How DeFi Is Changing Financial Institutions

DeFi may have an important impact on how banks operate in the future and has the potential to change the structure of financial systems at the macroeconomic level. DeFi is an umbrella term for a financial system that functions without intermediaries such as banks, insurances or clearinghouses. It is operated solely by the power of smart contracts. DeFi applications serve the role of traditional finance (CeFi) in a universal and transparent manner.

How DeFi Is Changing Financial Institutions

Handout

The idea of a new financial system is a part of the blockchain space and has been since its inception. Since 2020, DeFi has been growing at a rapid pace and today, billions of USD have been put into the ecosystem. The growth is predominantly led by applications (protocols) built on the Ethereum blockchain.

Commercial banks

The primary business model of commercial banks is to accept deposits and give loans to clients. Borrowing and lending form the cornerstone of effective financial systems since the holders of the funds receive an incentive to provide liquidity to the markets. In exchange they earn a return on assets that would otherwise be unproductive. DeFi protocols serve to enable unknown participants to both lend and borrow resources on a wider scale without involving intermediaries.

These applications bring lenders and borrowers together and determine interest rates automatically according to supply and demand. Anyone can engage with these protocols at any time regardless of location or amount. The recent hype around DeFi apps is driven by the growth of lending and borrowing protocols. By contrast, traditional finance loans in DeFi are commonly secured by overcollateralization. Companies including Aave are working on permitting uncollateralized loans akin to traditional finance.

Investment banks and issuers of financial instruments

The business model of investment banks typically involves the advisory on financial transactions. The trading or creating of complex financial products and management of assets fall into the sector of investment banks. DeFi protocols offer similar products. For example: Synthetix is a derivative issuance protocol, which enables decentralized creation and trading of derivatives on assets including stocks, currencies, and commodities. The decentralized asset management for cryptocurrency is evolving. As an example, Yearn Finance is an autonomous protocol, and searches for their best yields in the DeFi space while simultaneously investing for its users.

Exchanges

Exchanges serve to organize the trading of different assets. These include stocks or foreign currencies that exist between two or more market participants. The exchange of crypto currency against fiat money (for example the US dollar) can be credited to CeFi. Regular holders of cryptocurrencies must use exchanges like Binance or Coinbase (centralized organizations) to swap a unit of cryptocurrency against another.

With the new emergence of decentralized exchanges (DEX), holders of crypto don’t need to leave the crypto space to swap their tokens. One prime example of a DEX is Uniswap. DEX are compiled of smart contracts that hold liquidity reserves and function according to defined pricing mechanisms. The automated liquidity protocols play an important role in developing an independent decentralized ecosystem without any CeFi intermediaries.

Insurances

The most important function of insurance is to smooth out risks and bring security for market participants. For example, one model of decentralized insurance is Nexus Mutual. This offers insurances that cover bugs in smart contracts. Everything based on smart contracts in DeFi—especially the exposure in the code of smart contracts—-creates a higher risk for DeFi users. Decentralized insurances are still in origin stages. It is anticipated that larger and more sophisticated insurance models have the potential to emerge in the DeFi space.

Central Banks

Stablecoins are based on blockchain protocols that have the principle of price stability encoded so they fulfill the function of a reserve currency. The introduction of stablecoins set the foundation of the functioning decentralized financial system. It enables participants to engage with each other without the underlying risk of price volatility.

There are three options for how a crypto can reach price stability:

  1. Stablecoins can reach high degrees of price stability by pegging a currency to other assets. For example, for each issued unit of USD coin, a real US dollar is held in reserve.
  2. DeFi perspective: another interesting approach is the issuance of stablecoins by using other crypto as collateral. The central protocol for the DeFi ecosystem is Maker DAO. The crypto DAI is backed by other cryptos and ensures with its algorithm that the value of 1 DAI is around 1 US Dollar.
  3. The experimental approach aims to reach price stability without use of collaterals. For example, protocol Ampleforth automatically adjusts the supply of token in accordance with demand.

