The introduction of DeFi has left us with an unprecedented question: do we really need banks, and can individuals be their own banks? Clearly, this question is multifaceted, as when changing the financial landscape, the endeavor raises several issues including politics, privacy, regulations, and security. At PBWS 2020: Online Edition, we invited 5 experts for a panel to discuss how DeFi is transforming end-users’ relationships to financial services, the barriers to mass adoption, and the role that regulation plays in this uncharted territory.
The panelists discussed the importance of introducing not just new currencies, but also new systems and infrastructures, which is where DeFi comes into play. This leads to higher financial inclusion, giving access to investment opportunities to those who don’t have a lot of capital or are not already involved in the world of finance, as well as providing opportunities to create their own financial products. For the first time, consumers have the option to opt-out of traditional financial options and to be their own bank.
DeFi affects (or will likely affect in the future) retail consumers, institutions, the unbanked. Currently in these first stages, companies are building for a specific, tech -savvy kind of retail user. The space is still new in comparison to traditional financial services, but it is growing. There is still a barrier to entry because using DeFi requires an advanced level of technological knowledge, as well as internet access.
The demographic that didn’t have access to financial services before is more interested in adopting it and for those who already had easy access to financial services it is less interesting and liquid than traditional finance because it is still comparatively smaller, however this may change over time.
Although the primary function of regulators is to protect end consumers from custody risks, the decentralized nature of blockchain protects the consumers by making the information that was previously protected by operators available to everyone, therefore the regulators don’t have to go to each operator to check if they are wash trading or doing other illegal activities, and the consumer is protected because all data is transparent and available for everyone to see on the blockchain. However, self-custody is much different and risky in a different way.
Proposing new alternatives to financial systems is inherently political and social. Regulators ultimately can change the laws or create laws, and they are trying to understand crypto and experiment, as in some sandbox and safe harbor models. DeFi companies need to determine if they want to stay completely decentralized, or if they will conform with the regulators to become more available to everyone.
Users are becoming more and more tech savvy in regards to their financial services, and it’s becoming necessary to more proficient in new technologies in order to be competitive in finance. Now it is even possible to live without a bank and only use DeFi, however it requires the necessary education and access to the technologies. Some services like flash loans are only possible with DeFi, which leaves those dependent only on traditional finance out of the loop. Also, since blockchain isn’t limited by location, new demographics who previously didn’t have these financial opportunities are entering the market, creating jobs and new services using this technology.
No one who has internet access is excluded from DeFi, which is much different from CeFi, where the barriers to entry are typically whitelisted. This has allowed for mass experimentation and the emergence of new projects. There have also been many experiments about governance, which is inherently different from traditional finance. Some of the innovations are similar to CeFi,