Financial System Pain Points vs DeFi Value Proposition

Current financial system still run on Mainframes and Cobol applications, both old technologies, costly, that doesn’t allow agile maintenance and changes.

By focusing on enhancing the customer journey, developing a robust infrastructure, and establishing a viable business model, companies can position themselves for growth and sustainability.

In recent years a combination of factors and events threw the global monetary system under discussion, forcing central banks worldwide to take action.

Over the past 50 years, the financial sector has not seen significant infrastructural changes. Even with the remarkable increase in transaction volume since the 1950s and the introduction of general-purpose payment cards, the processes in banking and capital markets have not undergone considerable enhancement.

Unprecedented events, macro-financial, economic, geopolitical changes, and institutions entering the market are converging TradFi (traditional finance) into DeFi (decentralized finance).

DeFi is an open-source peer-to-peer finance, where transactions do not require a counterparty to process them. Avoiding 3rd parties mediation fees using smart contract automation business logic implies a change to the business model.

There is a lot going on in DeFi ecosystem and it is not always intuitive to wrap the head around concrete applications, and implications in the traditional world.

TradiFi PAIN POINTS

Fintech introduced a better customer experience, easier access to financial services, better distribution, and cheaper services. Despite it improved the front end with a fresher and more appealing customer journey, didn’t address the hurdles coming from an obsolete technology infrastructure.

Meanwhile, customers have become more demanding, requiring a user experience at the same level as other digital services.

If on one side fintech is eroding market segments, especially the younger generations (Millennials, Gen Z), on the other, crypto and blockchain are frightening SWIFT (non-profit cooperation signed in 1977 by American and European banks to facilitate cross-border payments dispatching messages that credit or debit their account rather than actual payment its self) despite the new innovations in 2022, SWIFT network capabilities can’t compete with the order of magnitude of technological disruption brought by crypto and blockchain.

Covid triggered crypto adoption that had explosive growth in the summer of 2020, surging to 1B TVL (Total Locked Value) that kept growing up to 200B until May 2022 with total DeFi wallet users of 4.7M.

The loss of trust in the financial institutions, central and commercial banks, the war, the inflation in developed countries, the hyperinflation in developing countries, the surge of interest rates, and the recession, are adding uncertainties to a financial sector infrastructure already inappropriate for the market request.

Despite we live in a global economy, the infrastructure didn’t change so much to fulfill higher demand and more sophisticated customers, keeping the same type of services, with the same low level of efficiency.

The majority of the Financial Systems still run on a mainframe, which implies:

• high complexity in a business-critical environment that can’t be interrupted and mistakes have critical economic and brand impact
• high operations cost to change and maintain. High rate of human errors due to manual processes, low fault tolerance for single points of failures due to centralized servers, services provided too slow for the customers
• legacy systems incompatible between different financial institutions (see OpenBanking), insufficient security level, struggle to keep up with compliance, changing regulations, and standards

Apart from Crypto and web3, there are also other less disruptive technologies, affecting the way retail and corporate consume finance: AI/ML, RPA, Chatbot, OpenAPI, Cloud, Mobile and Biometrics.

DeFi VALUE PROPOSITION

Open, permissionless

Everyone with a mobile phone can access it. Know your customer(KYC), and anti-money laundry (AML), is managed based on the exchange-specific jurisdiction regulations. This potentially opens the doors, to 1.7 billion unbanked, or people excluded by the international financial system, worldwide.

DEX capabilities

Self-sovereign — no external authority, government, institutions, or banks, can’t freeze your assets, can’t close or size your account, and can’t refuse to provide any services since the transactions are direct peer-to-peer.

Ownership — asynchronous cryptography (the pair private/public key) allows self-custody of your own assets without the need for 3rd parties. Not your key not your coin, means that if you don’t have the private key, you don’t own your funds. If stored in a bank, or bank-like centralized exchange custodial wallet, where your keys are held by a 3rd party service.

Privacy — transactions are pseudo-anonymous by design– transactions are linked to addresses that correspond to public keys derived from user-held private keys, not by username or password. Transactions are encrypted and stored on nodes around the globe.

Transparency, public — assets can be traced where they are within the blockchain along with their provenance. For this reason, despite conventional thoughts, cryptocurrencies (bitcoin) are the worst medium to use for illicit activities that are best founded with cash.

Mobility — in a digital wallet you can potentially carry on all your assets and move them worldwide.

Cheaper & faster — it is the first financial network where remittance and settlement occur within the same network in almost real-time. Remit money and settle payments are cheaper and faster.

Superior Operations — this translates in terms of operations management in a huge decrease of complexity, streamline processes, reduce costs, increase of efficiencies, and instantaneous go-to-market reach.

More secure — due to the combination of capabilities like asynchronous cryptographic functions, digital signature that sign, time stamps the transactions, the immutability of the ledger, consensus mechanism that randomizes the block of transactions executed, and distributed system with no single point of failure.

Read the entire Article on Medium https://shorturl.at/imqLZ

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