How Nimbus might integrate itself with banking

Nimbus is a DAO-governed ecosystem of dApps that offers 16 revenue streams for users based on IPO participation, lending, crypto-trading, and more. So far Nimbus has 50,000 users and continues to grow. The key offerings to Nimbus stakeholders are that it has 16 earning strategies for users in one platform. It has unique access to IPOs, startup financing, and other opportunities, now available in crypto. So far it has two tokens providing access to it all: NBU and GNBU. Nimbus could integrate further with banking as it continues to expand its user base. With much to offer its stakeholders including special access to its IPO offering, there are many incentives for users and stakeholders to sign up for Nimbus and become further integrated. As crypto trading becomes more popular as a revenue stream for users, Nimbus will continue to become further entwined with the banking industry as a for profit entity. With options to lend, borrow, and trade for crypto users, Nimbus is rapidly expanding its user base and will likely see exponential growth in the coming future. One thing is for sure, Nimbus will continue to integrate further as the ecosystem expands and develops.

Note: Investment in cryptocurrency is subject to risk and readers should do their own due diligence. Entrepreneur Media does not endorse any such investment.

Internet Explorer Channel Network
News Related

OTHER NEWS

Netflix CEO Says He 'Screwed Up' Response to Employee Anger Over Dave Chappelle Special

Netflix co-CEO Ted Sarandos said he “screwed up” communicating with his staff after they expressed displeasure with Dave Chappelle’s new streaming comedy special, The Closer. Employees are planning a walkout ... Read more »

Gautam Adani Meets UK PM, Assures To Commit $70 billion to Energy Transition

Business tycoon, Gautam Adani on Tuesday, met United Kingdom(UK) Prime Minister Boris Johnson at the Global Investment Summit. The Adani Group chairman said he will commit $70 billion towards Energy ... Read more »

An Ant Colony Is the Perfect Metaphor for the Economy. Here's What Else You Need to Know.

Ants are fascinating creatures. Far more than a simple picnic pest or inspiring hero moving a rubber tree plant, ants are complex creatures that demonstrate the value of teamwork, networks ... Read more »

So You Want To Be an Angel Investor? The Issue Is Exit

Arvind Khaalibaithnewala shifted his considerable bulk on the sofa and absent-mindedly flipped channels on his television. Known as Khaali to his friends, he was in his fifties and had recently ... Read more »

Facebook Expected to Reveal Its Secret New Name

Next week, Facebook may forgo its household name.  KIRILL KUDRYAVTSEV | Getty Images According to a report posted by the Verge on October 19, the social media behemoth is planning to rebrand ... Read more »

Latest: FBI Confirms Items Belonging to Brian Laundrie, Human Remains Found in Florida Park

Update 4:37 P.M.: In a press conference held in Florida, the FBI confirmed that there were in fact human remains found in the Myakkahatchee Creek Environmental Park on Wednesday morning. Octavio Jones | ... Read more »

CredAble Raises $30 Mn Series B Funding Led By Plutus Wealth And Oaks Asset Management

CredAble, an AI-powered technology platform enabling working capital financing across enterprise ecosystems using state-of-the-art technology, digital KYC and onboarding, deep ERP, and bank integrations, on Wednesday announced to have raised $30 ... Read more »

MarketWolf Secures $5.5 Mn Seed Funding

MarketWolf, an innovative ‘intra-day options only’ trading app recently announced to have raised $5.5 million in a fresh round of seed funding largely from high profile individual investors who hold ... Read more »

Consumer Foods Brand Yu Raises $ 1 Mn

Yu, a consumer brand that is re-imagining consumer packaged foods with their 100 per cent natural instant meal bowls, has secured $1 million funding. The round saw participation from Manish ... Read more »

