DeFi - The Modus Operandi of the Financial Future

Our world is changing at a breakneck pace, with technology approaching new heights almost every quarter in a year! Even though the rest of the world had come to a halt, the pandemic had resulted in unusually high activity in the digital asset realm.

However, Decentralized Finance (DeFi) is not a new fad in the world of technology; rather, it has gained significant traction in recent years. And this has been the case since blockchain became a new blitz in the technology arena, but the question is, why all this rage now? Two factors are responsible: Convenience and Digitalization of everything, including the finance realm.

DeFi is a form of finance that offers traditional financial instruments without depending on middlemen such as brokers, banks, or exchanges. Instead, it employs smart contracts on blockchains, the most popular of which is Ethereum. A blockchain stores data so that it is virtually impossible to change, hack, or copy. It is fundamentally a distributed digital ledger of transactions replicated and dispersed across the blockchain's entire computer network.?

In the traditional model of banking or finance, a slew of protocols must be followed in order to complete transactions, invest, borrow and lend, or even trade. Even in today's digital banking environment, the bank provides customers access to digital payment gateways to complete transaction processes. While it provides the necessary ease to customer in their financial transaction, they also have to remain vigilant by not being caught in a catch 22 situation following concerns over security and identity theft. In the view of that fact, blockchain technology requires no human intervention, there are fewer chances of such risks and errors. Its peer-to-peer philosophy advocates for the abolition of traditional centralised institutions such as banks, non-bank financial companies (NBFCs), exchanges, and brokerages.

Moreover, experts believe that DeFi has significantly disrupted the global financial ecosystem, with cryptocurrencies being adopted at an astonishing rate by world economies!?

DeFi now provides many opportunities ranging from easy and cheaper access to capital funding to decentralised digital asset classes, efficient lending and borrowing, and synthetic stock exchanges. Some DeFi initiatives, such as Uniswap, have evolved into high-performance global financial markets that serve both individuals and institutions.?

The use of DeFi isn't restricted to the banking or FinTech sectors. As technology advances, so do our lives and issues concerning our sustenance, including finances. So, when it comes to financial security, DeFi offers a variety of safe and reliable options.?

Of late, we see the inflationary pressures specifically affecting interest rates in fiat currencies that are continuously falling. This has made it difficult for the middle-class around the world to save and invest. Hence, one of the most significant DeFi use cases has been in the insurance industry. Though the current insurance system is plagued by complex audit systems, paperwork, and bureaucratic claiming protocols, the use of smart contracts has the potential to make it much more productive and cost-effective.?

While the rest of the world is focusing on a DeFi-related paradigm shift, there is no dearth of enthusiasm in Indians as well for decentralized finance or blockchain technology. However, the lack of a regulatory framework has proven to be a temporary impediment to its ascension to mainstream status. Just recently, India was ranked as one of the top Asian countries for cryptocurrency trading.?

And despite previously stating its reservations for cryptocurrencies, the Indian government wasted no time in expressing its support for the blockchain community. In fact, the launch of an official central bank-backed digital currency or digital rupee is part of a larger plan to fully integrate crypto into the country's economic space.?

DeFi has the potential to alter the face of currencies, payment methods, banking, insurance, trading, and the overall economy because this technology is here to stay. Moreover, since DeFi offers a secure and simple way to trade or exchange transactions it will eventually gain more trust with the masses. Both institutions and traders will readily adopt this technology owing to the convenience and safety it provides. In fact, it’s high time that governments around the world start to work on a regulatory framework as blockchain and DeFi are the future of fintech.?

-Shekhar Bhandari

President, Global Transaction Banking

Kotak Mahindra Bank

Disclaimer:

This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.

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