Developed as an alternative to traditional financial systems, decentralized finance (DeFi) replaces institutions with applications. DeFi blockchain projects, however, also play critical roles in the finance and banking industry. Organizations looking to the future can leverage blockchain for decentralized finance to support and secure core banking activities and offerings.
So what is DeFi, and how does it work? In this article, we explore blockchain for decentralized finance to determine how DeFi can help your firm compete in new marketplaces while securing existing activities.
What Is Decentralized Finance?
Decentralized finance is an emerging financial technology built on public blockchain infrastructure, known as distributed ledger technology (DLT). The National Institute of Standards and Technology (NIST) defines blockchain as a “collaborative, tamper-resistant ledger that maintains transactional records.”
DeFi is an umbrella term applying to many innovative financial services. DeFi consists of several components:
- Software
- Stablecoins
- Security protocols
- Hardware
The purpose of blockchain for decentralized finance is to give anyone with an internet connection access to financial services regardless of location. To that end, Nasdaq highlights two DeFi goals:
- Increase financial services access
- Reduce transaction times.
Understanding the DeFi Blockchain Connection
ZDNet emphasizes that “no one person created the concept of decentralized finance.” Most DeFi services, however, use the Ethereum network, co-developed by programmer Vitalik Buterin (and several others) in 2013. Ethereum is a blockchain that provides several functions.
Unlike with Bitcoin, a well-known cryptocurrency, programmers can build other blockchain applications, called decentralized apps (dApps), on top of Ethereum’s code. These applications are part of a digital economy, allowing users to complete transactions without involving financial institutions.
Blockchain-based banking and financial applications include cryptocurrency products, such as loans, savings or investment accounts. Consumers often select non-traditional services, like decentralized and centralized exchanges or digital wallets, because they have more control over their digital identity and appreciate the frictionless customer onboarding experiences.
The security of blockchain infrastructure makes it ideal for financial services. Crypto exchanges, digital wallets and platforms, however, are vulnerable to theft or compromise, just like traditional online banking services. Institutions can enter the DeFi arena securely using a portable Know Your Customer (KYC) blockchain solution.
Solving Challenges With Blockchain for Decentralized Finance
Financial leaders face increased competition from digital-native fintechs. But security and compliance remain top concerns. Blockchain for decentralized finance helps conventional institutions explore the emerging role of crypto in banking. Since blockchains are immutable, malicious parties can’t alter transactions.
At the same time, the industry must comply with the Know Your Customer (KYC) process for Anti-Money Laundering (AML) regulations. Fortunately, a robust customer acceptance system like Instnt helps financial organizations break into cryptocurrency without putting their reputation on the line.
Instnt Access™ relies on the hyperledger blockchain, which is flexible, confidential and resilient. Hyperledger supports decentralized identifiers (DIDs), allowing banking customers to register just once and subsequently sign in with one click. It can also handle around 2000 transactions per second, compared to Ethereum’s 20, enabling the near-instant experiences consumers expect.
Financial institutions partner with Instnt, a digital onboarding and identity verification provider, to protect assets and their reputation. Your organization can dip its toes into cryptocurrency with the reassurance that Insnt will provide a zero fraud liability guarantee for each good customer accepted.
Reduce Fraud With DeFi Crypto Services
Cryptocurrencies and blockchain for decentralized finance may produce seismic shifts in the global financial system. Is your organization ready to compete? Embrace crypto offerings and deliver a remarkable customer experience with a customer acceptance platform.
Instnt, the leader in fraud protection and prevention for digital customer onboarding services, provides up to $100MM annually in fraud loss insurance while streamlining customer identity and verification processes. Start your free demo today to learn how to manage crypto risks and increase profitability.