The global financial system is at a critical point. For a long time it was based on centralized institutions: banks, stock exchanges, regulators. These structures controlled all financial transactions and ensured stability and predictability, but they also created barriers – bureaucracy, high fees, and time consuming audits. With the development of blockchain technologies, there is an alternative: decentralized finance, or DeFi, which offers a completely different approach, where decisions are made not by banks and officials, but by algorithms and users.
The most surprising thing about DeFi is the speed of its development. While the traditional financial system took centuries to form, decentralized finance has become a multi-billion dollar industry in just a few years. In 2020, the amount of funds locked in DeFi protocols was about a billion dollars. Already in 2021, that figure has surpassed 100 billion. This is one of the most rapid transformations in the history of finance, comparable only to the emergence of the Internet and the spread of mobile payments.
Decentralized finance is based on blockchain and smart contracts. These are software algorithms that automatically fulfill the terms of transactions, eliminating the need for intermediaries. In such a system, you do not need a bank’s approval to get a loan, a stockbroker to trade assets, or a notary to finalize the transaction. Everything happens instantly, transparently and without unnecessary costs. Anyone with internet access can use DeFi’s services, regardless of citizenship, credit history or income level. This is especially important for countries with unstable economies and limited access to banking services. For example, in Venezuela, where hyperinflation is devaluing the national currency, many residents keep their savings in cryptocurrency and use decentralized platforms for money transfers and payments, because traditional banks are either failing to perform their function or are under strict restrictions.
Transparency is another key aspect of DeFi. All transactions are recorded on the blockchain and cannot be faked or hidden. In a traditional financial system, banks and corporations control the movement of funds, can block accounts, limit transfers, and manipulate rates and fees. With DeFi, there is nothing like that: users see the full picture of capital flows and interact directly with each other, without having to trust a third party.
But in spite of its obvious advantages, DeFi is still not devoid of problems. One of the main threats remains the absence of regulation. If in a traditional system depositors are protected by deposit insurance and banks are obliged to comply with financial regulations, in a decentralized environment the responsibility for the safety of funds falls only to the user. Any error in the code of a smart contract can lead to the theft of millions of dollars. This is what happened to the Poly Network platform in 2021, when a hacker cracked the system and extracted more than $ 600 million dollars. Later, to the surprise of everyone, he returned the stolen funds voluntarily, saying that he just wanted to show the weakness of the system, but this case showed how high the risks are in the unregulated space.
Another challenge is the high volatility of cryptocurrencies, on which most DeFi platforms are based. Sharp rate hikes can lead to unexpected losses, and stabilization mechanisms are still far from ideal. In addition, the technology remains difficult for the mass user. Whereas in a bank it is enough for a client to sign a contract, in DeFi it is necessary to understand the ways smart contracts work, to know how to protect their funds and minimize risks.
Despite this, decentralization continues to gain popularity. Large financial corporations and government agencies cannot ignore this trend. Already, banks are testing blockchain for internal settlements, and the Chinese government has launched the digital yuan, partially using elements of decentralized technologies. In the U.S., regulations are being drafted that could create a legal framework for integrating DeFi into the traditional system. Some banks are even beginning to offer customers access to cryptocurrency assets, something that seemed impossible a few years ago.
It is interesting that even the biggest financial experts are divided into two camps. Some believe that DeFi is a temporary hype, a bubble that will eventually burst, as happened with numerous dotcom companies in the early 2000s. Others, on the contrary, believe that we are at the beginning of a new era, where money will no longer be tied to national borders, and finance will become truly global and accessible to all.
It is likely that the future lies not in the complete abandonment of traditional finance or its displacement by DeFi, but in its integration. Perhaps we will arrive at a model where banks remain the guarantor of stability and blockchain technology provides transparency and automation.
While DeFi offers freedom but requires awareness and knowledge. Traditional finance offers protection but limits users. The question is not whether decentralization can replace banks, but how profoundly it will change them. We are living in a time when the financial system is changing in front of our eyes, and what form it will take after ten years depends largely on how much people are ready to accept the new reality.