DeFi May Not Herald Independence Day From Traditional Banking
PYMNTS, 05 July 2021
Independence Day weekend brings to mind freedom, of course. And before too long, we may have independence from the banks, from the third parties, and from the financial system itself. Or maybe not.
The promise of decentralized finance (DeFi) is that the advent of cryptocurrencies, and perhaps more significantly, blockchain, will eliminate the reliance on the traditional players in financial services.
In a nutshell, third parties would not have a hand in transferring money (or, really, anything of value) for users. That would eliminate the banks, the counterparties, the currency brokers, pretty much … you name it.
Centralized finance, as has taken shape over centuries, focuses and enables the activities that have become the bedrock of how we conduct daily life — borrowing and lending, of course, but also the transactions that get us goods and services.
It’s been a hallmark that banks and other firms are where we establish accounts, send orders, and generally give authorization to act on our behalf. Orders — to draw on a checking account, to make a trade, to buy a bond — came and still come through central powers (banks or central banks) and exchanges.
The Glue That Binds
The absence of the central authority, via DeFi, leaves only the app, the blockchain and the direct interaction between the buyer and the seller, or the sender and recipient.
The key glue that binds the parties in a transaction is trust. In the case of centralized finance, we trust the system, or the intermediary (like an exchange). In DeFi, it is the technology, most visibly the immutable transaction ledgers, that garner the trust.
