Is DeFi Ready to Disrupt? Here's the Fact!

Syafira Nur Tazkia Abdillah . September 22, 2022

Picture: Token Information

Techspace - DeFi (Decentralized Finance) is one of the advantages of cryptocurrencies that experts predict will disrupt traditional financial institutions. This system competes with traditional financial services by implementing the CeFi (Centralized Finance) system.

Read also: What is Decentralized Finance and How Does it Work?

The world's central banks are now busy with Central Bank Digital Currency (CBDC) research. Since 2020, DeFi has grown at an astonishing rate. Billions of US dollars revolve in this decentralized financial ecosystem. This growth is mainly supported by protocols built on the Ethereum blockchain.

Read also: CeFi vs DeFi: Exploring the Advantages and Disadvantages

Protocol as an Alternative to Traditional Financial Institutions

Then, how is the development of the DeFi system and its potential to outperform traditional financial methods in the years to come? Here's an overview of the actors in the DeFi ecosystem: 

  • Commercial Banking

The DeFi protocol allows for large-scale lending between unknown participants and without intermediaries. In addition, the implementation of DeFi also allows meetings between creditors and debtors with interest rate rules that are set automatically on demand in the blockchain system. This protocol is also inclusive. Anyone can use it anytime and anywhere, with any amount. Loans in DeFi are usually guaranteed through an over-collateralization system. 

  • Investment Bank and Financial Instruments Issuer

Synthetix, a derivatives issuance protocol in the DeFi system, is one of the protocols that enable the decentralization of derivatives trading. This protocol applies to assets to decentralized asset management for crypto assets. Then, Yearn Finance is an autonomous protocol that allows users to make investments automatically.

  • Exchange Services

With the advent of Decentralized Exchange (DEX), holders of crypto assets no longer need to leave the crypto space to exchange their tokens into fiat currency DEXs consist of smart contracts that hold liquidity reserves and function according to a defined pricing mechanism. Such automated liquidity protocols play a vital role in developing an independent decentralized ecosystem, thus requiring no CeFi intermediaries.

  • Insurance Services

DeFi Insurance Services is still in the early stages of development. Still, in the long term, we can expect various types of insurance to be supported by the DeFi system. DeFi is the answer needed to make insurance services more efficient.

  • The Central Bank

Stablecoins is based on a blockchain protocol with the principle of price stability that is inherently coded and fulfills the functions of a reserve currency. The presence of stablecoins as the foundation of the DeFi system allows its users to engage without risking the underlying price volatility.

Is DeFi Ready to Disrupt?

The explanation above shows that DeFi is a system entering its completion phase. DeFi is here to replace traditional financial institutions. Crypto-based finance has reached the next stage of maturation as it has covered almost all the essential functions of the financial system. It shows that DeFi is taking an important step towards becoming a traditional financial solution. Three stages of maturation in the Centralized Finance (CeFi) system:

  • Efficient Transfer of Value

The availability of CEX (Centralized Exchange) access and crypto wallets are the only successful Blockchain business models on a large scale. CEX is the main entry point into the crypto space. Crypto users can exchange fiat currency for cryptocurrency. Crypto wallets allow users to store and transfer crypto assets securely. With these two things, efficient value transfer is also possible without the intermediary of traditional financial institutions.

  • Connecting Savers and Borrowers

In the coming year, the functionality of the payment system can be enhanced by the development of stablecoins, DEX (Decentralized Exchange), and protocols between borrowers/lenders. DeFi will develop the necessary platforms to facilitate the flow between savers and borrowers. 

  • Competing for Traditional Financial Funds

DeFi appears to be preparing various platforms to compete with traditional financial institutions. The advantage of DeFi is that they don't have to follow the same rules as conventional financial institutions. This allows DeFi to continue to innovate financially. However, the DeFi system does not yet guarantee customers who wish to invest their pension funds. 

Does DeFi Potentially Outperform CeFi in the Years to Come?

There are three reasons why DeFi is a financial system that will last for the future. DeFi has the potential to outperform traditional economic methods because:

  • The speed

At which it grows, DeFi is a global, scalable ecosystem. If the DeFi protocol succeeds in becoming an alternative to traditional financial institutions, its progress will grow exponentially.

  • Room for Growth

According to the Institute of International Finance, global household debt at CeFi was US$48 trillion in 2019. If DeFi manages to acquire customers as much as 0.1% of the value held by CeFi, then DeFi's TVL can grow 500% compared to early September 2020Market

  • Segments

According to the World Bank, 1.7 billion adults cannot access banking services. DeFi is unlicensed, meaning anyone can access these financial services anywhere. Those people only need electricity, an internet connection, and gadgets to access DeFi.

The text above explains the development of DeFi, which is considered to outperform CeFi in the future. The implementation of DeFi will be a challenge for traditional financial people in various fields. Whatever the development, we must be able to adapt to change.

CeFi vs DeFi: Exploring the Advantages and Disadvantages

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