When Satoshi Nakamoto, the father of Bitcoin and blockchain technology itself, envisioned a new decentralised world of finance, it probably wasn’t speculative investment in 10,000 NFT apes that he had in mind. He had bigger plans.
Decentralised finance (an umbrella term for emerging financial technology based on secure distributed ledgers known as blockchain) solves pain points experienced by finance operation teams worldwide. Solving these pain points can make a huge difference for businesses; improving profit margins by saving on fees, freeing up finance resource and unlocking new markets. We've identified the top four problems DeFi solve below:
1. High barriers to entry
Traditional finance has struggled to reach some remote parts of the world, leaving millions of people and a lot of businesses, without access to banking services. For businesses in reach of TradFi, strict KYC /AML checks, which help maintain the integrity of the traditional system, can be a blocker - banking systems are typically outdated and inflexible, and the paperwork takes a considerable amount of time and resource to complete.
The barriers to accessing decentralised financial services are much lower by comparison. DeFi, by its very design, is accessible to everyone worldwide, provided that you have access to the internet. And whilst licensed financial service providers like ourselves conduct KYC/AML checks, paperwork is significantly reduced through leading-edge technology and a more agile system ran by compliance experts, so we never give customers a 'computer says no' answer.
2. High costs
Payment rails Swift and SEPA are often costly, major banks can charge between 3-5% on a transaction via Swift. These fees can really add up for businesses, especially those that transact globally with customers, partners or suppliers.
Whilst the cost of using stablecoin on and off ramps depends on the blockchain used, the miners fees and overall volume and demand, the average cost of moving money through DeFi methods is considerably lower. The cost of transferring USDC, a stablecoin pegged to the USD, can be as little as 0.1%.
3. Lack of transparency around payments
Transparency, or lack thereof, is closely intertwined with the friction associated with cross-border payments, which are a frequent pain point for businesses. It's very difficult to find out the true cost of a service, and hidden fees are a prevalent issue.
One of the defining characteristics of decentralized finance systems is, all transactions, data, and codes on the blockchain are transparent to everyone. Such a level of transparency builds trust among users, as everyone in the network can; understand what kind of transactions are taking place, and the associated fees of each transaction.
4. Slow settlement speeds
Waiting for a large deposit to clear can be incredibly frustrating for businesses, delays have the potential to slow down general business operations such as; disrupting wage payments, impacting supply orders, and potentially making it harder to pay overheads on time.
By many traditional forms, settlement can take up to three days, despite the actual clearing transaction only taking a few seconds. DeFi applications can drastically decrease settlement times. Blockchain technology enables “instant” real-time settlement, eliminating waiting times, with the the aim of taking the settlement time from T+1 to T+0 (i.e., instantaneous).
Overall, whilst DeFi is still undergoing significant developments, the above provides undeniable evidence of its potential for adoption and disruption within corporate financial services. The only question is how and when will your business enter this new age of finance?