Why Decentralized Banking Is Taking The World By Storm
There is a revolution going on and it’s taking place in cyberspace.
Blockchain has disrupted global banking systems and is transforming the finance industry.
One core value proposition that blockchain technology seeks is financial inclusion — accessibility to everyone.
Certainly, it is a welcome development for the world’s 1.7 billion unbanked.
Decentralized banking models present themselves as an attractive alternative over traditional banking institutions because of the shift in power dynamics — elimination of middlemen and direct transactions without regulation.
Author of the best-selling “The Business Blockchain”, serial entrepreneur William Mougayar surmises:
“The blockchain symbolizes a shift in power from the centers to the edges of the networks.”
However, before tackling why decentralized banking is proving so popular, let’s define the term first.
What is decentralized banking?
Decentralized banking, sometimes called decentralized finance (DeFi for short), is defined by Blockgeeks.com as:
“…an ecosystem of financial applications built on top of the blockchain.”
The major objectives of DeFi surround the creation of a financial infrastructure that’s:
· Non-proprietary — i.e. open-source
· Conspicuous — i.e. transparent
· Decentralized — i.e. with no central governing authority
Decentralized banking environments give users total control of their investments with all communications being executed within decentralized applications (dApps).
Now, let’s turn our attention to three reasons decentralized banking is taking the world by storm.
3 Reasons decentralized banking is in high demand
Here is why decentralized banking is fast gaining traction across the world:
Reason #1 Decentralized banking removes intermediaries
Maintain your privacy while you bank anywhere, anytime, and at cost-effective rates. What’s not to love about decentralized banking?
Legacy banking institutions require every user to provide a government-issued ID, proof of address, and sometimes a Social Security number in order to open an account and transact.
Decentralized banking systems don’t need all this. Essentially, parties enter into agreements via smart contracts.
Smart contracts are simply computer protocols that verify, facilitate, and enforce digital transactions in a credible manner without needing to involve third parties. Consequently, users don’t have to pay the typically high intermediary party fees.
Reason #2 Decentralized banking is financially inclusive
According to the Federal Reserve, up to 22% of American households (55 million people) are unbanked.
Owing to the permissionless nature of blockchain, there are no gatekeepers to discriminate against users and no requirement to provide identification prior to transacting.
Anyone can create a profile on the decentralized banking infrastructure. No one is excluded from accessing and using DeFi dApps.
Reason #3 Decentralized banking is transparent
Making changes to traditional banking models is difficult because little is publicly known about how these financial institutions actually operate.
In fact, 20th-century industrialist Henry Ford once remarked, “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
Trust is a critical element within financial circles, and hence the emergence of new banking systems that are open and transparent and which allow users to contribute to how they operate has been timely.
The bottom line
Blockchain technology is just getting started and will prove to be pivotal in transforming and shaping the banking sector of the future.
To learn more about this be sure to read my next blog How Automation and Blockchain Are Transforming Finance