How DeFi and Web 3 Could Shape the Future of Finance
Author : Shabla Lab
Decentralized finance’s (DeFi) advantages must benefit all parties involved and all categories of customers. If not, only the more affluent segment can access or afford it. Concerns that the DeFi community is trying to outperform the system rather than improve it must be addressed. Governments and authorities will not give in otherwise. Not even a bit or byte!
Over the years, mavericks, thinkers, and inventors have introduced many brilliant ideas into the financial markets. These concepts have characterized humanity’s prosperity and decline, and the related non-financial morality has been denied. However, a recurring theme across these centuries has been the growing centralization of power in the financial markets.
Not too long ago, we witnessed the collapse of the traditional banking systems during the Global Financial Crisis. These systems were not only failing internally but also depriving customers and losing their faith, which put pressure on regulators to recognize that the system was flawed. Governments had to save the institutions that caused the crisis to protect current consumers and maintain economic stability.
This sparked several significant new concepts for reconsidering our financial systems and structures. The idea of decentralized finance then accelerated its development. We are required to do so and are subject to the operational oversight of the intermediaries when we invest in the existing, regulated traditional financial system (especially the banks). Have these established systems improved consumer interests or provided a solution for inclusive finance? No, that would be slight.
Old finance needs to be inclusive.
Despite our lofty promises, we have let down the rest of the world. There are currently 1.75 billion unbanked individuals. They cannot acquire affordable credit or invest their sachet-sized weekly or biweekly savings in today’s interconnected society. Importantly, despite the Internet’s expansion, many experience digital isolation and are thus excluded from most socioeconomic engagement.
Sadly, many consumers turn to shady or expensive payday loans to solve their cash flow problems. Even if these customers were to be banked, traditional banks might not be interested in doing business with them or might need to generate more income from such a small segment of the customer base.
Additionally, the current financial systems are situated in an ecosystem with expensive or weak interconnection. The economic liberty to select goods and services suitable for customers is prohibited by switching fees. The simple act of shifting money from one financial institution to another looks difficult and time-consuming in most of the world. It could take several days to send money via wire across markets in different nations.
Have we ever given our financial institutions any thought or questioned them? Given that most stock exchanges are digital, why should a stock market transaction take two to three days? Why is the credit card access charge still high for retailers or vendors? Why are banks still having trouble and are hesitant to help smaller business owners and entrepreneurs? Why is it so challenging to comprehend the operational silos that still exist within these organizations? Why do the regulators still worry about allowing FinTechs to grow more quickly? Why does it seem that regulators are backing traditional institutions, notwithstanding how poorly those institutions may have performed in the past and the financial damage they may have had on society? There are many questions like this, and they all point to what extra may be done to raise the caliber of what financing can genuinely give.
Why Web 3.0?
The breakthroughs in decentralized finance (DeFi), which form the basis of Web 3.0, such as blockchain and distributed ledgers, are still emerging. The fundamental tenet of Web3 is the decentralization of the current Internet’s main structure and the equitable power distribution of all content producers.
Even though many governments despise them, cryptocurrencies are a widely used commercial application of various web3 concepts. Simply put, blockchain technology adoption is scaling slowly. There was little room for user interaction on Web 1. It could only be read, and access was slower. Web2, currently in use, gave rise to social media, where users generate content.
Defiance is not what Defi (Decentralized Finance) is.
Devi’s fundamental tenet is to forgo the costs associated with access to or presence in physical locations in favor of peer-to-peer contact. Financial institutions’ business models would be impacted and changed by this basic premise. Financial applications using smart contracts built on blockchain technology are referred to as “decentralized finance.” Smart contracts are automatically enforced agreements that don’t require current intermediaries to carry out the agreed-upon transactions. All that would be needed is internet access.
The majority of current Defi applications were created on the Ethereum network. Emergent networks could provide faster access, scalability at reduced prices, and improved security due to innovation in this field. The Defi developers have also begun tackling issues with excessive energy consumption and becoming more environmentally friendly.
Intermediaries and associated inefficiencies exist in current financial systems. Consumers pay the price for this in terms of suffering and expense. DeFi, on the other hand, addresses these issues with its standardized interfaces and shared infrastructure, enabling effective interoperability. DeFi’s open nature provides security and confidence, which present institutions have consistently failed to deliver.
Concerns Will Continue
Governments and regulatory organizations will always be concerned about social governance and “losing control.” The following queries would fall under this category:
- Will any of the three web technologies lessen governmental control over the supervision of financial institutions?
- Will decentralization make it more challenging for authorities to control the Internet?
- Will any of these technologies pose national security risks or have unintended consequences?
- Will they cause problems with consumer protection and make cyber danger even more difficult?
- Can the technologies be weaponized against the state in any way?
The typical old boys of centralized finance will continue their traditional industry lobbying. It might also employ its network to spread misinformation about any potential short-term negative effects of technologically enabled decentralization.
Even though the bait may appear to be the antithesis of the establishment, pragmatic regulators and governments won’t fall for it. Instead, they may utilize their influence to develop funding systems that are more robust and resilient for all. They are exploring options for establishing an economic democracy with greater potential for financial inclusion. We have also witnessed how quickly the world economy is changing due to the widespread use of cashless and virtual payment methods by fintech companies. Going cashless and going digital have received the most support in India from the government.
Various projections indicate that by 2031, Web 3.0 might boost India’s GDP by nearly $1 trillion. India will be the second-largest internet user in the world in 2021, with over 845 million users on the internet and 518 million on social media. India is anticipated to have over 1.53 billion internet users by 2040, yet the country’s demographics will remain stable and productive, with a median age of 35. India can set the standard for financial inclusion and impact if it has a good regulatory outlook and continues to foster the creative application of technology in finance.
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