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October 3, 2022
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How will DeFi’s success rebuild trust in financial institutions? –

The effective functioning of society has long depended on people who believe in its institutions. Due to the COVID-19 pandemic and leadership failures, this belief has come under a big question mark. Could DeFi’s success become a much-needed catalyst for changes in the financial market?

The decline in confidence is most evident in the financial services sector. In its 2021 Confidence Barometer, Edelman discoveredthat only 53% of US respondents admit that they believe in the “right thing” of US institutions. That is as much as 5% less than in the 2020 survey. A good example of this is the battle between Main Street and Wall Street, which took place during the January GameStop rally. An event that showed how many young investors simply do not believe in financial institutions.

The departure from institutional power is also evident in the rapid development of decentralized finance – DeFi. By using decentralized applications on the blockchain, DeFi enables individuals to borrow funds, trade coins and earn interest on savings. Their transactions are regulated by smart contracts. So – no banks or intermediaries.

DeFi success

TVL, or Total Blocked Value, is the best way to determine DeFi’s success. In March, the value of TVL in the DeFi sector was almost $ 59 billion. This is a significant result, considering that a year earlier this amount was around $ 500 million.

The cryptocurrency market – dominated by Bitcoin (BTC) – is currently worth over $ 1 trillion. This means there is still a long way to go before DeFi makes it to the “headlines”. Remember, however, that almost 10 years passed before Bitcoin won the interest of investors. And it looks like DeFi may only take half that time.

Why? Because young investors – such as GameStop traders – understand the concept of digital scarcity. They take into account the fact that intangible assets have value. This is why they buy non-exchangeable tokens as a way to trade digital goods. The most famous example of the NFT phenomenon was the March auction of Christie – artist Beeple’s digital collage – bought for almost 70 million dollars using crypto.

It is the next generation that will be looking for ways to invest their inheritance – choosing the system and platform they will rely on. Given a choice, Millennials and Generation Z will always choose an investment option that is cheaper and more accessible. 24 hours a day, 7 days a week.

Traditional institutions’ counterattack

With the growing popularity of DeFi, we can expect a response from traditional financial institutions. Banks and other existing entities will fight hard to defend their territory. They know that in order to remain competitive, they will have to: extend working hours, shorten billing times and increase user functionality.

They are already starting to introduce smart contracts and other DeFi technologies, and existing platforms – both to increase efficiency and keep pace with market demand. Moreover, already in the February whitepaper published by the Depository Trust & Clearing Corporation, DTCC has proposed shortening the settlement cycle for US equities from two business days to one. Even so, the planned implementation of the plan can take up to two years, which differs significantly from the immediate operation of cryptocurrencies. In a world that is rapidly moving towards a 24/7 model, stock issuers who stick to the old methods will soon be left behind.

The road ahead is promising – but is it easy to go?

While DeFi technology is evolving rapidly, it will take some time to get the capabilities where they are needed and to be deployed on a large scale. The network fees required to trade on decentralized exchanges (such as Uniswap) are still high (although they are expected to decline over time). Of course, it cannot be denied that we are able to buy or trade digital assets 24 hours a day (with immediate delivery) and dictate our own terms. But still, there are around 1.7 billion people who consider themselves “bankless.” DeFi offers everyone with an internet connection and a mobile phone a full range of banking services.

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