DeFi Vs. Fintech
Next Billion Tech
I have been maneuvering DeFi, Decentralized Finance, for the last few weeks. It is fascinating and yet daunting, as I am not sure the present form of fintech will survive if they don’t move from existing archaic infrastructure in the backend to DeFi infrastructure.
What is DeFi?
According to Investopedia1,
DeFi refers to a system by which software written on blockchains makes it possible for buyers, sellers, lenders, and borrowers to interact peer to peer or with a strictly software-based middleman rather than a company or institution facilitating a transaction.
One day in DeFi is like one month in the real world, and it’s moving that fast; protocols, use cases, and applications are coming every day, despite a tiny ecosystem of blockchain developers.
Whether fintech in payments, remittance, lending, savings, investments, or even full-stack neo-banking has limitations in terms of scale, especially across geographies. Several other issues exist with the current fintech from the end customer point of view, whether retail or business:
High remittance costs
Low deposit interest rates, even considering neo-banks like Revolut (USD 33Bn), N26 (USD 9Bn) disrupting the banks provide 0.65% to 0% interest, which they feel quite proud about.
Slow in operations, I am using Mercury Bank for my LLC, and it takes at least one day to transfer the money. I mean, which age are these neo-banks in.
Market reach - can’t serve low-density areas / rural areas/customers with low deposit capacity.
Let’s just look at the total value locked in DeFi protocols - with ANC, Anchor Protocol at the lowest in the top 10 DeFi protocols of TVL of USD 5.89 Bn.
DeFi is in its infancy, where most retail investors are pretty educated in terms of understanding the tech stack, so in some sense, it’s at its early-adopter phase. We need to move from the early-adopter phase to mass adoption and to move in that direction. We need to build solutions that serve the frictionless onboarding from off-chain to on-chain. Let’s understand how on-chain transactions are different than on-chain transactions.
On chain transactions are the transactions available on the blockchain (distributed ledger) and are also visible to all the nodes on the blockchain network. Off-chain transactions, on the other hand, is the movement of value outside of the blockchain.2
So, to move the real-world money, we need to move real-world everyday users to move their money on these DeFi protocols, not just for the sake of high-risk, high-reward investments but also
Borrowing/lending: help retail and institutions borrow/lend capital with protocols like Centrifuge (provides borrowing against illiquid assets such as invoices, real estate, and commodities), or Goldfinch / Maple (provides loan to financial intermediaries like MFIs, lending fintech, etc.)
With this kind of DeFi protocols and applications coming up, I anticipate many-core fintech offerings being built over DeFi. If the existing fintech doesn’t transition using DeFi infrastructure, it might be replaced by DeFi protocols and apps.
What do you think? Where can DeFi play a critical role - payments, lending, savings, investments, asset management, liquidity provider, etc.? I would love to hear from you.
If you are building a DeFi startup or investing directly in DeFi protocols or startups, please do write to me. I would love to learn more from you and would be happy to help in any way.
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