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Should crypto take the experience of the big bankers for DeFi platforms?

11 Aug 2022 By : Sudeep Saxena
Southeast Asia’s Lar

What is the future of banking? How can you make money through money? The low-yielding climate globally is tempting both amateur and professional investors to put their money in high-yielding crypto banking products. 

In the times when everything is turning digital, from entertainment to means of communication, to banking and transactions, this digital currency market is like a parallel universe of banking, commerce, and investment, which is to be predicted to hold the potential of dramatically impacting the global economy and disrupting sectors. It can reshape banking as we now know and change how you and I borrow and save.

Looking at the current cryptocurrency projects, the banking sector is taking its time and not rushing to offer its consumers cryptocurrency-based products.

 Now the question arises, How are smarter yields and crypto lending mechanisms used by banks important to develop and maintain cryptocurrencies?

Though different platforms allow customers to borrow and lend crypto assets, deposition of digital assets to earn an income is becoming the most in-demand service.

In this rapid ever-changing environment, banks need to keep evolving and changing regulatory requirements to keep up with the pace.

Now the rapid expansion of the crypto market is extending into regular banking. Customers are drawn to cryptocurrency banking platforms by annual percentage yields (APYs) that are orders of magnitude larger than those offered by regular bank accounts, as crypto banks offer interest-bearing accounts, term deposits, credit cards, collateralized loans backed by crypto asset deposits, and other services similar to regular banks' offers, albeit at significantly higher interest rates/yields.

Typically, newer crypto projects with higher risks and specialized currencies provide the largest profits. And in this new age, the appeal of generating enormous profits in a low-yielding global market is also drawing widespread interest.

 Services for Custody-Customers can use the custody service to preserve unique cryptographic keys connected with accessing private wallets.

But how to simply set it up with professional assistance? Here banks can bring in new and inexperienced individual investors like you and me by offering technologies that encourage the use of cryptocurrency by telecommunications companies.

 And since we all know, any bitcoin transaction or custody service provided through crypto companies must follow KYC standards, which will aid in avoiding unwanted transactions, scams, or illegal activity. These KYC/AML regulations will assist banks and other financial organizations in tracking clients involved in cryptocurrency transactions.

 We all have concerns regarding security especially when it comes to newer investments. Well, banks can help to reduce cryptocurrency holders' security fears. Bringing cryptocurrencies under the control of banks will assist in the reduction of illegal transactions.

Can your payments and transactions occur considerably faster now? Well yes, if banks use public blockchains, similar to stablecoins, to speed up their payment process and utilize blockchain technology, settlements and clearance of processed transactions can happen considerably faster.

There is less trust in smart contract agreements as the transaction's success is decided by computer code rather than individual behaviour. In such cases, banks can increase trust by acting as trustworthy third parties.

Now have you heard these terms of liquidity farming or yield farming? No? Well, it is an investment technique for collecting interest and other rewards in exchange for lending or staking cryptocurrency. Yield farmers use complicated strategies to maximize returns and increase yields, such as transferring their cryptos between various liquidity pools or lending platforms, and continually seeking the pool with the greatest APY.

Users can borrow and lend any cryptocurrency on these DeFi services under the DeFi umbrella in the short term at programmatically calculated rates. According to a Harvard Business Review article, "practically, it replicates a strategy in traditional banking — a foreign currency carries trade — in which a trader wants to borrow the currency with the lower interest rate and lend the one with the larger return." The large yields offered by DeFi yield farming lead to significant dangers that are often ignored by inexperienced investors, making the related risk balance challenging.

The commercial banks lend out collected deposits and pay depositors a part of the gains as interest. On the other hand, Traditional banks are highly regulated and are required to protect consumer money. They must preserve reserves for bad loans and refrain from extremely speculative lending, which results in low returns on capital and, as a result, low yields on bank deposits.

Like traditional banks, crypto finance platforms pool crypto deposits to make loans and pay interest to depositors. They provide depositors/investors with incentives to provide stability in the crypto-assets market through staking, a method of securing cryptocurrency in exchange for rewards, and lending services. Crypto finance platforms are mostly unregulated, have no reserve requirements, and practice secretive financing, i.e., lending to unnamed third parties and institutions that can make risky bets to gain a higher return on cryptocurrency deposits.

