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DeFi and It's Future Impact in the Banking Sector

Cointime Staff· 5 min read

By Zenith Chain

The days when people had to carry large amounts of cash are long gone. These days, most transactions happen online and with fintech solutions like banking platform services or mobile payment systems. This means faster business processes for people — but there’s still one problem. These centralized platforms involve third-party players, slowing the transaction process and increasing business costs.

It’s no secret that the traditional financial system is broken. The recent rise in popularity of DeFi (decentralized finance) seeks not only to change within a country’s economic borders. Instead, its vision involves redefining how money moves around the world through blockchain networks which eliminate central authorities during transactions while introducing new possibilities.

The rise of decentralized finance, or “DeFi,” has been one of the most talked-about topics in the cryptosphere over the past year. From yield-generating protocols to lending platforms, the DeFi ecosystem has launched an expansive network of applications that offer users a wide range of financial services.

So, what exactly is DeFi? And how could it impact the banking sector? Let’s take a closer look.

Decentralized Finance and the Banking Sector

With DeFi intertwined with banking, people can access various financial utilities. Not only does this eliminate intermediaries and reduce costs for businesses, but it also creates an income avenue. It’s time we make banking affordable again by banking the unbanked populations.

This new technology will execute financial transactions without relying on third parties via peer-to-peer financial networks that employ security standards and connectivity advances.

The transparency of data on the blockchain makes DeFi such a powerful tool. The public nature allows anyone with internet access to view all transactions made, which cannot happen in traditional banking systems where shared information is primarily based on trust. This is why a trustless system like the DeFi platform poses fewer risks than conventional banking systems.

The financial sector is one of the most trusted areas in our society, with users entrusting their banks to secure assets. However, security has been the major challenge faced by this sector, and banks are at the forefront of this loophole. DeFi offers a level of security that is unparalleled in traditional banking. Blockchain platforms like Zenith Chain use state-of-the-art crypto technologies to securely store their databases, which are protected by homomorphic encryption — an innovation untouched by conventional banking.

The banking sector is submerged in an ocean of procedures and Know Your Customer protocols. Due to the high level of literacy required for today’s banking sector, transaction processes are slow and expensive.

Furthermore, users must go through a series of verification procedures before being granted access to financial services — while some can swim their way through these tedious tasks, others will be left drowning from exhaustion before getting started. However, this increase in requirements narrows down the financial opportunities available to the uneducated.

DeFi is an exciting new frontier that can empower the poorest of people. It provides them access to financial services they never had before, breaking down barriers, so everyone has an equal opportunity.

How Traditional Banks are Losing Their Grip on Global Payments

One of the most significant ways DeFi impacts the banking sector is through global payments. For years, banks have been able to charge exorbitant fees for international money transfers due to their monopoly on cross-border payments. However, that monopoly is beginning to crumble with the advent of decentralized payment networks.

These decentralized payment networks provide a cheaper and faster alternative to bank-based international payments. For example, Ripple is a decentralized payment network that offers instant settlements and low transaction fees. Major financial institutions have adopted Ripple’s protocol, and the company is now processing a billion worth of transactions per day.

With the growing DeFi users and partners network, it is well-positioned to eat into banks’ market share in the global payments space.

Some Use Cases For DeFi in the Banking Sector

Decentralized Exchanges

Decentralized exchanges are a way to trade cryptocurrency without brokers or other intermediaries. They’re cheaper and more secure than centralized exchanges because they run on self-executing smart contracts that execute automatically when conditions inside of them have been met, which means you don’t have any human intervention in your trade process.

Peer-to-Peer Payments

One of the many benefits of adopting DeFi is that payment transactions become quicker and more efficient because dApps eliminate any need for intermediaries. The second thing worth noting about this system, which makes it even better than before, is cost efficiency. There are virtually no fees at all when making international wire transfers.

Digital Identity

Blockchain is a game changer for people in developing countries. The technology allows them to access financial services that were previously out of reach due solely because they couldn’t provide documentation verifying their identity. Still, now with this new tech, everyone can verify themselves quickly and easily.

Lending

DeFi allows users to earn passive income when they deposit their tokens in a lending pool.

Borrowing

DeFi users can also borrow money simply and flexibly.

Liquidity Mining

Liquidity mining is an innovative way for DeFi users to earn money by depositing funds into a liquidity pool. In exchange, they are granted shares in gas fees generated on the platform.

Tokenization and Asset Management

Decentralized finance is not just about tokenizing assets and trading them across borders; it’s also providing traders with new markets to invest in. It also offers reliable asset management through smart contracts.

What Does This Mean for The Future of Finance?

While it’s still too early to say definitively how DeFi will impact the banking sector, one thing is certain: the rise of decentralized finance is sure to have far-reaching implications for the future of finance. As more individuals gain access to financial services outside traditional banking institutions, we will likely see a significant shift in how these services are provided.

In addition, as DeFi protocols continue to grow and evolve, we are also likely to see an increase in the number of individuals who are comfortable using crypto and participating in decentralized finance applications. This could lead to even more widespread adoption of DeFi protocols and eventually result in a significant shift in how we think about and use money.

Conclusion

Decentralized finance is a revolutionary technology pioneered by blockchain technology. It is poised to transform the banking system. While DeFi is still in its early stages, the technology has the potential to explore new horizons in the world of banking and finance.

# DeFi # Crypto

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