Today’s financial climate – strained by the ‘Great
Resignation’, outdated central banking policies, artificially restrained
interest rates, and other factors – has shaken confidence worldwide in major
financial institutions.
As a result, individuals and institutions are looking for
new and innovative ways to preserve and generate wealth.
Enter DeFi
One powerful alternative is decentralised finance, or DeFi –
an umbrella term for financial services powered by blockchain infrastructure.
With DeFi, consumers can do most of the things that banks support – earn
interest, borrow, lend, buy insurance, trade derivatives, trade assets, and
more – albeit in a smoother way as it does not require paperwork or a third
party.
DeFi has been gaining traction, fueled by the fact that it
reduces human error through smart contracts, provides access to markets from
anywhere at any time with an internet connection, and cuts out intermediaries.
In essence, DeFi turns money into a programmable and interoperable protocol,
akin to what earlier versions of the web did to digitise information and
content.
While DeFi is a relatively recent trend, the amount of value
locked up in DeFi protocols has grown to more than $200 billion, with trading
volumes reaching almost $100 billion per month. The DeFi ecosystem itself is
rapidly expanding both in terms of diversification from Ethereum to multiple
blockchain infrastructures (e.g. NEAR, Solana, Polkadot, and Avalanche) as well
as the emergence of new layers that replicate the features of centralised
finance (lending, payments, and marketplaces) or support brand new use cases.
The venture world is actively embracing DeFi, as the past
months have seen an uptick in DeFi unicorns – such as Anchorage (asset custody
and governance), Fireblocks (embeddable APIs for token storage and digital
asset operations), and Lukka (back-office platform for DeFi auditing).
DeFi meets fintech/insurtech and vice versa
Established fintechs and insurtechs are already beginning to
harness DeFi and bring its functionality into their consumer-facing brands.
Fintechs have been key drivers in the development of banking alternatives, offering
customers new ways to pay and manage their money. Insurtechs have done the same
by leveraging technology to provide better customer experiences. DeFi is the
next logical step, especially because fintechs and insurtechs can seamlessly
weave DeFi functionality into their existing user interfaces, making it more
approachable and consumer friendly.
At the same time as fintechs and insurtechs are encroaching
on DeFi platforms by incorporating decentralised functionality into their apps,
new DeFi entrants are trying to dislodge neobanks and challenger insurers with
differentiated products that leverage the blockchain.
For instance, several projects, including Juno, Dharma,
Linen, and Outlet, are launching DeFi neobanks. Their goal is to provide users
a high-yield account for savings that competes with cash accounts of fintech
start-ups like Wealthfront and neobanks like Monzo. This is enabled by
providing a simple alternate banking interface that seamlessly blends crypto
and traditional finance.
Web3: it gets even more interesting
In 2022 and beyond, DeFi, fintech, and insurtech will
continue to converge even more, causing an existential threat to traditional
banks and insurers. The convergence of fintech and insurtech with DeFi will
open even broader opportunities beyond just the decentralisation of monetary
flow.
These opportunities will be further fuelled by Web3.
Leveraging blockchain infrastructure, Web3 can offer open, decentralised
database and compute layers as opposed to siloed servers or cloud instances. As
users cruise the internet and use financial applications, the data from those
interactions no longer solely lives on that single application’s server. It’s
recorded on a shared and publicly accessible ledger.
As a result of open, transparent transactions and
interactions, essential financial functions such as credit scoring, identity
verification, and fraud prevention will be reconfigured, resulting in multiple
benefits for consumers. Namely, Web3 shifts the balance of power back in favour
of the consumer. The ability for individuals and businesses to transact with
entities across the globe––free from interference by central parties––sets the
stage for a robust economic ecosystem online. This is particularly notable for
content and entertainment creators, to whom Web3 offers novel and powerful ways
to connect and engage with their audiences or fans.
There are also benefits for financial institutions. Consider
insurers. Using blockchain’s distributed ledger technology, insurers can store
and have access to a single claim’s information, negating the need to invest in
gathering data from public and private domains.
Blockchain technology, coupled with distributed ledger
technology, can also help banks reduce or eliminate the use of intermediaries.
Specific areas in which banks can benefit highly from these technologies are
payments, clearance and settlement systems, fundraising, securities, loans and
credit, trade finance, and customer KYC and fraud prevention.
A final word
The financial services industry is undergoing major
upheaval, spurred on by technology developments such as blockchain and
distributed ledgers. What’s certain is that DeFi is here to stay, Web3 is right
on the horizon, and financial services will never be the same.
Financial institutions of all kinds must start allowing
access to DeFi functionality to consumers through their banking and insurance
services. Otherwise, they’ll be left in the dust by DeFi platforms and
challengers that see the future — and the future blends ease of use and
convenience with the power of decentralised finance.
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