The disruption of DeFi - Sandeep Kaur, Founding Executive at FeeDi

has disrupted traditional finance. In Traditional finance, central certifying authorities, (such as central banks), are required to print money in transaction facilitation, whereas DeFi decentralises centralised operations by creating open, global, and accessible alternatives (with an internet connection) to every financial service in modern days...

As we curate our industry report on DeFi for the financial services, we have been interviewing some of the thought leaders in this space.

Today we interviewed Sandeep K. , Founding Executive at FeeDi, a wealth management?startup bringing transparency to the money management business using blockchain technology solutions, about how she sees DeFi changing the landscape of finance and what risks that entails...

What problems does DeFi solve for financial services?

Blockchain technology is known for its property of transparency, immutability and possibility of faster transactions.

I have seen DeFi try to solve problems in traditional finance, such as;

Centralised control: Businesses and consumers deal with a single localized bank and the strong control exerted by governments and large institutions that hold a virtual monopoly over elements such as the money supply, rate of inflation, and access to the best investment opportunities. DeFi upends this centralised control by relinquishing control to open protocols with transparent and immutable properties. For example In traditional finance borrowing and lending rates are controlled by institutions. In DeFi, the rates are determined algorithmically and give control of market parameters to COMP stakeholders.

Limited Access: 1.7 billion unbanked people don’t have access to loans and most of the traditional institutes that are only available certain hours of the day. Whereas DeFi is available 24/7 from anywhere with an internet connection.

How is DeFi shaping the banking landscape?

Cryptocurrencies and Defi technology is still very nascent and how DeFi will shape the banking landscape is still up for debate. However, the use of smart contract technology is already being seen to improve current processes. For example, today simple wire transfer takes up to 3 days for settlement. But using DeFi protocols and stablecoins this can be done at a very cheap cost and in a fraction of the time.

A report by the world bank hypothesises that DeFi technology, like smart contracts, could increase efficiency in the issuance of consumer credit like home and auto loans which are still labor-intensive manual processes.

Is fraud a real concern when it comes to DeFi?

Due to the anonymity feature of DeFi it is a magnet for fraud and money laundering and lacks consumer safeguards that exist in traditional finance. As per the research from a blockchain analytics firm, Elliptic , in 2021 more than $10 billion was lost to DeFi scams. The reason being that the DeFi is prone to so many scams due to smart contract risk and governance risks.

Smart contract Risk: Though the name “smart” contract implies that it is smart, it is irresponsible to ignore the risks that comes with autonomous programs. Especially when these programs are tasked to manage users funds. The smart contracts are programmed by humans and are therefore prone to human error and programmer malpractice. Many blockchain developers are not prepared to acquire the level of sophistication and knowledge that is required to develop secure smart contracts, especially in this era of copy-paste.

Governance risk: DeFi, being an open source sector, is vulnerable to attacks as soon as the governance system launches. There is no centralised authority making any decisions to protect the company as we have seen in traditional finance. What is more, DeFi has voting rights, so any bad actor can acquire a majority of the liquid governance and gain control of the protocol to steal funds.

Due to all the frauds and hacks we have been seeing in DeFi, it is essential to put together good practices and regulators may have to step in sooner rather than later.

Where do you see DeFi going in the next 5 years?

I believe that the Tokenization of real world assets such as real estate and stocks is one of the very powerful user cases of DeFi that we will see in the next 5 years. For example tokenizing real estate and using that asset as a collateral to trade on a public blockchain which will make this illiquid asset more liquid. I believe this could also make transactions related to these assets faster and more efficient.

I believe that the nature of DeFi being available 24/7 will see an uptake in those who are currently unbanked being able to access financial services with a click of a button using internet.

I imagine there will be a complete rebuild from the bottom up. Finance will become accessible to all, with a $10 transaction being treated identically to a $100m transaction. Ultimately, I see DeFi as the greatest opportunity of the coming decade and look forward to the reinvention of finance as we know it.

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?If you would like to find out more about our industry reports and how you can be included in them or if you would like to download them, please contact Ojas Sekhri on [email protected]