Will DeFi Replace Traditional Financial Institutions as Banks Fear Falling Behind the Traditional News Industry?
The total locked value of Decentralized Finance (DeFi) reached a record high of $1 billion in February this year. In March, the global financial markets were affected by the COVID-19 pandemic, and DeFi was no exception, with the total locked value halved and DAI facing a bad debt crisis. However, DeFi not only survived but the total value recently surged to $1 billion again.
Nemil Dalal, a former Coinbase product manager and Y Combinator (YC) alum, shared his unique insights on the future of DeFi in an article by blockchain media Bankless. He used the analogy of the early "impact of the internet on newspapers" to suggest that DeFi, like the internet, will bring about a generational shift in the banking sector.
Source: "DeFi will do to banks what the Internet did to newspapers"
Table of Contents
Traditional Newspaper Industry – From Monopoly to Decline
Nemil Dalal pointed out that in the past, newspapers made substantial profits by monopolizing the local market. However, the rapid development of the Internet has had a significant impact on industries such as newspapers. Initially, Craigslist (an American classified ads website) disrupted the newspapers' main source of revenue, and then advertising and search engines began to dominate the advertising revenue, with the addition of social media platforms further fueling this trend.
It wasn't until 2020 that the "massacre" of the newspaper industry by the Internet began to ease. Newspapers stabilized their profit models through monthly subscription services, but the industry had undergone a complete transformation, with a significant decline in newspaper industry employment, with nearly 60% of jobs disappearing.
The Crypto Era: Banking Microservices
The Internet has also brought about significant changes in the banking industry, with traditional banks continuing to innovate and online banking becoming the norm. However, Dalal pointed out that some strange phenomena still exist. For example, wire transfers remain costly and must still go through cumbersome cross-border remittance processes, and even just opening a bank account can take anywhere from 2 days to 36 days:
Dalal believes that the profit model of banks is simple and aggressive: the public deposits at low-interest rates, and the banks lend at high-interest rates while ensuring repayment. However, some DeFi projects like Compound offer features that traditional banks cannot achieve, including:
- Global accessibility
- Code-operated rather than human-managed
- Operates 24/7 like the Internet, blockchain
One of the key features of blockchain is its global accessibility without geographical constraints, making global banking not only possible but almost expected. In addition, Compound establishes operational rules through code, retaining majority rights for users and governance members. Compared to banks, although Compound borrowers may still default and there may be code vulnerabilities, its operators cannot misappropriate assets.
The Future of Financial Services
Dalal believes that rather than de-banking, blockchain is more like redefining banking, similar to how the public has redefined the channels for accessing news in the 21st century through real-time reporting, social media, and news websites.
Banks will not transform overnight, Dalal said. After all, it took 20 years for the public to feel the power of the Internet in the traditional newspaper industry. The public needs to be able to easily use blockchain and discuss smart contracts as they did constitutional or banking regulations in the past, and risk management needs to be institutionalized.
Dalal pointed out that this will not only impact banks but also most Wall Street institutions. Since the birth of Bitcoin in 2009, the rise of cryptocurrency exchanges has created a global 24/7 trading, a truly alternative financial system. Platforms like dYdX make short trading easier, while exchanges like Uniswap and Kyber allow users to buy and sell any amount of crypto assets worldwide.
Despite the continuous acceleration of fintech startups over the past decade, the real financial impact is just beginning.
Reference Links:
_[4]https://etherscan.io/address/0xc00e94cb662c3520282e6f5717214004a7f26888#code