Cryptocurrency: What is DeFi and how is it replacing traditional finance?

*This content is brought to you by Jaltech

By Jonty Sacks*

With the creation of cryptocurrencies and the underlying technologies that come with them, one of the biggest developments and most feared by the financial sector is the rise of Decentralised Finance, commonly known as “DeFi.”

Jonty Sacks, partner, Jaltech

DeFi is a broad term for alternative financial systems and services which are built on top of blockchain technology. This new digital universe is modelled toward building a new, internet-native financial system using blockchain technology to replace traditional [archaic] financial systems.

In layman’s terms, DeFi is financial services that are completely internet-based, uses blockchain as its backbone and can be implemented and executed in real-time without any middlemen. This provides users with greater efficiency and lowers costs to transact.

Defi systems follow specific protocols (a set of rules for transacting and regulating token supply) executed via smart contracts. DeFi competes with existing financial services by offering global access and exploiting the limitations of traditional banking systems. For instance, cross border payments take anywhere between 2 to 3 days to settle, whereas, in the DeFi environment, settlement can occur within minutes. DeFi protocols compete across multiple financial sectors including lending, insurance, and exchange.

Traditional finance vs DeFi

One fundamental difference between traditional finance and DeFi is that traditional finance is largely dependent on human resources to process and approve decisions and perform tasks (for example, the approval of a home loan) whereas within the DeFi ecosystem all activities are fully automated through smart contracts.

For information about Jaltech’s Cryptocurrency Basket, click here.

AAVE is a prime example of an automated DeFi protocol. AAVE allows customers to deposit their cryptocurrency as collateral when applying for a loan. The process of applying and receiving approval/rejection is all done online and takes a few minutes. To date, AAVE has received deposits of more than USD 200 billion in cryptocurrency.

The efficiencies within the DeFi environment are enhanced given that there is no need to engage with a human gatekeeper. The obvious reason for the rapid growth of DeFi is centred around the competitive advantages it has over traditional financial systems, a few examples can be summarised below:

DeFi Traditional Finance
Operating hours 24 hours a day Business hours
Operating days 365 days a year Business days
Settlement delay Within minutes Up to 3 days
Transaction Costs Very low Moderate to high
Accessibility Anywhere with an internet connection Limited to the financial institutions’ capabilities
Customer  onboarding Within minutes Longer than 24 hours
Permissionless

 

No permission access DeFi protocols Long-drawn out applications processes, including FICA, credit approvals etc

Although DeFi offers ordinary people the ability to transact globally, 24/7, 365 days a year, the majority of consumers are years away from adopting this technology in their everyday life. However, given the efficiencies and low transaction costs, it’s highly likely that cryptocurrencies linked to protocols will continue to appreciate over time, the question is which protocols will be the next Goldman Sachs of the DeFi world.

  • Jonty Sacks – Partner at Jaltech

Jaltech offers everyday people effortless and convenient access to the cryptocurrency market.

One of Jaltech’s investments is its Cryptocurrency Baskets which is tailored for investors who are looking for an investment option that provides investors with exposure and diversification across protocols, digital currency and blockchain technology.

For information about Jaltech’s Cryptocurrency Basket, click here.

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