As speculative trading in crypto assets can yield huge returns, there is a high demand for crypto borrowing. Primary borrowers include hedge funds that engage in leveraged trading, as well as market makers or exchanges that need crypto stability or want to lend to their trading clients. Fund managers and traders take advantage of market weaknesses to make highly profitable

bets on price differences between the crypto market and crypto futures. These traders pay huge returns on crypto loans to crypto banking platforms. The exceptional payments, less the crypto banking platform cut, pass to primary crypto holders as yields, substantially exceeding those available from traditional bank accounts. High yields are possible owing to market inefficiencies and growing demand for crypto borrowing for investment.

 Whereas decentralized finance is an alternative to the usual banking and finance methods used around the world. Unlike traditional banking, there is no central authority serving as a go-between for the sender and the receiver of funds. In some cases, this decentralization is associated with better privacy and lower transaction fees.

 The Blockchain network is the overwhelming favourite for a decentralized finance platform. The blockchain's "smart contract" feature is the explanation for this preference. A smart contract is a code-based agreement that executes itself if and when the terms of the agreement are met. A hospital, for example, can create a smart contract for patient data that is only accessible with a code issued to the patient. Every contract resides on the blockchain and can be traced if necessary.

Decentralized exchanges (DEXs), lending platforms, yield farms, stablecoins, and liquidity miners are some well-known DeFi applications. DEX crypto exchanges enable users to trade cryptocurrencies directly with one another. Three popular DEXs are UniSwap, Pancake Swap, and SushiSwap. When lending, lending platforms use smart contracts. Yield farming allows cryptocurrency investors to earn interest in their investments. Stablecoins are cryptocurrencies that are linked to an asset, such as the USD, in order to regulate it.

 

Another important question that you must know the answer to is,

What Is a Credit Monitoring Service and how will it aid in functioning in a DeFi space?

A credit monitoring service monitors borrower activity to notify consumers of possible fraud and changes in their creditworthiness. Credit monitoring services, for example, can protect against identity theft, which occurs when an individual's personal information is stolen and used for malicious purposes without the person's permission. When a credit card is stolen and used, a credit monitoring service should detect the various purchasing patterns and notify the credit card account holder.

 

Although credit monitoring services are primarily used to protect consumers from identity theft, they also track a consumer's credit report and credit scores. Identity theft-related criminal behaviour can range from making illegal purchases at retail or online stores using stolen credit card information. This global, peer-to-peer ecosystem along with enhanced tracking and security of smart-contract-powered apps that enable analytic lending, saving, yield farming, flash loans, trading, and other activities without the use of human intermediaries such as brokers, bank clerks, traders, and institutions such as banks or payment processors. The entire approval procedure for financial transactions is carried out using smart-contract algorithms built within blockchains.

 These factors do contribute and makeup in as one of the essential factors being routed in the DeFi sector where the control isn’t in the hands of the These financial intrinsic factors contribute largely towards the. Because thieves misuse this information without the victim's knowledge, such criminal conduct can be difficult to identify until long after it has occurred, at which point an individual's credit may be destroyed.

In the functioning of this the capital adequacy ratio (CAR), also known as the capital to risk-weighted assets ratio, measures a bank's financial strength by using its capital and assets.

The credit monitoring ratio is useful for tracking the behaviour in DeFi is very essential since the anonymous nature of the users and customers makes tracking its credibility of it more untrackable and untraceable.  It is used to protect depositors and promote the stability and efficiency of financial systems around the world. This could highly profit and safeguard the DeFi space and help in building and not toiling off the foundation that the DeFi space is built upon.

So the conclusion we draw is, that the DeFi segment of the crypto market has grown tremendously, and the present status of the DeFi industry In the last two years, going from about $31 billion to about 24 thousand crores in INR.

In April 2020 to almost $68 billion about 48 thousand crore INR in April 2021. However, the DeFi segment, like much of the crypto business, is a bit risky: the market dropped by more than the 31 billion USD mark in May 2021. Rapid drops in cryptocurrency prices and rising Ethereum transaction fees are two of the issues facing DeFi systems. 

Unauthorized hacking is another concern for the DeFi business. While overall criminality in the crypto market has declined, with the increase of the technology listed above and more secure cryptographic algos, the DeFi sector does sure look to be budding and it will become more mainstream as a form of finance after the current existing banking system.

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