve all seen it by now – the death of the high street bank. We’ve even experienced it – when is the last time you stepped foot inside a bank branch?
It’s pretty obvious by now. We are a digital society.
Even before the pandemic hit and turned our worlds upside down, Millenials and Gen-Zers everywhere started to rely more on the internet for their daily needs, from ordering food instead of going grocery shopping to making payments through e-banking solutions instead of physically going to ATM machines or banks.
As the momentum of the DeFi sector, cryptocurrencies, and blockchain technology continues to build, a very pertinent question is – will DeFi coexist with legacy banking, or replace it?
To put it all into context, DeFi has a few advantages over its centralised counterpart:
- Efficiency. Removing intermediaries creates an opportunity for less friction and makes processing a financial transaction more fluid.
- Costs. In traditional finance, the intermediaries governing transactions are taking fees that are generally higher than the ones you currently pay on DeFi apps. The worst part, and this is where it hurts, is often you interact with a series of intermediaries, so that, of course, involves a bit of death by a thousand cuts in terms of costs.
- A more open, democratic system. With DeFi, you don’t necessarily have to have a bank account to access financial tools, you just need an internet connection.
The hurdles that need to be overcome before DeFi could pose a real threat to traditional finance
At the moment, cryptocurrencies come with technical challenges and even some trust issues for most people – they are not necessarily simple to obtain and are still somewhat difficult to spend. It is hardly surprising that mainstream adoption just hasn’t happened yet.
The current state of affairs is that while crypto is a speculative asset, they are limited in their utility as a replacement to fiat.
Yet another hurdle that needs to be overcome is legislative acceptance. While there are positive signs for cryptocurrency, most moves to regulate or legitimize Bitcoin and other cryptocurrencies treat tokens as an asset and not as legal tender.
As we stand today, it is clear that DeFi remains in its infancy and has so far had little impact on banks’ profitability or market share. Having said that, there is substantial growth, and the total value of DeFi assets rose to over $200 billion – an astounding 1000% annual increase. Despite this significant growth, DeFi assets remain far below those of traditional banks.
Looking ahead, these are my informed predictions in answer to the question:
- We will see less and less physical banks in the real world, as they opt to operate at lower costs and focus on digital solutions to their clients.
- DeFi will become mainstream and popular with the masses – given the efficiency that it can provide them with, as well as lower costs, once people understand the benefits and can access it via a UI that is already familiar to them, DeFi will become a more tangible threat to traditional banking.
- Banks will start to utilize some of the DeFi technologies to improve their own infrastructures and systems, such as using smart contracts to digitize traditional bank functions like lending, borrowing, and saving.
- Regulation will come into place, effectively cementing DeFi as an “alternative” financial offering and giving it the opportunity to live alongside legacy banking.
And my final prediction?
- DeFi will probably never completely replace banking as know it today, but there will be an overlap as the big banks deploy the tech in a bid to keep up with the unique offerings that decentralised, blockchain technology based companies give; and the two systems will co-exist.
No matter which philosophy you believe in, it is clear that DeFi is here to stay.