Growth of Decentralized Finance & Its Impact on Traditional Finance

 

Many aren't at all satisfied with how traditional finance works and there are several reasons for this, including how problematic the bureaucratic elements can be. To combat this, decentralized finance or DeFi has been created, and suffice it to say, it has had quite the impact on the world as it stands.

 

Those who are into crypto and keep tabs on the nature of things via cryptocurrency data API know this, but those in the traditional space are just as aware. Let’s check how exactly this is the case, and in doing so, several interesting things will be shown.

Contents:

- Quickly transactions vs. banking delays

- A concept beyond crypto profits

- Its impact on traditional alternatives

- The сhallenges of DeFi

- Final thoughts

Quickly transactions vs. banking delays

Decentralized finance, in essence, opposes the traditional, centralized model by removing the middleman through which all activity occurs, typically the banks. This is achieved through the use of blockchain technology and the smart contracts within that facilitate, verify and record all activity. Because of this, the middleman is removed, which in turn makes peer-to-peer communication and payments possible.

 

Decentralisation is therefore quite beneficial and several things can be pointed out to show this. These include the following:

- The programmable smart contracts can automate activity, while also being used to create tools and assets

- It has the potential to be more secure due to blockchain technology's immutable nature 

- It can be more affordable per transaction, as none of the fees present in standard finance are present

- The lack of traditional intermediaries also means that transactions aren't as slow

- Its utilization of the very blockchain technology also means that it is more transparent, which means all transactions can be viewed by users, something that adds to the security, as all things are traceable

A concept beyond crypto profits

The above are among the reasons that DeFi, at least as a concept, has grown. Its potential can be seen beyond the profitability of cryptocurrency, the general market, and the crypto trading solutions space. This may make one think that the place of traditional finance is threatened, but for this to be the case, the drawbacks of DeFi have to be addressed, and they include:

- The fact that entering the ecosystem may be challenging due to the technical nature of the space, although this may change due to educating the masses on how it works

- The fact that DeFi has a litany of risks which include the failure of smart contracts, or the volatility of crypto, although, education on such matters as well as tools like a Market Data API may help

- The fact that the DeFi idea is relatively new means that regulations surrounding it are rather murky, which has the potential to make it increasingly more difficult to navigate, and worse to adopt globally

Its impact on traditional alternatives

It should be stated that DeFi as a whole, as stated by Statista, has seen a decline since its 2021 peak. However, there is still a good deal of interest in it and traditional institutions are among those looking to incorporate decentralization into their operations.

 

This shows that DeFi is impacting the traditional real beyond just threatening to eclipse it, and below are a few ways in which the two worlds merge:

- Banks have begun to incorporate the blockchain technology that backs the DeFi model into their own to enhance both speed and transparency, while still

- The murky nature of DeFi, as it pertains to regulations is still present, but traditional institutions can incorporate them for the above reasons while providing a stable regulatory framework

- The stability of traditional finance can also be seen in the Central Bank Digital Currencies or CBDCs, which are essentially your standard crypto coin, only with the stability of assets like fiat

- Decentralization is also quite useful when it comes to assets, or better still, how a fractional approach is possible through tokenization, which the blockchain technology supports

 

The point regarding tokenization is particularly important, especially as the idea of Web3 and a metaverse become a reality. These things center heavily around decentralization and DeFi, so the growth and the future of these concepts will be alive there at the very least. This could create jobs, help with innovative finance, and even create facilitation tools, such as a virtual API for institutional ownership data, something that will grow the metaverse economy.

The сhallenges of DeFi

DeFi platforms' decentralized nature makes them more prone to security threats such as hacking, fraud, and smart contract vulnerabilities. The lack of a centralized authority makes it difficult to handle issues or offer customer service.

 

Furthermore, DeFi's quick expansion has raised questions about its viability and potential market volatility. As DeFi becomes more integrated into traditional finance, there will be an increased need to address these concerns and build a more safe and reliable ecosystem.

 

Final thoughts

Finance, as it's been traditionally done, has been quite tedious for many, be it because of its relative lack of transparency or the accompanying high fees. While decentralized finance is by no means perfect, it offers solutions to traditional finance issues, which is enough for people to consider. When considering DeFi and exploring it in 2024, take note that even traditional finance stalwarts recognize its potential and actively seek to incorporate its features into their operations.

 

This incorporation can be seen in several ways, as the above shows. As we move closer to a world where the metaverse is a thing, more of it will be seen, adding to DeFi's growth.

 

You can get your Real-Time and Historical DEX Data with a free DEX Data API key.

Build with us today!

Start Free Trial