Blockprime co-founder and director Volker Hartzsch is a seasoned entrepreneur and investor with extensive experience of the blockchain industry. This article will look at digital currency and the potential of DeFi to revolutionise the banking and financial services industry.
In traditional finance, banks and other financial institutions serve as intermediaries, essentially calling the shots in terms of the financial products they wish to offer and how much they wish to charge for those services. However, platforms such as Bitcoin and Ethereum are giving traditional financial institutions a run for their money, essentially cutting out the middleman and facilitating direct exchange of value between individuals, paving the way for decentralised finance or ‘DeFi’.
DeFi has several advantages over traditional finance, chief among them transparency. Other advantages of DeFi lie in the system’s security, which makes it less vulnerable to hacking attempts, and its availability compared with conventional finance, which is often restricted to customers of financial institutions and other monetary organisations.
On Bitcoin trading platforms, DeFi has had a revolutionary impact in terms of enabling users to access financial instruments without the need for intermediaries. One prominent area where DeFi has had a game-changing impact is in the field of crypto exchange platforms.
DeFi applications are integrated into blockchain platforms such as Ethereum, enabling developers to create smart contracts – facilitating the execution of complex financial transactions automatically and without the need for intermediaries. For example, platforms like Ethereum allow users to lend cryptocurrency to others, borrow cryptocurrency and repay it with interest, and earn interest on deposits. Cryptocurrency users can trade with each other via decentralised exchanges that are essentially open to anyone with an internet connection.
Although DeFi has several benefits, it also presents some challenges. Built on decentralised blockchain networks, DeFi is not subject to the same legislative monitoring as traditional finance, increasing the risk of fraud and other types of financial crime.
Another potential issue lies in the technology’s adaptability, with existing blockchain infrastructure currently inadequate in terms of processing the same trading volume as traditional finance.
DeFi aims to democratise finance by replacing traditional, centralised institutions with peer-to-peer relationships capable of providing a full spectrum of services, from routine, everyday banking, including mortgages and loans, to asset trading and complicated financial relationships.
Today, virtually every aspect of the financial services sector is managed by centralised systems operated by gatekeepers and governing bodies. DeFi challenges the status quo of the traditional banking system by disempowering these middlemen.
TrustToken co-founder and CEO Rafael Cosman describes decentralised finance as ‘an unbundling of traditional finance’. Essentially, DeFi takes power back from the banks, exchanges and insurers, putting it in the hands of regular people and enabling them to trade with each other freely via peer-to-peer exchanges.
