The current financial climate – strained by the “Great Resignation”, outdated central bank policies, artificially restricted interest rates and other factors – has shaken confidence in major financial institutions around the world.
In 2022 and beyond, DeFi, fintech and insurtech will continue to converge even more
As a result, individuals and institutions are looking for new and innovative ways to preserve and generate wealth.
Enter DeFi
A powerful alternative is decentralized finance, or DeFi – an umbrella term for financial services powered by blockchain infrastructure. With DeFi, consumers can do most things that banks support – earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, etc. – but in a smoother way because it does not require paperwork or a third party.
DeFi has been gaining momentum, fueled by the fact that it reduces human error through smart contracts, provides access to markets from anywhere and anytime with an internet connection, and cuts out middlemen. Essentially, DeFi turns money into a programmable, interoperable protocol, similar to what earlier versions of the web did to digitize information and content.
While DeFi is a relatively recent trend, the amount of value locked up in DeFi protocols has reached over $200 billion, with transaction volumes reaching almost $100 billion per month. The DeFi ecosystem itself is growing rapidly both in terms of diversification from Ethereum into multiple blockchain infrastructures (e.g. NEAR, Solana, Polkadot, and Avalanche) as well as the emergence of new layers that replicate the characteristics of centralized finance (loans, payments, and marketplaces) or support new use cases.
The venture capital world is actively embracing DeFi, as the past few months have seen a rise in DeFi unicorns – such as Anchorage (asset custody and governance), Fireblocks (integrable APIs for token storage and digital asset operations ) and Lukka (back-office platform for DeFi audit).
DeFi meets fintech/insurtech and vice versa
Established fintechs and insurtechs are already beginning to leverage DeFi and incorporate its features into their consumer-facing brands. Fintechs have played a key role in the development of banking alternatives, giving customers new ways to pay and manage their money. Insurtechs have done the same by leveraging technology to deliver a better customer experience. DeFi is the logical next step, especially because fintechs and insurtechs can seamlessly integrate DeFi functionality into their existing user interfaces, making it more accessible and consumer-friendly.
At the same time as fintechs and insurtechs are encroaching on DeFi platforms by incorporating decentralized features into their apps, new DeFi entrants are trying to dislodge challenger neobanks and insurers with differentiated products that leverage blockchain.
For example, several projects, including Juno, Dharma, Linen, and Outlet, are launching DeFi neobanks. Their goal is to provide users with a high-yield savings account that competes with cash accounts from fintech start-ups like Wealthfront and neobanks like Monzo. This is made possible by providing a simple alternative banking interface that seamlessly blends crypto and traditional finance.
Web3: it gets even more interesting
In 2022 and beyond, DeFi, fintech and insurtech will continue to converge even more, causing an existential threat to traditional banks and insurers. The convergence of fintech and insurtech with DeFi will open up even broader opportunities beyond simply decentralizing money flows.
These opportunities will be further fueled by Web3. Leveraging blockchain infrastructure, Web3 can offer open, decentralized database and compute layers, as opposed to siled servers or cloud instances. As users browse the Internet and use financial applications, the data for those interactions no longer resides solely on that single application’s server. It is registered on a shared register and accessible to the public.
As a result of open and transparent transactions and interactions, essential financial functions such as credit scoring, identity verification and fraud prevention will be reconfigured, resulting in multiple benefits for consumers. Namely, Web3 shifts the balance of power in favor of the consumer. The ability for individuals and businesses to transact with entities around the world, without interference from central parties, paves the way for a robust online economic ecosystem. This is especially notable for content and entertainment creators, for whom Web3 offers new and powerful ways to connect and engage with their audience or fans.
There are also benefits for financial institutions. Consider insurers. Using blockchain distributed ledger technology, insurers can store and access information from a single claim, eliminating the need to invest in data collection from both public and private domains.
Blockchain technology, combined with distributed ledger technology, can also help banks reduce or eliminate reliance on intermediaries. Specific areas where banks can greatly benefit from these technologies are payments, clearing and settlement systems, fundraising, securities, lending and credit, trade finance, customer KYC and fraud prevention.
One last word
The financial services industry is undergoing major upheavals, spurred by technological developments such as blockchain and distributed ledgers. What is certain is that DeFi is here to stay, Web3 is on the horizon, and financial services will never be the same.
Financial institutions of all kinds need to start allowing consumer access to DeFi functionality through their banking and insurance services. Otherwise, they will be left in the dust by DeFi platforms and challengers who see the future – and the future combines ease of use and convenience with the power of decentralized finance.