For the longest time, the finance industry has been a conventionally analog domain, but not anymore—thanks to the ever-dynamic technology. From Traditional Finance (TradFi) decades ago through Centralized Finance (CeFi) to the current trend—Decentralized Finance (DeFi), the trajectory is potentially going to remain exponential.
Earlier whispers questioning how the world without banks would feel like are getting amplified by the day, mainly because of the booming DeFi sector in the crypto market. As of August 2021, DeFi's net asset worth was over $126 billion and has continued to increase ever since.
But first things first.
What Is Decentralized Finance (Defi)?
Decentralized Finance is the latest development in the FinTech ecosystem, which aims at disintermediating finance by leveraging blockchain and cryptocurrency technologies.
Consumers from the entire spectrum of finance can engage in normal trade without involving financial institutions like banks and insurance companies.
Using decentralized infrastructure such as Ethereum and Solana, users can create decentralized programs like dApps and smart contracts, specifying the terms and conditions they want to trade. It's only when the conditions are met that the exchange takes place.
That allows buyers and sellers to engage at a peer-to-peer level, eliminating the need for intermediaries in the transaction chain.
Even though CeFi is still dominant in the crypto market, it still has many associated drawbacks that blockchain resolves through DeFi.
Three Fundamental Challenges of Centralized Finance (CeFi)
Intermediaries—the Root
In CeFi, investors do not interact with each other directly. Instead, they are forced to entrust the intermediary entity or broker to transact on their behalf.
Cumbersome Entry Permissions Required
Nearly all exchange entities expect new customers to undergo the Know Your Customer (KYC) procedure. While this is a safety strategy for ensuring prospective investors are not involved in illegal activities, KYC remains a controversial concern in the crypto industry.
It prolongs the entry period for new investors and makes them question the safety of their data. Note that storing this data means deploying additional resources, and the entities stand to be penalized in case of customer data breaching.
Mistrust
Lack of trust has caused setbacks in CeFi, and it's among the key reasons that naysayers constantly discredit the crypto industry.
After the financial crisis in 2008, even the "too big to fail" banks like JPMorgan Chase felt the pinch. Most banks lost funds to defaulted mortgages, customer credits, and failed businesses. That's considered the root of the trust issues that most millennials have towards banks up to date.
Currently, it takes a lot of courage for investors to entrust such intermediaries with their assets. No wonder DeFi and blockchain, in general, have gained so much traction since their inception.
Benefits of Blockchain
Blockchain Is Decentralized
The decentralized structure of blockchain is the reason DeFi does not involve third parties. As we mentioned earlier, smart contracts equalize both parties so that none of them considers themselves superior over the other—it is community-owned.
Smart contracts also allow instant transactions once the conditions are met, plus no delays associated with KNC. (KNC is an Ethereum token used for paying fees on the Kyber Network). Phasing out brokers has also translated to zero service or transaction fees, allowing maximum proceeds transfer between both parties.
Transparency
Since smart contracts are community-owned, each registered party is entitled to knowing whatever transaction happens. That means all members get access to the same information—transaction history and other documentation. All transactions are date-stamped and time-stamped.
Smart contracts are also immutable, meaning they cannot be manipulated or changed for any party's benefit. This is particularly beneficial with real estate, where different parties can exchange a property but still maintain the titles.
Lower Cost, Faster Transactions
CeFi is traditionally costly because of the many resources that go into maintaining human resources and data management.
But now that everything in DeFi is automated and all necessary data is specified in the smart contract code, labour and data management costs are virtually eliminated.
Like most computerized systems, blockchain can modernize and automate many manual processes in a fraction of the time it would take humans. Transactions happen in a span of microseconds, and this feature has seen Walmart streamline its supply chain and save a lot of time and resources.
Data Security
Before a proposed record enters a block in the blockchain, all parties involved must evaluate it and agree. Once agreed, it's encrypted and enters the block with links to previous blocks. To edit any records, the entire chain must be updated, which calls for massive computing power. That's why blockchain is immutable and the reason why hackers cannot penetrate.
The Future of Mortgages and How Fundmore.ai Helps You Align Yourself
The future is clear. It's just a matter of how fast the mortgage industry will ultimately be transformed by Decentralized Finance (DeFi)!
As a mortgage lender, underwriter, or investor in the mortgage domain, it may be time to start to understand how your business can leverage the future of Finance. As we have seen, DeFi will help your mortgage business save time, resources, maximize data security, earn trust, and a lot more.
Ready to bring change to your business? Our team at FundMore.ai is all set to help you with your digital transformation.
Reach out to us today, and let us show you the way!