DeFi, Cryptocurrencies, and the New Banking

The new DeFi (Decentralized Finance) applications are coming to change the banking system and replace the traditional financial system by removing intermediaries, shareholders, managers, employees, and buildings. They are based on cutting-edge technology, and blockchain and with encryption they provide smart contracts without the banking bureaucracy and human mediation.

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Modern automated DeFi applications provide financing, investment, lending, insurance, and mortgage management services outside the formal banking system. As a sophisticated technology, DeFi’s provides innovative ways of conducting commercial and financial transactions.

Traditional banking and the dominance of banks seem to be shaken. Sergey Nazarov, the founder of Chainlink, believes that by 2022 the funds tied up in DeFi protocols (similar to the funds under management in traditional banking) could reach $1 trillion, up from the $67 billion that exists today.

Today, almost all DeFi services involve digital currencies like Bitcoin and Ethereum instead of real money. Users gain access through software. They connect their digital wallet to the app, select a service from the menu, which does not require human intervention as it is executed automatically. The only condition for participation is the existence and possession of cryptocurrency that will be made available for bail.

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The use of DeFi removes the geographical barriers that exist in the traditional banking system and relate to the borders of a country. Users (depositors and borrowers) can be located anywhere on the planet. The rules ensure transparency as transactions are automated and each transaction is almost instantaneous. DeFi applications offer highly competitive rates as they do not have high operating costs and a large number of employees and staff. With these facts, they can give more attractive interest rates compared to traditional investment products, and the profits are shared with customers rather than shareholders. Returns in many cases have reached 400 times for those who innovated and believed in the new venture.

However, there are still several concerns that DeFi legally, is in grey areas and fears of impending interventions by regulators. There are also issues related to transaction security. As the funds being moved are ever-increasing, there is always the risk of hackers.

Today, the total value of cryptocurrencies reaches $1.6 trillion worldwide. The main cryptocurrencies are Bitcoin and Ethereum, and there are already a total of 5,762. According to Bloomberg, a new cryptocurrency called Global Transaction Unit (GTU) is to be announced on Wednesday 16/6/21 by the Swiss-Danish group Concordium AG, which is launching a new blockchain technology in collaboration with Denmark’s Aarhus University. As the company’s CEO Lone Fonss Schroder says, the key difference between the GTU and cryptocurrencies like bitcoin will be the ability of the new cryptocurrency to provide the kind of transparency that regulators and the formal economy demand. “Our protocol provides for authentication, which means that for every transaction its origin will be identified. If the regulators want to know, by court order, who did what, they can find out.”

The new era that began with Bitcoin has proven that transactions can now take place without the mediation of banking institutions or governments, and DeFi is trying to prove that lending can exist without regulators. Certainly this first period, of such a major change, has problems but when conditions mature a new and different financial reality will emerge.

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