Many have been speculating about what the rise of Bitcoin and the DeFi platform will mean for financial services in the long term.
The Covid-19 pandemic has also rapidly changed the way financial services now operate and lend.
Individuals and businesses find it more difficult than ever to meet lenders’ expectations and have begun to look into other alternatives.
With the global financial crisis, people need transactions and investments that are transparent more than ever.
As a result, many have begun joining the DeFi ecosystem that promises all the above and higher returns by investing in cryptocurrencies such as Bitcoin.
The Rise of Bitcoin
Bitcoin is the world’s largest cryptocurrency, followed by Ethererum. It was created in 2009 and was traded for as little as $0.0008 to $0.8 in 2010.
In recent weeks, we have seen a huge rise in Bitcoin’s price and this only seems to continue. The current Bitcoin price is $41,312.12.
There are many elements that have worked hand in hand to make Bitcoin rise in value.
One of the main driving force behind the growth is the inflation of the US dollars and is the result of the 2.4 trillion that was added to the economy in their recent Coronavirus stimulus package.
Many believe within the current economic climate, it is best to hold less cash and be hedged against intense market swings.
The DeFi platform allows users to trade cryptocurrencies directly with one another without having to trust an intermediary with their money.
So What Exactly Is DeFi?
DeFi stands for decentralised finance and it is a way to describe a variety of financial applications in cryptocurrency.
The main objective is to eliminate the financial intermediaries and have no central authorities involved taking care of your money.
Instead, DeFi is built on top of public Blockchains like Bitcoin and Ethereum cryptocurrencies.
Anyone can join DeFi and have direct access to their own E-wallet that is secure, safe and transparent.
People can use the platform to exchange, lend and borrow cryptocurrencies to earn interests.
How Is Blockchain used in DeFi?
Blockchain is a specific database for storing information, and when it comes to DeFi and cryptocurrency such as Bitcoin, it offers compelling values to users.
In cryptocurrency’s case, Blockchain is used in a decentralised way, so no-one has any control over it but yet everyone retains control.
Blockchain records information in a way which is secure and difficult to change, cheat and hack.
In DeFi, a Blockchain is a digital ledger of transactions that is duplicated across the entire network of computer systems.
Each individual block holds a number of transactions and a record of every new transaction is added to a participant’s ledger.
The Digital Trust In Bitcoin
While Bitcoin is on the rise, trust is a risk between parties in the digital world.
When joining and looking to invest on the DeFi platform, you have to prove your identity, but this is all new, so the underlying characteristics of technologies that drive trust in cryptocurrencies are not yet clearly understood.
But, with Blockchain if one block is changed, it will appear quickly and if a hacker wanted to corrupt the system, they would need to change every block in the chain.
With the rise of cryptocurrencies, blocks are continuously getting added to the chain and providing extra security to the ledger.
The Drawbacks of Cryptocurrency
Although Bitcoin is on the rise, risks are a part of any investments and cryptocurrencies are extremely volatile which makes them harder for day to day use.
Since most cryptocurrencies are pegged to other mediums such as gold or the currency of a nation then their value is closely tied down. So if one goes down, the other will follow.
Cryptocurrencies are all software-based and there will always be a chance of getting hacked.
They may stand for decentralised but they are still controlled by the creators and organisations.
For example, Ripple known as the XRP cryptocurrency is currently being sued by the SEC (Securities and Exchange Commission) over allegations of breaching investor protection laws.
Trading in XRP is getting suspended from the 19th of January 2021. Although they have claimed that deposits and withdraws are not going to get affected, things remain unclear for now.
All in all, the idea of cryptocurrency replacing other national currencies has a long way to go to prove itself.
What DeFi Means For Financial Services
The benefits of DeFi will likely have an impact on financial services in the future.
Since lending, borrowing and investing in cryptocurrencies such as Bitcoin is going to be faster, much cheaper and more transparent for all parties involved, how can financial services adapt to keep their customers happy?
Financial services with a lack of transparency and traceability are most vulnerable in this new digital business era.
Although currencies lose and gain value constantly, the DeFi movement has made many believe if they store their savings in crypto, they are far more protected and will not be tied down to any third parties.
The Future of Financial Services
The Covid-19 pandemic has continued to bring on significant challenges that many do not have the answer to.
But, many financial services have begun investing in Blockchain in order to improve their business and reduce their costs for their consumers.
Santander was one of the first banks in the UK to introduce and invest in Blockchain to provide more efficiency, transparency, and security for their transactions.
Depository Trust & Clearing Corporation, CLS Group, and the London Stock Exchange are some of the examples that have also partnered up with IBM to build secure and trustworthy platforms.
Blockchain could potentially help to resolve some of the current challenges faced by financial sectors.
Here are some of the potential benefits of Blockchain for financial services :
The benefits above not only could help financial services improve their business, but they can also make things easier, faster and less expensive for their consumers.
As the DeFi movement is taking off and with Bitcoin’s price rising faster than ever, it is more important than ever to give consumers what they need.