The Financial War for the Future

During the 2020s, there was a spike in the interest of non-fungible tokens (NFTs) and cryptocurrencies. Major enterprises such as Tesla have delved into the potential of decentralised financial models.

Irrespective of your opinion on the present developments in the financial field, it is obvious that technology is significantly impacting the industry. We are undergoing a swift digitisation that has caught us off guard, and those who can capitalise on the possibilities that arise may reap significant rewards.

It is still premature to precisely anticipate the result; yet, it seems that the present trajectory is leading us towards a conflict amongst governments, banks, fintech, big tech, and the rather recent notion of decentralised finance (Defi).

What exactly does Defi imply?

Decentralised Finance, abbreviated as DeFi, is a phrase utilised to refer to any publicly accessible financial product or service that operates on blockchain technology. It may involve an array of diverse services, encompassing lending and borrowing amenities to asset trading.

The lack of supervision by the government and the participation of an impartial intermediary, like a marketplace or payment handler, are prominent characteristics in the supply of these products and services.

Imagine a scenario where you can purchase products and services using digital currency. You would no longer require third-party services such as ApplePay or PayPal, since you can transfer the requisite funds directly from your digital wallet. Additionally, there are no extra or undisclosed fees associated with this payment method.

It’s an idea that could captivate libertarians – a financially unregulated setting with negligible governmental intervention, yet fortified by the security of a public blockchain that rivals that of conventional financial systems.

Therefore, what is the rationale behind using DeFi?

  • Every user is at liberty to hold and utilise their personal property.

    Users have unreserved authority over their own funds; there are no mediating parties or transaction fees involved.
  • To put it succinctly, DeFi doesn’t necessitate authorisation from anyone.

    Users have the liberty to conduct transactions with any entity they prefer, without incurring any fees from their financial institution or being subject to any regulations.
  • Transparency exists in business transactions.

    The majority of blockchains operate as a public ledger, thus all transactions are observable to anyone who wishes to access them.
  • All transactions occur instantaneously.

    Rates of interest are altered numerous times every minute, and the blockchain is updated as soon as a transaction is concluded.
  • Data stored in DeFi is immutable.

    Information on a blockchain is exceedingly challenging to modify.
  • There are numerous free DeFi protocols available.

    Unlike proprietary software, the source code for Ethereum and other projects is completely open and accessible to everyone. Developers have the ability to quickly and effortlessly link DeFi applications to develop new financial products and services without requiring authorisation.

It is critical to exercise caution when appraising potential investments, as something that appears excessively favourable may not be authentic. Unfortunately, several DeFi projects, such as Axie Infinity and the NFT market, collapsed in 2023 as a result of implausible promises and too much marketing. One of the most extensively used cryptocurrencies, Luna, recently experienced a considerable crash, resulting in investors losing billions of dollars.

Blockchain technology is generally considered to be secure; however, Decentralized Finance (DeFi) systems are still susceptible to malicious human intervention, just like any other financial system. If your credit card details are stolen, you can take measures to have the card temporarily deactivated. On the other hand, if your cryptocurrency wallet is stolen, you may have restricted options for legal recourse.

The complexity of DeFi systems is likely to be the main hindrance to their universal acceptance. Despite the prevalence of discussions around NFTs, their nature and operations are still not entirely clear, even after two years, and setting up a cryptocurrency wallet can be an arduous process.

Traders Are Taking Action

Governments worldwide are closely observing the Decentralized Finance (DeFi) industry due to its high volatility. With some firms now valued at over $90 billion, it is impossible for governments to overlook the industry. For instance, the Wall Street Journal reported that the US Securities and Exchange Commission (SEC) was scrutinising cryptocurrency exchanges that had previously been unregulated.

The Financial Action Task Force (FATF) has issued fresh recommendations to governments globally, urging them to collect data on pivotal figures in the cryptocurrency industry. These regulations are specifically pertinent to individuals who possess significant authority or influence in decentralized finance (DeFi) operations.

When evaluating decentralized financial systems, it is essential to assess how conventional market regulations apply. Governments are unlikely to attempt to regulate the DeFi market directly, though restrictions pertaining to the conversion of DeFis to fiat currency may be implemented.

It is crucial to acknowledge that the foundational technology and infrastructure of DeFi systems are remarkably attractive to several monetary systems globally. Central Banks are urged to contemplate digital currency as a substitute for the gradual reduction of physical currency.

China has emerged as a pioneer in the digital wallet domain with the introduction of its own payment platform. The Chinese public is very open to digital payment approaches, and Tencent’s Digital Wallet is currently used by one billion individuals.

What Implications Does This Have for New Businesses?

We foresee a substantial growth in digital wallets in the near future, with offerings from governments, large tech companies (e.g. Apple Pay), and decentralized finance (DeFi) infrastructure. As the industry progresses, financial institutions such as banks are likely to seek innovative solutions.

It is rational to expect that both Fintech and Big Tech firms will look to purchase smaller businesses as larger companies continue to pursue destination platforms – all-encompassing ecosystems that fulfil consumer needs.

The DeFi industry has encountered a recent slowdown, though it is anticipated to recuperate shortly. The downturn can be ascribed to the existence of deceitful schemes and dishonourable individuals operating within the market.

The DeFi industry is expected to be reinforced in the wake of new regulations and expanded public knowledge. This presents a vast opportunity for businesses seeking to expand into new markets.

Special attention must be paid to constructing tools that act as a protective measure for the public, facilitating the bridging of the knowledge gap between experienced DeFi users and those contemplating the technology. With gross margins ranging from 65-80 percent, DeFi could potentially pose a significant challenge to more established payment processors like Visa and Mastercard. However, this seems improbable given the current situation.

Conventional payment processors have secured their position in the market by being trustworthy, yet they are still susceptible to disruption. Until DeFi attains the same level of ease and dependability as present solutions, it will only draw a restricted audience.

When the dust settles, we will find ourselves in an entirely new world, and startups would do well to explore ways of benefiting from these changes.

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