The Impact Of Decentralized Finance (DEFI) On Traditional Banking

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INTRODUCTION

Today I will be discussing or writing about the impact of decentralized finance on traditional banks, all too well we have seen how defi is impacting the word of finance today in ways not seen before and truly it would not be out of place to say defi for a fact has reshaped the landscape of finance today in the globe.

With the way the world's economy is going and the financial system which for the most part is hugely a centralized system, decentralized finance brings something into the world of finance that wasn't there before that's why we could say that defi has impacted traditional banking and to that effect let's see what these impacts are.

• DISINTERMEDIATION

What this means is absence of intermediaris and that is being done by the presence of a decentralized finance which doesn't operate the same way traditional banks do which acts as the third party for facilitatation of transactions whilst decentralized finance on the other hand using smart contract ensures automated enjoyment of financial services.

With the use of smart contract it does things rather differently than what we are used to and delivers financial services in ways never seen before, trades and lending and borrowing are some of the services that defi has redefined because before now we were used to banks acting as third parties for us before we could do any of this but now with defi such things are done without the need of banks as users freely engage with each other.

Because of this defi has truly impacted traditional banks since it's being preferred by many as alternative hence there is a chance that traditional financial institutions could be put out of business as defi continues to grow.

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• REDUCED COSTS

Another area where we have seen major impact is that users can now enjoy financial services at a much more reduced cost which normally wasn't so because of the presence of banks which charges considerable amount of fee for each transactions it users make which could become a problem for most users.

I mean not everyone is financially buoyant enough to always have their little funds cut in bank charges that's why they look to defi as an alternative, decentralized finance is facilated through smart contract on blockchain technology which means no third party and this means the cost for transactions are considerably lesser when compared to that of traditional banks and for that reason most would rather deal with defi than with traditional banks.

So reduced cost is another major impact that defi has had on traditional banks as even international transfers are made with low charges never seen before while ensuring efficiency.

• FINANCIAL INCLUSION

Defi has also helped to create financial inclusion at a wider levels in that everyone really enjoy financial services whether you are in a civilized or technologically advanced area with banking facilities or not, the unbanked and underbanked are now included thanks to defi which really opens financial service opportunity to all.

Defi is helping the greater population to have access to financial service and there isn't really any much requirement thus removing the hurdles places by traditional banks before one could enjoy financial services so what defi does is to help users bypass any rigorous bank requirements making it more ideal for many ofcourse no one wants stress and that's what defi gives users.

With a mobile phone and internet connection, you only need these two things and you can enjoy any services at all be it lending, borrowing, trading or staking or any other thing as it involves payments. So truly defi is impacting traditional banks today.

• THREAT TO DEPOSITS

Well for liquidity traditional banks rely on the deposit of it's customers without it there won't be any liquidity and that could lead to banks closing down. Well how does defi poses a threat to banks main source of liquidity generation that through deposit?

Well the incentives that comes with keeping funds here is much more higher, for one you wouldn't worry about constant devaluation experienced by many national currencies today and defi too ensures that when users stake they is a high return to investment which then serves as incentive for users to keep investing in defi and for many who has funds in banks which keeps depreciating may consider the real possibility of taking it out and puting it in defi.

Why put money where your money will lose its value as against where you will earn more from your original stakes, so defi is more attractive to users truly threating bank deposit.

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CONCLUSION

Indeed decentralized finance have immense potential to reshape financial landscape and truly as we are seeing financial inclusion, threat to deposit and reduced costs are some of the ways decentralized finance impacts traditional banks today even though this too could present an opportunity for collaboration between defi and traditional banks for the greater good.