What is DeFi?
Decentralized Finance, or DeFi, is one of the fastest growing financial technologies. Based on secure distributed ledgers, similar to those used by cryptocurrencies such as Bitcoin or Ethereum, DeFi is opening doors to new innovation because of the way it is different from traditional finance, or the systems that banks, credit unions, brokerages, and payments in general run on today. While everyone will likely not be fully jumping to the new systems DeFi offers in the near future, it does present benefits that many believe may represent the future of finance. Tech companies like Meta alongside large banks like JP Morgan Chase have begun investing quite a bit of time, money, and other resources into exploring DeFi & other “web3” opportunities. At its core, DeFi allows for new peer-to-peer transfer of value with no direct third-party verification or oversight, opening the door to faster, cheaper, simpler, more accessible finance and exchange; not only for your everyday retail banking user, but also for corporations and financial institutions across the world as well.
In this article, we’ll be focusing on DeFi’s application to modern-day retail banking that banks and credit unions can take advantage of today. In the next blog in this series, we’ll explore some opportunities for larger commercial and international banks. As you’ll learn, DeFi may have a significant positive impact on the way finance is done across the board. Be sure to subscribe below so you don’t miss out.
What is needed to participate in DeFi, and why should financial institutions care?
In its simplest form, DeFi allows anyone, anywhere to send and receive digital assets as long as they have access to the Internet. Setting up a digital wallet to hold funds is very simple and can be done in minutes, with no verification of identity, special contracts to sign, or other barriers to entry that traditional financial institutions may have in place. This makes finance more accessible by giving those unable to bank normally, whether that be because of bad credit, low funds, or living in an area without access to secure banks, a way to store value securely. It also opens the door to global movement of assets, as there is no regulatory or taxing authority involved in the transaction.
Digital assets, when isolated from everything else, aren’t worth much. It’s when you start attaching it to other pieces and understanding the broader DeFi ecosystem that they begin to shine. Today, cryptocurrency exchanges allow you to turn your fiat currency into cryptocurrency and vice versa. This gives digital assets the power of being a tangible store of value - hold them in a wallet and/or stake them in a network like Ethereum and it may withstand inflationary pressures of fiat, or use them to facilitate instant payments better than the traditional finance systems that exist today. Next, allow merchants to start accepting digital assets as payment, as many are beginning to do, and you have a whole new financial system. Finally, add smart contracts built on top of the blockchain network these digital assets are using in order to define rules, automate transactions, create workflows, and to ensure participants are certain of the outcome of their exchange, again without any third party, and you have a new way to transact that is cheaper and faster. All of this is already built and has been growing in popularity recently, with new use case innovations regularly being developed to bring secure, seamless finance to more people.
As with all new technologies, DeFi has not been without its growing pains, but players in the industry are learning. For instance, people trusted both cryptocurrency lending platform Celsius and popular exchange FTX, both of which went insolvent with many customer’s funds still trapped inside of them this year (and both of which we wrote about). In FTX’s case, while the story is still developing and more will likely come to light, it does seem likely that actions were taken from within the organization that in the US might be considered fraud and illegal. Many crypto-interested people are now looking for new ways to safely store and trade their digital assets, without a large, private, self-interested exchange in the way.
Meanwhile, banks and credit unions need to innovate to stay relevant. Many traditional financial institutions are struggling to gain and retain the younger generation of spenders as they withdraw money from traditional banks and credit unions to neobanks and other fintech firms, many of which have been adopting traditional banking features alongside crypto tools like checking and savings accounts, debit and credit cards, loans, and more. Traditional finance needs to innovate to catch up and catch on, and the FTX debacle makes moving in on this a key opportunity as many users begin to distrust the fintechs they've put their money into.
Simply put, banks and credit unions can serve as the answer users are looking for as a place for safe, secure crypto investing. For financial institutions looking to get started with digital assets and DeFi, the first place to start is likely a buy/sell/hold solution for their users. Bank customers and credit union members can safely store their assets like Bitcoin and Ethereum through their bank and buy and sell them with their existing account funds. Thus, they can confidently use cryptocurrency as an investment tool and grow more comfortable with the future of finance. The financial institution can support this offering with education material so that users can make informed decisions, rewards programs that tie in to the institution's existing card programs, crypto-asset balance transfer so that users can seamlessly transfer in funds from the fintechs and neobanks they're investing with already, and more. CryptoFi offers all of this and can work with financial institutions to take the first step in their digital asset journey today.
So, is DeFi right for your institution?
As mentioned earlier, this goes beyond basic consumer use cases. DeFi unlocks the door for corporations, big banks, and central banks to engage in large, international transactions in better ways than traditional financial systems allow. We’ll explore that more in our next blog. However, it should be clear already that DeFi is opening the doors to a new financial infrastructure, and financial institutions looking to serve their users in new and exciting ways can become an early adopter if they begin implementing a digital asset program today. The total value locked in DeFi protocols has exceeded $55 billion as of August 2022, reflecting a growing trend towards greater acceptance of DeFi platforms, particularly from Gen-Z as well as millennial generations. Providing a service for investors to work with their trusted banking providers will lead to a new wave in crypto investment and exchanges, revolutionizing the security and use of crypto exchanges. Just expanding the institution’s offering with a robust buy/sell/hold program for leading cryptocurrencies is a great first step. Interested in learning more? CryptoFi’s team can help. Learn more & contact us today at https://www.cryptofi.tech.
Sources:
https://www.investopedia.com/decentralized-finance-defi-5113835
https://tradersunion.com/ratings/crypto/common/p2p-crypto-exchange/
