Decentralized Finance: the Future of Banking?

Decentralized Finance (“DeFi”) is rapidly thriving in the blockchain world. Describing a range of technological applications in the financial industry, DeFi is run by a peer-to-peer network instead of a centralized entity. In other words, instead of a single company organizing the transactions, a network of computers enables people to transact with each other directly.

The most prominent examples of DeFi applications are decentralized lending platforms. These are based on a blockchain protocol that uses smart contracts to execute transactions automatically once certain conditions are met.

On the one side of the transaction are people looking to earn interest, paying their money into a wallet on the DeFi platform. On the other side are people who need a loan. They lock their collateral – in a digital format – into a wallet on the lending platform. Once the smart contract reviews the collateral and the money, the borrower can then receive grants to the loan and repay the loan and interest to the lender. If the borrower doesn’t meet the repayment obligations, the lending platform will automatically sell the collateral and refund the lender.

How is this different from a bank?

Unlike banks, these kinds of transactions don’t need an intermediary. Everything happens fully automated through a blockchain network. There is no banker who manually analyzes the creditworthiness of the borrower or mediates the transaction. With no banks being involved, transactions become significantly cheaper and faster. 

Lending is just one example. There are also decentralized investment platforms, decentralized savings accounts, and decentralized currencies (cryptocurrencies). As technology continues to advance, it is highly likely that decentralized platforms could one day become a severe threat to the business models of banks, insurance firms, and financial brokers. They could be the future of the financial industry.

Like DeFi, Export Portal prioritizes transparency and security in global trade. We care about the difficulties small and medium-sized businesses face and are here to help. Learn more about what Export Portal can do for you!