DeFi: blockchain bubble or banking alternative?

digital finance banking alternative

A joint industry study from Boston Consulting Group and has probed whether decentralised finance (DeFi) is a bubble ready to burst, or set to overcome growing pains and become a sustainable alternative to banks.

The DeFi movement aims to leverage decentralised networks such as blockchain to disrupt or transform traditional financial products operated by banks and other large financial institutions.

In the last year, the value locked into DeFi has increased 1500 percent to $US8 billion, according to DeFi Pulse, an analytics and rankings platform for the decentralised finance space.

Current challenges

However the report, ‘The Sudden Rise of DeFi: Opportunities and Risks for Financial Services’ tempers the anticipated potential of DeFi, assessing the current challenges facing the industry and the underlying technology.

The authors highlight several critical improvements crucial for its future growth and adoption beyond the fringes of financial society, including limited liquidity, security & smart contract risk and regulatory risk.

Financial inclusion potential

However, the report argues that the traditional centralised finance industry excludes an enormous proportion of the world from access to financial instruments, increasing the wealth divide. 

And that decentralised finance has the potential to bridge the gap and disrupt traditional finance by making money, payments and other financial services universally accessible.

“With this demand, DeFi is not necessarily a pure bubble about to burst,” the report states.  

“It might deflate once the hype subsides, but as globalisation progresses and the business ecosystem further shifts towards new-generation business models built upon shared governance and decentralisation, there will be a growing demand for solutions like DeFi which will provide new ways banking, trading and investing.

“Perhaps even setting the standard for economies to climb out of the shadows.”

Business must ‘understand impact’

Kaj Burchardi, Managing Director with BCG Platinion – a division of the Boston Consulting Group – says whether companies choose to embrace decentralised finance or not, they still need to understand its impact.

“Especially in payments, loans and exchange,” he says.

“By uncovering current levels of liquidity, charting the progress of regulation, and judging levels of risk – companies can continually assess whether services should be substituted for a more decentralised model.”