The 2020 version of DeFi looked like a radical and frankly weird alternative to legacy banking. But in 2021, we might start moving to DeFi v.2 – one that banks and corporations can embrace. However, it will be very different from the sushi swaps and yield farming crazes that we've seen so far, with bank-friendly projects like Cryptoenter taking the lead.
'DeFi as the destroyer of banks' is the wrong way to look at things
In the minds of DeFi enthusiasts, the relationship between decentralized finance and banks is all about disrupting, replacing and even destroying legacy finance. But it doesn't have to be this way: banks vs. DeFi is very different from the horse carriages vs. motor vehicles contest a century ago. In fact, there are many ways that banks and corporations can profit from offering DeFi services:
- Serve customers across the globe without opening international branches;
- Send money instantly and almost without fees or corresponding banks (borderless liquidity);
- Earn a fee on every P2P loan, trade, and asset conversion;
- Issue digital coins to facilitate customer transactions;
- Get ahead of less digitized rivals in the competitive banking space
In a recent interview, director of digital assets at IBM Nitin Gaur said that “financial institutions should understand [DeFi] because it has the potential to (…) take over and subside (…) the existing business models”. IBM itself will probably play a major role in the process: for example, in January 2020 it issued a $120,000 grant to Smart Block Laboratory – the creator of Cryptoenter, a full-stack digital banking solution. The new platform can be integrated with any bank, exchange, or e-Commerce business to offer loans, payment processing, crowdfunding, and more.
Cryptoenter CEO: DeFi must abandon Ethereum
Compound, Uniswap, Aave, Maker – all the DeFi biggies run on the Ethereum blockchain. But ironically, Ethereum may be the biggest hurdle on DeFi's path to adoption by businesses and financial institutions. As explained by Pavel Lvov, CEO of Cryptoenter:
“No bank in its right mind will adopt a system in which fees and processing times are unpredictable. You can't say to your B2B or even B2C customers, 'Sorry folks, the network is overloaded, so you'll have to pay $5 per transaction today and wait about an hour'. That's why Ethereum is unusable in the corporate environment. The fact that all big DeFi projects use it due to the fact that so many devs work with Ethereum.
At Cryptoenter, we chose Hyperledger Fabric, because it allows for very high speeds (up to 20,000tps) and plug-and-play consensus. On top of it, we built our own Rubicon Blockchain that can enable any bank or business to offer DeFi services. Currently CryptoEnter is the world's only DeFi platform that runs on Hyperledger and IBM Cloud, so I believe we'll have the first-mover advantage here. We've already signed up SKS-BANK (CREDIT BANK OF MOSCOW) – a well-known Russian bank.”
Ripple is a great system – but it's not the (only) answer
When one thinks of blockchain applications in traditional finance, Ripple is the first thing that comes to mind. True, RippleNet allows banks to send money across borders in seconds at a fraction of the cost of regular transfers, but it's not really DeFi - for two reasons:
- RippleNet is aimed at internal institutional use. Banks use the system to interact with each other, but they don't offer it as a service to their retail customers. In other words, you as a regular bank account holder can't get immediate access to RippleNet and send remittances over blockchain to your family abroad;
- Ripple's scope is mostly limited to transfers, while DeFi is a much wider concept: it includes lending, currency exchange, retail payments, investments, and much else.
Pavel Lvov concludes:
“If we want to convince financial institutions that they need DeFi, we need to offer all-in-one solutions. It's much easier for a bank executive to sign up for a system that enables five different services than for five DeFi products that enable just one service each. That's why we focused on integrating as many DeFi opportunities into our platform: from P2P lending to a social network for investors. You only need to plug in a single product to become a full-scale DeFi hub, even if your business had nothing to do with blockchain before. Our efforts are paying off: we already have over 15,000 registered users. ”
In the past 12 months, the amount of assets locked in DeFi has skyrocketed from $650m to $12.4 billion. Banks can't ignore a market that has grown 20x in a year – and they won't. But we have to keep things in perspective: if all of DeFi were a bank, then its $12bn in assets would land it in the second hundred of the US list. On the scale of global finance, DeFi is still tiny – so it's naive to expect that it will destroy or replace traditional banks. Instead, it has to become respectable enough to work with them.