DeFi will disrupt banks

Mark Cuban, the billionaire investor who is bullish on cryptocurrency and blockchain, has been telling CNBC that DeFi apps will challenge the traditional banks. Moreover, he believes that if banks weren’t so slow to embrace change, then they wouldn’t be facing this issue.

He particularly enthusiastic about the lending and borrowing aspects of DeFI. He said, “It’s a hassle to borrow money from a bank, and the foundational DeFi benefit is that it simplifies borrowing for personal purposes.” It also “allows anyone with funds to be a lender as well,” which is another plus.

As many of you will know, DeFi applications aim to recreate the traditional financial system and make it more accessible to a wider customer base. They are cryptocurrency based and the majority run on the Ethereum blockchain. Through DeFi lending, users can lend their cryptocurrency, just as a traditional bank does fiat currency, the difference being that the person lending the crypto earns interest on it.

In the traditional banking world, when a bank makes a loan, it is using the liquidity available from all the accounts it manages, yet none of the liquidity providers reap any rewards, only the bank does. DeFi changes that.

Furthermore, with DeFi, the barrier to entry is low for the borrower. The opposite is true for traditional banks. As CNBC says, “In most cases, the only requirement to take out a DeFi loan is the ability to provide collateral with other crypto assets.”

Cuban said, ″[B]usinesses, decentralized or otherwise, tend to benefit when they offer customers the path of least resistance to get what they want and/or need.” He added an important point: “DeFi is not monolithic. It’s competitive. It will evolve to meet customer needs.” Banks, it appears, are not doing that.

And yet they could have. On this subject, Cuban commented, “Banks could have simplified/automated to the point that DeFi wasn’t needed. They didn’t. They are so stuck in legacy [operations] they are disrupted by simple fintech.” 

Although banks are averse to change, DeFi will not wipe them from the face of the earth, but DeFi applications will still disrupt the traditional space.

Of course there is a downside with DeFI. For example, when you use a DeFi app, there’s no regulations or insurance in place, and “due to the volatile nature of cryptocurrency, investors would need to be comfortable with large swings in price.”

Looking ahead, Cuban predicts the “big players” in DeFi will “welcome regulation” since it will “allow the industry to grow and still have a Wild West aspect,” he said.

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