Today’s financial climate – strained by the ‘Great Resignation’, outdated central banking policies, artificially restrained interest rates, and other factors – has shaken confidence worldwide in major financial institutions.
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
One powerful alternative is decentralised finance, or DeFi – an umbrella term for financial services powered by blockchain infrastructure. With DeFi, consumers can do most of the things that banks support – earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and more – albeit in a smoother way as it does not require paperwork or a third party.
DeFi has been gaining traction, fueled by the fact that it reduces human error through smart contracts, provides access to markets from anywhere at any time with an internet connection, and cuts out intermediaries. In essence, DeFi turns money into a programmable and interoperable protocol, akin to what earlier versions of the web did to digitise information and content.
While DeFi is a relatively recent trend, the amount of value locked up in DeFi protocols has grown to more than $200 billion, with trading volumes reaching almost $100 billion per month. The DeFi ecosystem itself is rapidly expanding both in terms of diversification from Ethereum to multiple blockchain infrastructures (e.g. NEAR, Solana, Polkadot, and Avalanche) as well as the emergence of new layers that replicate the features of centralised finance (lending, payments, and marketplaces) or support brand new use cases.
The venture world is actively embracing DeFi, as the past months have seen an uptick in DeFi unicorns – such as Anchorage (asset custody and governance), Fireblocks (embeddable APIs for token storage and digital asset operations), and Lukka (back-office platform for DeFi auditing).
DeFi meets fintech/insurtech and vice versa
Established fintechs and insurtechs are already beginning to harness DeFi and bring its functionality into their consumer-facing brands. Fintechs have been key drivers in the development of banking alternatives, offering customers new ways to pay and manage their money. Insurtechs have done the same by leveraging technology to provide better customer experiences. DeFi is the next logical step, especially because fintechs and insurtechs can seamlessly weave DeFi functionality into their existing user interfaces, making it more approachable and consumer friendly.
At the same time as fintechs and insurtechs are encroaching on DeFi platforms by incorporating decentralised functionality into their apps, new DeFi entrants are trying to dislodge neobanks and challenger insurers with differentiated products that leverage the blockchain.
For instance, several projects, including Juno, Dharma, Linen, and Outlet, are launching DeFi neobanks. Their goal is to provide users a high-yield account for savings that competes with cash accounts of fintech start-ups like Wealthfront and neobanks like Monzo. This is enabled by providing a simple alternate 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 even broader opportunities beyond just the decentralisation of monetary flow.
These opportunities will be further fuelled by Web3. Leveraging blockchain infrastructure, Web3 can offer open, decentralised database and compute layers as opposed to siloed servers or cloud instances. As users cruise the internet and use financial applications, the data from those interactions no longer solely lives on that single application’s server. It’s recorded on a shared and publicly accessible ledger.
As a result of open, 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 back in favour of the consumer. The ability for individuals and businesses to transact with entities across the globe––free from interference by central parties––sets the stage for a robust economic ecosystem online. This is particularly notable for content and entertainment creators, to whom Web3 offers novel and powerful ways to connect and engage with their audiences or fans.
There are also benefits for financial institutions. Consider insurers. Using blockchain’s distributed ledger technology, insurers can store and have access to a single claim’s information, negating the need to invest in gathering data from public and private domains.
Blockchain technology, coupled with distributed ledger technology, can also help banks reduce or eliminate the use of intermediaries. Specific areas in which banks can benefit highly from these technologies are payments, clearance and settlement systems, fundraising, securities, loans and credit, trade finance, and customer KYC and fraud prevention.
A final word
The financial services industry is undergoing major upheaval, spurred on by technology developments such as blockchain and distributed ledgers. What’s certain is that DeFi is here to stay, Web3 is right on the horizon, and financial services will never be the same.
Financial institutions of all kinds must start allowing access to DeFi functionality to consumers through their banking and insurance services. Otherwise, they’ll be left in the dust by DeFi platforms and challengers that see the future — and the future blends ease of use and convenience with the power of decentralised finance.