Skyber Raises INR 40 Lakh

Skyber, a SaaS and B2B commerce-based platform, recently raised INR 40 lakh in one round of investment through the Encubay Angel Network, a women-led and women-focused angel network. Apart from ... Read more »

CVB Financial (CVBF) Beats Q3 Earnings Estimates

CVB Financial (CVBF) came out with quarterly earnings of $0.37 per share, beating the Zacks Consensus Estimate of $0.36 per share. This compares to earnings of $0.35 per share a ... Read more »

Covenant Logistics (CVLG) Q3 Earnings and Revenues Beat Estimates

Covenant Logistics (CVLG) came out with quarterly earnings of $1.02 per share, beating the Zacks Consensus Estimate of $1 per share. This compares to earnings of $0.56 per share a ... Read more »

Kaiser Aluminum (KALU) Misses Q3 Earnings and Revenue Estimates

Kaiser Aluminum (KALU) came out with quarterly earnings of $0.57 per share, missing the Zacks Consensus Estimate of $1.10 per share. This compares to earnings of $0.33 per share a ... Read more »

UFP Industries (UFPI) Beats Q3 Earnings and Revenue Estimates

UFP Industries (UFPI) came out with quarterly earnings of $1.93 per share, beating the Zacks Consensus Estimate of $1.55 per share. This compares to earnings of $1.25 per share a ... Read more »

Sea Limited Sponsored ADR (SE) Stock Sinks As Market Gains: What You Should Know

Sea Limited Sponsored ADR (SE) closed at $360.60 in the latest trading session, marking a -1.74% move from the prior day. This change lagged the S&P 500’s daily gain of ... Read more »

How to Get the Top Best Buy Black Friday 2021 Deals

NerdWallet is here to help you win Black Friday, while leaving your budget intact. We spend the time, you save the money. Visit regularly for holiday shopping tips and announcements ... Read more »

Farmers & Merchants Bancorp Inc. (FMAO) Beats Q3 Earnings and Revenue Estimates

Farmers & Merchants Bancorp Inc. (FMAO) came out with quarterly earnings of $0.63 per share, beating the Zacks Consensus Estimate of $0.55 per share. This compares to earnings of $0.40 ... Read more »

First Internet Bancorp (INBK) Tops Q3 Earnings Estimates

First Internet Bancorp (INBK) came out with quarterly earnings of $1.27 per share, beating the Zacks Consensus Estimate of $1.14 per share. This compares to earnings of $1.03 per share ... Read more »

OneMain Holdings (OMF) Q3 Earnings and Revenues Surpass Estimates

OneMain Holdings (OMF) came out with quarterly earnings of $2.37 per share, beating the Zacks Consensus Estimate of $2.29 per share. This compares to earnings of $2.19 per share a ... Read more »

Rexford Industrial (REXR) Tops Q3 FFO and Revenue Estimates

Rexford Industrial (REXR) came out with quarterly funds from operations (FFO) of $0.43 per share, beating the Zacks Consensus Estimate of $0.39 per share. This compares to FFO of $0.33 ... Read more »

Starbucks (SBUX) Gains But Lags Market: What You Should Know

Starbucks (SBUX) closed the most recent trading day at $113.86, moving +0.33% from the previous trading session. This move lagged the S&P 500’s daily gain of 0.37%. – Zacks Prior ... Read more »

Markets Mostly Higher: TSLA, IBM, CSX After the Bell

Another good day in the market indexes this Hump Day, with only the Nasdaq barely finishing in the red, -0.05%. Nevertheless, it snaps a fourth-straight trading day higher. The Dow ... Read more »

Graco Inc. (GGG) Q3 Earnings and Revenues Miss Estimates

Graco Inc. (GGG) came out with quarterly earnings of $0.57 per share, missing the Zacks Consensus Estimate of $0.64 per share. This compares to earnings of $0.59 per share a ... Read more »

