The rise of blockchain technology is driving the significant transformation of the financial landscape, giving way to a variety of solutions based on the concept of Decentralized Finance (DeFi). This is more than just hype; it is a huge leap regarding how financial services will be delivered and accessed in the future. DeFi enables peer-to-peer financial exposure without intermediaries, truly shaking the very foundations of the traditional banking system.

The DeFi Revolution

Blockchain technology and cryptocurrencies have come a long way from that single introduction of Bitcoin back in 2008—something considered globally viable for more than just the adventurous few, niche experimenters. However, the development of Ethereum in 2015, with smart contract functionality, truly opened new possibilities in finance and has allowed projects like Aave, MakerDAO, Compound, and Uniswap to emerge. These platforms ran over and disrupted traditional financial systems, offering decentralized alternatives for lending, borrowing, and trading, all without intermediaries. This sector, as highlighted, was growing but now has a TVL in DeFi protocols of around $54 billion as of 2024.

Discussing this through the eyes of Diffusion of Innovations, we can ascertain that we’re in the early majority phase. DeFi and blockchain technology have come a long way from the early adoption phase and are now picking up steam in the eyes of institutional investors and regulatory bodies. This period is marked by increasing mainstream acceptance, a high degree of development in regulation, and the cementing of digital assets into traditional structures. The continued expansion of DeFi is indicative of a larger trend in which old players in finance become compelled to join this disruptive technology.

It’s all about more exciting times to see the vicious circle of consumer and traditional finance world. At the beginning itself, banking and financial institutions remained away, taking a cautious approach towards the blockchain movement. However, the businesses were always on the hunt to bridge the gap that was there between the traditional financial systems and the new crypto world. This eventually led to consumer-driven integration of the banking industry with the crypto services and vice versa, established as a hybrid system that let the digital and traditional financial services to coexist.

It’s today, after the regulators put down new rules and with banks being more open to interacting with the world of crypto, that we’re back to the original idea of total decentralization. Now, consumers are the ones pressing for integration. They are striving, more and more every day, towards a completely decentralized finance system in which no traditional financial institution or state control is held above it. This paradigm shift is pointing out that DeFi itself is very dynamic and evolving with time; it’s in DeFi that financial changes are being presented.

Read more: Fordefi Unveils First Institutional-Grade MPC Wallet for DeFi on Sui

DeFi vs. Traditional Banking: A Comparative Analysis

Traditional banks have their sprawling infrastructure and protection from regulators to provide a semblance of stability and security. Still, they come with limitations that DeFi intends to solve:

1. Accessibility: In traditional systems of banking, people with not enough credit history or those living in areas that are not well served are almost barred from financial services. On the other hand, DeFi is all-inclusive and hence accessible by any person who may have access to the internet.
2. Transparency: Banking operations are usually very private; the behavior of all the participants is hidden from the customer. DeFi operates on public chains, and this whole process is undeniably transparent and unique.
3. Efficiency: Most of the traditional banking processes are slow and costly. In the case of international transactions, it becomes even slower and costlier. DeFi provides almost instantaneous transactions at a fraction of the cost and thus increases efficiency by a great degree.
4. Innovation: Compelled by regulatory necessities and mostly traditional systems, banks can barely innovate. The open-source nature of DeFi fosters quick experimentation and development in keeping the financial ecosystem dynamic.

Impact on the Lending Market

The DeFi lending market has seen rapid growth in multiple platforms, which offer decentralized lending and borrowing. By 2024, the TVL on all combined DeFi lending protocols is approximately $54 billion. While that today constitutes less than 1% of global household debt, now approaching $60 trillion (IIF Global Debt Monitor, 2024), the rapid growth of DeFi strikes. At more than 40% year over year, DeFi takes incredible hold and interest by users for credits outside the channels of traditional financial brokers as further yields and better accessibility are promoted. With DeFi’s lending principles so fundamentally different from those of traditional banks, it follows that quite soon, banks will have to reassess their underwriting and risk models in view of the increasing influence of the DeFi markets. The fast pace of growth seen in the industry will force traditional financial institutions to be more innovative as they work to keep up with the changes.

