Decentralized finance is a form of finance that does not require traditional intermediaries such as banks, brokerage firms, or stock exchanges. Instead, all the business that these organizations typically do is done through technological solutions, including smart contracts and blockchain.

The old banking system and the DeFi system are significantly different. While the traditional economy is slowly developing and adapting, the DeFi sector companies built a parallel financial system from scratch in just a few years. There are payment systems, lending protocols, exchanges, and more. There is also a growing stable foreign exchange market for fiat assets including Tether (USDT) and USD Coin (USDC).

Increased recoil
One of the biggest differences from DeFi is the potential return on capital / savings that users can expect. The average bank interest rate in the United States today is only 0.06%, and the average savings account gives only a marginally improved interest rate of 0.09%. Compare that to storing your money in the DeFi protocol as storage for, and you can expect to generate 11.4% annual return on dollar pegged stack coins. When it comes to financial returns, DeFi trumps traditional out-of-sight banks.

Innovate slowly
Another important factor driving DeFi forward is the culture of innovation. On the other hand, the banking sector is known to be slowly adapting. Try to think of the big improvements that banks have made over the years, and chances are good that you will find emptiness.

This does not mean that banks have not introduced any innovations. Over the past half century, they have integrated card payment technology, online banking, telephone banking, and mobile applications. This is not something, but it is not a very long list. You might think that I forgot to take ATMs with me, but they date back to 1967, so this innovation is more than half a century old.

Lower barriers
One of the main differences between old banks and DeFi is how and where barriers are lowered. Decentralized finance aims to reduce barriers to consumers by making banking more inclusive and accessible to all. Meanwhile, conventional banks are closing their branches in an attempt to save money. Over the past five years, 3,500 large banks have closed their doors permanently in the UK, equivalent to about 55 banks a month.

With the erosion of retail banking by the banks themselves, they reshaped Defi’s competitive landscape to compete. As DeFi tries to lower barriers to consumers, the old banking system inadvertently reduced barriers to competition. As Bill Gates said in 1994: “Banking is important. Banks are not. ” No one took this more seriously than the old banking system.

Do more
While DeFi has made great strides in recent years – especially with 2020 prominent in the sector – there is still a lot of work to be done. One of the main strengths of the industry is that it relies heavily on the Ethereum blockchain. Over the past year, as Defi has exploded in popularity, transaction speeds have dropped significantly and transaction fees have increased.

Some up-and-coming players hit critical mass just in time to offer a replacement. Polkadot, in particular, is often promoted as a competitor to the Ethereum crown, and several developers are currently working on products for the network. In the twelve months ended Q2 2020, the number of active developers on the Polkadot Next Generation Network increased by 44%. There are over 250 projects built on Polkadot right now, so the newbie is likely to get the most of the DeFi pie. Meanwhile, there are projects trying to alleviate Ethereum’s growth challenges with side chain solutions.

Mistrust and resentment
The government’s decision to bail out private banks with public funds may have kept banking institutions afloat after the financial crisis, but dissatisfaction with the failure is still high. This crisis is also closely related to the history of bitcoin (BTC) and decentralized money, as the bitcoin generation block had the headline: “Advisor to The Times, January 03, 2009 on the brink of saving a second bank.”

DeFi is as good as the person who programs it. There have been a number of notable exploits and hacks of DeFi protocols that have exposed vulnerabilities in the sector. Since growth shows no signs of slowing down, it is clear that the future of banking and financial innovation belongs to decentralization.

Source: CoinTelegraph