Paycom Software (PAYC) Stock Sinks As Market Gains: What You Should Know

In the latest trading session, Paycom Software (PAYC) closed at $512.63, marking a -1.17% move from the previous day. This change lagged the S&P 500’s 0.37% gain on the day. ... Read more »

I'm a Certified Coach and These Are the 3 Questions I Ask in Every Session

We’re making some changes over at the SUCCESS Line. Introducing your new host—me! I am the managing director of SUCCESS Coaching, and I am so excited to be picking up ... Read more »

How Suzy Batiz Found Perspective at Rock Bottom (and How You Can Too)

Trigger warning: This post references childhood abuse, rape, domestic violence, suicide and depression. What would you do if you had nothing left to lose? Suzy Batiz is the founder, CEO ... Read more »

How Small Finance Banks can reform the fabric of rural India's finance ecosystem

Financial security is a fundamental need of a person, much needed in order to survive and thrive in the world today. The pandemic has taught us about the uncertainty and ... Read more »

Small Finance Banks - A Progressive Journey through the Technological Prism

One of the key learnings from the pandemic was the digital quotient of an organization, in the backdrop of accelerated adoption of technology across sectors, especially banking. Today’s banking ecosystem, ... Read more »

Anand Mahindra Tweets Video Of ‘Driverless' Bike, Twitter Issues Red Flag

Image credit: Screengrab from video tweeted by @DoctorAjayita It could well have been a scene straight out of actor Ajay Devgn’s iconic stunt from “Phool Aur Kaante”. Except that it ... Read more »

Afraid of Making Poor Money Moves? Use Psychology to Predict Your Financial Behavior

It’s always fun to use “reverse” psychology on your kids: “Don’t you dare clean your room!” Sure enough, they run up the stairs, laughing hysterically, to make their beds and ... Read more »

Are Stocks Ready to Break to New Highs?

The stock market (SPY) is on a 5 day winning streak and now less than 1% away from the all time highs. This quickly shakes off weeks of painful pullbacks ... Read more »

Johnson & Johnson Rockets Higher Despite Mixed Results

Blue-Chip Dividend Grower Johnson & Johnson Is A Value If you’re looking for a safe place to park some money with an expectation for capital gains, above-average dividend yields, and ... Read more »

Diamondback Energy Rallies Post-Breakout, Ahead Of Nov. 1 Earnings Report

Diamondback Energy (NASDAQ: FANG)  may be setting up for a fresh round of gains after resetting its base count in August. It cleared a first-stage, cup-shaped base on October 5, ... Read more »

Bobbing for Apple Stock: Why Investors Keep Buying the Dip

Even a mega-cap juggernaut like Apple (NASDAQ: AAPL) isn’t immune to the occasional market-driven or company-specific downturn. It’s just that it doesn’t happen very often. And when it has, it ... Read more »

What's in Store for Boston Properties (BXP) This Earnings Season?

Boston Properties, Inc. BXP is slated to report third-quarter 2021 results on Oct 26, after market close. The company’s quarterly results will likely highlight year-over-year growth in both funds from ... Read more »

Airline Stocks to Watch for Earnings on Oct 21: ALK, AAL, LUV

The rapid spread of the highly contagious Delta variant of the coronavirus across the United States dealt a huge blow to the U.S.-based airline stocks. This is because after being ... Read more »

Kimberly-Clark (KMB) Queued for Q3 Earnings: Things to Note

Kimberly-Clark Corporation KMB is likely to display year-over-year growth in the top line, when it reports third-quarter 2021 numbers on Oct 25. The Zacks Consensus Estimate for revenues is pegged ... Read more »

3 Analyst Favorite Stocks to Buy Now

Having conviction in a stock is a lot easier when you know that some of the best and brightest equity analysts on the street have recommended it. While you should ... Read more »
On free-english-test.com you will find lots of free English exam practice materials to help you improve your English skills: grammar, listening, reading, writing, ielts, toeic