Why should institutions integrate DeFi into their financial products?
Despite the collapse of the cryptocurrency market at the end of May 2022, DeFi services continue to be in demand by long-term users. Financial institutions and banks need to prepare for the growing demand for DeFi services and should consider gradually implementing DApps in their products. And there are several reasons for this.
Decentralized finance is an ecosystem of traditional financial services on the blockchain. This is defined by its open, permissionless and trustless access: anyone with a crypto wallet and an internet connection can access DeFi services, such as exchanges, lending protocols, deposits, insurance, etc without counting on the trust of another person. But who is interested in DeFi services?
What is the DeFi consumer market?
DeFi is available to anyone with an internet connection, which currently has 4.6 billion users worldwide, potentially solving the problem of financial inclusion. According to the World Bank, more than 1.7 billion people in the world do not have access to banking services, of which 1 billion have mobile phones. Therefore, through decentralized technologies, these people could have the opportunity to access loan, deposit and insurance services through the online network.
However, in addition to Internet users, potential customers of DApps are also users of financial applications. According to US investment firm Grayscale, as the DeFi ecosystem matures, more and more financial applications are moving to crypto protocols, and this is the largest user base DeFi can attract. .
Demand for DeFi is growing
Even if the situation in the crypto market is unfavorable in the short term due to events such as the collapse of the ecosystem stablecoin Terra and its native crypto LUNA, crypto assets have shown their ability to recover at long term. And that goes for the DeFi market as well.
According to a recent report by Andreessen Horowitz, the value of the DeFi market has grown from near zero to over $100 billion in less than two years. And currently, the DeFi market capitalization reaches $112 billion.
The recent statement from S&P Global Ratings on the creation of the Decentralized Finance Group in response to increased investor demand also reveals the outlook for DeFi. The company said, “S&P Global Ratings recognizes that decentralized finance is increasingly transforming capital markets, including broadening the spectrum of market players, creating new asset classes and developing new capabilities in the market. ‘execution of financial transactions’.
Therefore, if financial companies do not think about their presence in the world of decentralized applications, such inaction threatens the loss of customers. Why did banks and financial institutions start buying digital assets in 2020 and 2021? Because the company’s customers and its shareholders have seen a strong demand for cryptocurrencies and the benefits it brings.
As we can see, people are the main driver of DeFi adoption. People will want to get rid of their debts and earn more money, which creates a demand for investing in cryptocurrencies and using DApps. This is why companies should consider integrating DeFi into their financial products today, as they already have a pool of customers ready and willing to use new services.
On consumer behavior
At the moment, banks don’t need to develop DeFi protocols – they just need to provide access to this ecosystem to allow users to use exchanges and save their money. For example, customers want to deposit through the DeFi protocol so that people can borrow their money and in return receive interest on their deposited funds.
But many people do not know how to access these platforms and services. After all, when a sales manager in a store thinks of money, they first think of a bank or some neo-banking apps. They would ask why they don’t have the option to put money into the DeFi protocol and conditionally receive 15% per year in one dollar instead of 0.5%, which the traditional bank provides. And 14.5% is a significant difference, so customers will want access to these financial products.
People want to use these technologically advanced services through the reputable banks that are already known because it provides a sense of security. customers tend to trust long-established, well-known brands because they’ve been around for so many years. Often customers will want to get loans easier and faster than banks, and many don’t want to deal with providing proof of income and navigating other bureaucracies. Therefore, companies must offer alternative financial products and determine for themselves how their centralized services are better than decentralized ones.
The advantage of banks is that they can lend money to a customer just by relying on the person’s name, this has been seen more recently with banks lending billions to Elon Musk. But for the majority of people, it still requires a variety of documents from the client, such as a contract with an employer, credit history, etc. The advantage of decentralized finance is that the only thing clients need is to put digital collateral. which has a value to take out a loan. And centralized companies should assess these benefits, where they can earn more, where less, and how they can invest their profits in such hybrid services.
A recent and successful example of licensed financial institution adoption of DeFi is the case of JPMorgan Chase & Co using blockchain for collateral settlements in traditional financial asset trading. In fintech, this was seen with Wirex and their DeFi product, X-accounts, which was used by over 100,000 users in the first six months of launch. This is also seen with the NEXO crypto card and their crypto lending services. In fact, all of these fintech services seem to customers as familiar as online banking, but under the hood, all of these operations are performed within the DeFi ecosystem.
In 2021, analysts at S&P Global Ratings pointed out that ignoring the DeFi trend could lead to a wake-up call for financial companies in the future. Additionally, in their view, financial services customers can see the benefits of blockchain solutions and redirect some of their funds to DeFi products. Banks should consider the benefits of using smart contracts to complement existing products and services to increase efficiency, as well as using new revenue streams to engage their customer base more deeply. This is why there is a need for financial firms to consider providing customers with access to the DeFi ecosystem if they wish to be able to expand their services and meet the growing customer demand for DApps. This may be the next big step towards mass blockchain adoption.
To be clear, not every financial institution needs DeFi products, but those who want to stay in the market and have a large enough user base to have a strong voice from customers will need to implement financial services. decentralized for their products to keep pace. with the ever-changing economic system.