Impact on the Payments Market

Cryptocurrency brings with it an advantageous disruption in speeding up cross-border settlements. Most cross-border settlements, in a conventional manner, include coordination by several correspondent and central banks-and take a number of days. For instance, a transfer from Australia to the UK can take as many as 7 business days to process, especially if it coincides with weekends or holidays. In response to such inefficiency, however, top payment networks, including Visa and Mastercard, have recently begun an experiment for uninterrupted settlement processing of stablecoins among their members. This is likely to shake up the payments landscape because immediate settlements are introduced in the system, even on weekends, because it introduces a constant, real-time capability to pay.

Crypto adoption by merchants is also well in stride: a full 85% of merchants whose annual revenues eclipse $1 billion consider accepting crypto transactions as a strategic means of attracting and retaining new customers. Besides, the processing fees for crypto are up to three times cheaper than those for traditional card purchases. Reports by global payment service providers indicate that the number of merchants who accept cryptocurrency has tripled to more than 6,000 worldwide. This is proof of growing acceptance for cryptocurrencies as mainstream methods of paying for goods and services.

The banking industry will likely see its settlements side undergo a radical change, as such. We are going to see new ways of settlement terms and a reduction in fees for individuals and corporations led by increased efficiency and lower costs induced in cryptocurrency transactions.

New Investment Instruments and Strategies

Most importantly, perhaps, is the growth in cryptocurrency exchange-traded products. There are close to 900 crypto ETFs and exchange-traded products (ETPs) listed globally, with assets under management approaching $10 billion by now. This marks a significant growth in not only the number of products but also the overall assets invested in them. The surge in the rise of crypto ETFs makes it easier for traditional investors to get into digital assets through a familiar and regulated investment vehicle.

With increasing demand for digital assets, more and more of traditional financial institutions, major brokers, and even banks started offering representation of cryptocurrencies as part of the instrument within their investment portfolios. Today, however, firms such as Interactive Brokers, Robinhood, Fidelity, Morgan Stanley, and Goldman Sachs are adding access to their clients for crypto investments in direct purchases—holdings—in crypto and crypto-linked securities with advisory focus on digital assets. This definitely just validates more and more the mainstream status of an asset category inside traditional financial markets that cryptocurrency is acquiring lately.

Tokenisation of assets is the most recent trend, where physical assets such as gold, real estate, and even commodities find their way into different blockchain platforms in a digitized form. It is the process of digital ownership of such assets, which can then be exchanged or used within DeFi platforms. For example, it allows investors to buy and sell fractional ownership in gold, represented on the blockchain, taking a previously illiquid form of investment and liquidity. Tokenization of assets unlocks yet other potentials, especially in traditionally illiquid assets. Thus, it is gaining substantial interest from individual and institutional investors.

As more investors adapt to these new instruments, traditional banks will also have to adapt to induct them into their range of offerings. That possibly should explain a realignment of investment strategy, and in future, a scenario whereby banks could, to a greater extent, serve as custodians and facilitators of digital assets.

The Future of Finance

Looking forward, DeFi has the potential to dramatically change the way financial services are delivered. It will probably not completely replace traditional banks, but advance the whole industry to demonstrate more transparency, act with greater efficiency, and involve broader sources of inclusion.

The traditional banks might consider the transparency and speed of transactions in DeFi and improve their services. Conversely, DeFi services can borrow some aspects from traditional finance with a view to being integrated within the bigger economy, while remaining more stable.

In conclusion, DeFi is a great leap forward in the evolution of finance, offering opportunities for innovation and inclusion. The more mature the technological arrangements in this landscape become and the more the regulatory framework takes its specific shape, the more likely it is that the traditional and the decentralized models will blend to have a dynamic and inclusive future in finance.

The article is contributed by:

Svyatoslav Garal, Global Head of Payments at Wirex.