Banks.
Banks are financial industry giants that facilitate payments, accept deposits, and offer lines of credit to individuals, businesses, other financial institutions and even governments. In fact, they are so large that the total market capitalization of the 10 largest banks in the world is estimated at $ 2 trillion. By comparison, the total market capitalization of the entire cryptocurrency market was estimated at about $ 200 billion as of December 31, 2019.
Banks are vital parts of the moving machine that the financial industry is: they allow money to be moved around the world by providing value transfer services (deposits, withdrawals, transfers), extending lines of credit (loans) and much more. However, banks are run by people and subject to politics, which means they are exposed to human risks such as mismanagement and corruption.
The 2008 global financial crisis demonstrated that banks' behavior can be overly risky: Governments have had to spend huge sums of money to bail out such banks. The crisis exposed the shortcomings of the traditional financial system and highlighted the need to improve it.
DeFi is committed to creating a better financial landscape made possible by the advent of the internet and blockchain technology. In particular, this applies to three key segments of the banking system:
1. Payment and clearing system (money transfers)
2. Availability
3. Centralization and transparency
1. Payment and clearing system
If you've ever tried to send money to an individual or legal entity in another country, you know the pain all too well - money transfers involving banks around the world usually take several business days and include all kinds of commissions. To make matters worse, there can also be problems with documentation, compliance with anti-money laundering laws, privacy concerns, and more.
For example, if you live in the US and want to send $ 2000 from your US bank account to your friend's bank account in Australia, there are usually three fees charged: your bank's exchange rate, outgoing international transfer fee, and incoming international transfer fee. In addition, the recipient will need several business days to receive the money depending on the location of his bank.
The cryptocurrencies that power DeFi bypass the middlemen who get the lion's share of these transfers. Most likely, it will also be faster: your transfers will be processed without any questions with a lower commission than in banks. For example, transferring a cryptocurrency to any account in the world will take from 15 seconds to 15 minutes, depending on several factors, and for a small fee.
2. Availability
Chances are, if you are reading this, then you have a bank account and you have access to financial services offered by banks: you can open a savings account, take out a loan, make investments, and much more. However, there are many others who are less fortunate and do not have access to even the most basic savings account.
The World Bank estimated that as of 2017, 1.7 billion people did not have an account with a financial institution, and more than half of them were from developing countries. These are mostly poor households and the main reasons for not having a bank account are poverty, geographic hardship and trust issues.
DeFi has the potential to make the lives of 1.7 billion people difficult to access banking services. All you need to access decentralized financial applications is a mobile phone and internet access, not going through lengthy verification processes. The World Bank estimates that two-thirds of the 1.7 billion people who do not have access to banks have access to mobile phones and DeFi applications could be their point of access to financial products instead of traditional banks.
DeFi is a movement that seeks to promote limitless, censorship-resistant and affordable financial products for everyone. DeFi protocols are non-discriminatory and give everyone the same experience.
3. Centralization and transparency
It cannot be denied that traditional, regulated financial institutions that comply with government laws and regulations, such as banks, are some of the safest places to keep funds. But they are not without drawbacks - even large banks can go bankrupt. Washington Mutual with more than $ 188 billion5 in deposits and Lehman Brothers with assets of $ 639 billion6 went bankrupt in 2008. More than 500 bank failures have been registered in the United States alone.
Banks are one of the centralized points of failure in the financial system - the fall of Lehman Brothers sparked the start of the 2008 financial crisis. Looking at past incidents, it is fair to say that centralizing power and funds in the hands of banks is dangerous.
It also has to do with transparency - ordinary investors cannot fully know what financial institutions are doing. Some of the events leading up to the 2008 financial crisis are related to rating agencies giving ratings
AAA (best and safest investment) high risk mortgage-backed securities.
DeFi will be different. The source code for the DeFi protocols is transparent and auditable. These protocols are usually managed by decentralized organizations to ensure that everyone knows what's going on and that no bad guys can make bad decisions alone.
DeFi protocols are written as lines of code - you cannot fool the code as it treats all participants equally without discrimination. The code runs exactly as it is programmed, and any flaws quickly become apparent as they are open to the public. In the end, DeFi's greatest strength is that they can eliminate middlemen and censorship.
Decentralized finance versus traditional finance.
Low speed and high fees, unavailability and regulatory uncertainty are some of the main problems that plague the current banking system. Unfortunately, not everyone has the privilege of accessing the current financial system - people who do not have this access are at a disadvantage.
The DeFi movement aims to bridge these differences and make finance available to all without any form of censorship. In short, DeFi opens up tremendous opportunities and allows users to access various financial instruments without any restrictions based on race, religion, age, nationality or geography.