Why Banks will offer DeFi to their Clients quite soon?

What is DeFi anyway? DeFi stands for decentralized finance and refers to a parallel financial system that is not controlled by governments, central banks and banks. Instead, various blockchain nodes, smart contracts or Decentralized Autonomous Organizations (DAO) serve as control instances.

While writing this article there are about 4M DeFi users worldwide.[1] The total amount of USD locked in DeFi also called “total locked value” (TVL) is around 110B[2]. This means that DeFi still has a fairly small share of the total crypto market, which currently stands at around 3T USD[3]. This is mainly due to the fact that buying cryptocurrencies has become very easy and does not require a wallet. Customers can login to an exchange or app and pay for cryptocurrencies directly, for example by credit card.

Decentralized finance (DeFi), on the other hand, is much more complex and requires some expertise and the use of one or more wallets.In addition, there were many hacks and scams in the DeFi area, especially in 2021. Nevertheless, many experienced users who have been active in crypto for several years use DeFi and can earn additional interest on their cryptocurrencies, but they are still early adopters.

However, in order for the number of DeFi users to continue to increase, the barriers to entry will have to fall and the regulatory framework needs to be established. After all, retail customers will not invest their money in financial products whose legal situation is completely unclear.
But why could DeFi be very interesting for these customers? The reason is that banks currently pay very low interest rates, but in the decentralized financial system, high to very high interest rates can currently be generated.

Why can DeFi earn higher interests than banks?

The fact that high yields can be achieved in the decentralized finance DeFi space is the result of several factors. Unlike banks, DeFi platforms have a great interest in attracting new customers and therefore pay out high interest rates to be attractive for them. DeFi platforms also cannot access a central bank to raise capital, and instead rely on liquidity providers, for example. For the liquidity providers, therefore, an incentive must be provided through interest rates. Another reason is that banks have to spend a lot of money on their IT infrastructure, but DeFi providers can rely on blockchain technology and need little infrastructure. In addition DeFi projects are usually managed by very small and agile teams, which also results in low costs. Banks, on the other hand, usually have a huge number of employees, a branches structure, a board of directors, stakeholders, regulatory and other costs. DeFi platforms can pay out more interest on deposits due to the low operational costs.

Why will banks offer DeFi services soon?

Since DeFi is much more agile and can offer more attractive products than today’s financial system, shouldn’t banks be afraid of it and fight it? Well, decentralized finance won’t “automatically end banking” because “banks aren’t stupid,” but DeFi applications will still disrupt the traditional space predicts Billionaire Mark Cuban.[4] So it is more likely that banks themselves will want to get involved with the technology and use it for their own benefit.

A good example for this is the ING Group. The ING is a global bank with a strong European base with around 57,000 employees and more than 38.4 million customers, active in over 40 countries. At the Singapore FinTech Festival Annerie Vreugdenhil, Head of ING Neo and Chief Innovative Officer of ING, announced a current DeFi project of ING. ING Group partnered with the Dutch financial regulator AFM to work on a DeFi P2P lending project.

That ING Group wants to become part of the crypto ecosystem has been clear at least since the publication of the white paper “Lessons Learned from Decentralised Finance” in spring 2021. In it, ING surveyed DeFi properties, experimented with the AAVE protocol, and concluded that the “best” of centralized and decentralized finance offerings could be achieved if they would cooperate.[5] The combination of DeFi and traditional banking is also described as CeDeFi - centralized decentralized finance.

Just imagine the shock that will go through the banking landscape when a few banks offer attractive DeFi products within one to two years. Banks could, for example, offer interest rates of 10% or more, which currently seems impossible without DeFi. Banks that are still many years behind the development and blockchain technology will have problems to stay in the market in the long run, if some banks offer much more attractive products. There will be a lot of pressure to adapt quickly to the new situation and also to offer new blockchain-based products.

How does Paycer fit into this scenario?

Well, the Paycer team is developing a bridge protocol to aggregate DeFi and crypto services and combine them with traditional banking (TradFi). This will allow Paycer to offer new user-friendly and profitable financial products. In a nutshell, Paycer is working on a technical solution to make DeFi more accessible and intentionally wants to cooperate with banks and financial service providers. The Paycer team places great focus on the clean legal design of its products. This will make Paycer a reliable partner for banks in the future, and banks that are already gaining initial experience with DeFi will benefit from a partnership. But also banks that have totally missed the boat on decentralized finance will be happy when Paycer offers them DeFi as a B2B product.

But Paycer will also be active in the retail business itself and offer attractive DeFi-based products to private customers. This will further increase the pressure on other banks to enter the DeFi market. In any case, there are exciting times ahead of us with regard to the financial system, which will affect everyone at some point in the future.

References:

[1] https://dune.xyz/rchen8/defi-users-over-time
[2] https://defipulse.com/
[3] https://coinmarketcap.com/
[4] https://www.cnbc.com/2021/09/23/mark-cuban-on-why-crypto-based-defi-will-disrupt-banks.html
[5] https://www.btc-echo.de/news/lending-protokoll-ing-group-lanciert-defi-projekt-129215/ (German)

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