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In January 2021, JP Morgan Chase CEO Jamie Dimon said, “Banks should be “scared s***less” of fintechs.” I wonder what his take on DeFi and crypto is, because all these new entrants in the financial services arena are redefining the industry, and traditional banks are now facing the daunting challenge of finding new models for one of the oldest industries in the world.
While banks have consistently had to adapt to more modern ways of serving clients (especially when we consider digital banking, enabling individuals to conduct almost all their financial transactions online) the digital asset class of cryptocurrencies and the promise of DeFi represents a totally new threat - a bankless world.
Let's take a closer look into the 3 ways we are moving ever closer towards this reality.
#1 - $43 billion TVL in DeFi
As it becomes more widely known, the DeFi sector has gained traction among crypto-enthusiasts, and is attracting investors across regions. Operating on blockchain technology, it aims to replace centralized financial institutions, as they will not collect fees and charges on transactions. DeFi platforms offer a whole range of financial services, ranging from asset management, borrowing, lending, and trading, all of which is driving growth of the market.
It is “full-steam” ahead and something which banks simply cannot ignore, especially as more and more people become aware of an opportunity to handle their finances in a way which effectively cuts out the middle man, and is cheaper, faster and more efficient. As the sector becomes ever richer, its threat to legacy banking and traditional finance becomes more tangible.
#2 - Automation via Smart Contracts
The method of relying on traditional, contractual agreements and third-party involvement to validate the fulfillment of terms outlined in the corresponding paperwork of the agreement, is outdated, slow, and, most importantly, not cost-effective for today’s financial institutions.
Smart contracts allow for automation - through basic lines of code that are stored on a blockchain and automatically execute when certain conditions are met, developers can build dApps that are highly scalable, secure, and low cost to execute.
An essential tool for all blockchain developers, smart contracts have accelerated the adoption of blockchain technology and contributed to the increasing momentum of the DeFi industry as a whole. This type of automation enables the delivery of existing financial services over blockchain networks and allows for the creation of new services where the rules and conditions of execution are guaranteed by the network itself.
The implications of using smart contracts in this way are incredibly profound for financial services.
#3 - Tokenization of assets & value
The tokenization of assets involves the digital representation of real (physical) assets on distributed ledgers, and has the potential to deliver a number of benefits, including efficiency gains driven by automation and disintermediation; transparency; improved liquidity potential and tradability of assets with near-absent liquidity by adding liquidity to currently illiquid assets; faster and potentially more efficient clearing and settlement.
It allows for fractional ownership of assets which, in turn, could lower barriers to investment and promote more inclusive access by retail investors to previously unaffordable or insufficiently divisive asset classes, allowing global pools of capital to reach parts of the financial markets previously reserved to large investors.
This is yet another selling point which banks are unable to match in their current offering, but which could certainly assist in spurring us into a “bankless” society.
The view ahead
The future will surely have room for both traditional and decentralized finance, but banks will take on a new positioning in our society - we have already been witness to the death of the high street bank since before the Covid-19 pandemic hit, and, with younger generations relying ever more so on digital and mobile interactions, physical branches become increasingly superfluous.
Author Bio
Karen Shidlo works at www.fiat24.com
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.