Impact of blockchain and decentralized finance on lending

Banking CIO Outlook | Tuesday 30 May 2023

Current financial transactions probably arose from the need for a standardized method of verifying the identity of individuals and businesses, thereby promoting trust between the parties.

FREMONT, CA: Blockchain technology offers new approaches to solving these lending problems. DeFi, a radical new decentralized financial system, will be unlocked by blockchain technology, hailed as the next World Wide Web-like game changer for online banking. The primary distinction between DeFi and conventional services is the “They” component, where services exist in a decentralized manner without an intermediary. The peer-to-peer model could significantly change the current state of financial services. The existence of peer-to-peer (P2P) financial transactions predates the development of community banking.

A blockchain is a shared ledger by definition, and a shared ledger can be global in scope. The system that delivers transactions’ necessary replication and immutability requires geographically dispersed nodes that are not controlled by a single entity. That means global users can access DeFi applications operating on a worldwide network. It is a marketplace where participants can trade at any time, giving lenders access to a worldwide clientele and allowing them to explore new lending opportunities. DeFi applications aim to leverage these features to facilitate new types of financial transactions.

A secure, virtual, global network that can cross borders and regulatory regimes. Because of online-only transactions, the time it takes to make lending decisions is drastically reduced. Traditional methods of conducting due diligence, which can take weeks to complete, need to be revised for this market. The financial industry is used to requiring service providers to register and follow local and regional regulations. The fact that financial service providers can extend their services beyond traditional geographic boundaries is positive, but compliance and regulatory requirements can increase exponentially.

The combination of Blockchain and DeFi will result in financial transactions involving a new class of digital assets. As the tokenization of goods and services in the “metaverse” environment expands, lending will introduce a new set of collateral that can be instantly authenticated and evaluated on the blockchain and thus used as collateral. A further Blockchain concept involving the maintenance of a digital “chain of custody” will help develop new security management techniques. The ability will necessitate a new approach to lending contracts.

Blockchain and DeFi leverage smart contracts that can incorporate a lot of intelligence and measurement into the contract, enabling predetermined, automated actions based on the size and terms of the contract. P2P transactions can only occur with the applicable guarantees of having trusted clearing houses or many intermediaries. Blockchain technology is rapidly maturing into a viable platform poised to significantly change the financial sector. Blockchain applications will continue to exist. From the financial industry’s future perspective, it is wise to understand and adapt to maintain market relevance.