Is DeFi really a threat to centralized finance?

[webtricks]

The application of DeFi as a lending/borrowing platform has some serious flaws and I doubt it could ever realize as a genuine debt market. The first problem is collateral type. Most of the DeFi lending platforms only accept collateral in ETH blockchain assets which are commonly ERC-20 tokens.

collateral-based lending is extremely limiting right now, but it's worth pointing out that in the future, asset tokenization could make defi significantly more useful.

let's assume that titles to real property, automobiles, boats, etc could be tokenized/digitized and precedent could be established where courts recognize these titles as legally binding. conceivably, this would enable defi platforms to extend services to the traditional mortgage and auto lending industries. this could be extended to anything where traditional certificate of titles are used today.

With the current model, DeFi will not able to integrate the 'tokenization of real assets' even if such on-blockchain asset is legally bound. Instead of working on P2P model, DeFi lending platform works on 'liquidity pool' model. Number of lenders together contribute to the pool which is then disbursed to the borrowers accordingly. Hence, there is no clear relationship between the buyer and the seller. It maybe possible that $40,000 I borrowed was contributed by 15 different lenders.

In such scenario, holding and liquidating asset would be impossible because custody of asset cannot be linked to a single individual.

So in short, DeFi model will only work if real value is on blockchain (like tokens) or value is backed by real value (assets created after staking tokens). In order to make tokenization of real assets possible, we will need a middleman who will first take custody of 'digital legally bound on-blockchain asset' on his ETH address. Then he will create another 'set of tokens' whose value will be equal to the value of digital asset less middleman's commission. Then these 'set of tokens' will be distributed to the lenders in ratio of their contribution to the particular loan.

Example: I am a borrower, I want to borrow $250,000 by giving my property having registry value of $320,000 as the collateral. I created smart contract and transferred the rights of my property to the contract address. 10 lenders contributed equally to my loan ($25,000 each) and transferred the amount to the pool' address. Then middleman created another smart contract. DeFi platform sent $250,000 from pool's address to the middleman's contract address. DeFi platform got back 10 TOKENS immediately on its pool address from the middleman's contract address which in turn was sent to each lender's ETH address. Middleman then transferred $250,000 from his contract to my contract address and immediately got my property's digital asset. Now my asset is locked on middleman's smart contract which could only be released once all 10 TOKENS are sent back to the contract address by the lenders.

This system could work out but still be labelled as 'centralized' because custody of property would still be in an individual's control (middleman) even if he won't be able to unlock it from his contract address without lender's permission.

[1715179166]

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[Ucy]

The application of DeFi as a lending/borrowing platform has some serious flaws and I doubt it could ever realize as a genuine debt market. The first problem is collateral type. Most of the DeFi lending platforms only accept collateral in ETH blockchain assets which are commonly ERC-20 tokens.

collateral-based lending is extremely limiting right now, but it's worth pointing out that in the future, asset tokenization could make defi significantly more useful.

let's assume that titles to real property, automobiles, boats, etc could be tokenized/digitized and precedent could be established where courts recognize these titles as legally binding. conceivably, this would enable defi platforms to extend services to the traditional mortgage and auto lending industries. this could be extended to anything where traditional certificate of titles are used today.

This system could work out but still be labelled as 'centralized' because custody of property would still be in an individual's control (middleman) even if he won't be able to unlock it from his contract address without lender's permission.

Perhaps, the custody of property should be in the control of multiple randomized reputable  people distributed across the globe to make this decentralized? I think the keys for accessing the property could be decentralized/distributed in this manner.
 I do not completely understand other part of your post. Just responding to clear the quote above^

[peterpanda]

The you think defi a a threat to the future of centralized finance? What's your opinion?

I don't see DeFi as a threat to the banks,because,at the end of the day,banks will simply buy and adopt DeFi technology(if they see potential in it).If there's no potential in DeFi,then this technology will simply die and nobody will use it anymore,just like how the ICOs died,back in 2018.
Seeing DeFi projects and banks as two opposite armies,which are going to war against each other is a big oversimplification.

Yes, there is no threat for banks as two are in different form. Actually people trust bank more than such kind of projects. Banking system will be continuing in future.

[Dragonfund]

The you think defi a a threat to the future of centralized finance? What's your opinion?

You really crack me up buddy
You mean something similar to the image below?
We need to clear one thing, centralized and decentralized finance comes with merit and Demerit

|	SN	|	DEX	|	CEX	|
|	Merit	|	no regulation, quick profit	|	regulations, profit takes time	|
|	Demerit	|	High risk and may loose all money	|	Low risk( except when there is economic trumoil)	|

We may have see another reforming of DEFI but I don't think the current one will have any significant against cex. The image below can't be a threat to centralized finance but to investors.

[figmentofmyass]

collateral-based lending is extremely limiting right now, but it's worth pointing out that in the future, asset tokenization could make defi significantly more useful.

let's assume that titles to real property, automobiles, boats, etc could be tokenized/digitized and precedent could be established where courts recognize these titles as legally binding. conceivably, this would enable defi platforms to extend services to the traditional mortgage and auto lending industries. this could be extended to anything where traditional certificate of titles are used today.

With the current model, DeFi will not able to integrate the 'tokenization of real assets' even if such on-blockchain asset is legally bound. Instead of working on P2P model, DeFi lending platform works on 'liquidity pool' model. Number of lenders together contribute to the pool which is then disbursed to the borrowers accordingly. Hence, there is no clear relationship between the buyer and the seller. It maybe possible that $40,000 I borrowed was contributed by 15 different lenders.

In such scenario, holding and liquidating asset would be impossible because custody of asset cannot be linked to a single individual.

i don't think we need to limit things to the current model or bother with liquidity pools. the example above could easily apply to a p2p transaction between two people---ie borrower and title holder. in other words, replacing banks as traditional mortgage lender. as long as the mortgage is in good standing, the title could remain "locked" by the smart contract. if default occurs, it would be released to the lender's possession.

In order to make tokenization of real assets possible, we will need a middleman who will first take custody of 'digital legally bound on-blockchain asset' on his ETH address.

i'm pretty sure it's trivial to do this without custody. the only problem IMO is that we need some sort of trusted third party for attestation purposes, so that both parties can reliably expect the tokenized title to hold up in court.

[Kong Hey Pakboy]

The you think defi a a threat to the future of centralized finance? What's your opinion?

I don't see DeFi as a threat to the banks,because,at the end of the day,banks will simply buy and adopt DeFi technology(if they see potential in it).If there's no potential in DeFi,then this technology will simply die and nobody will use it anymore,just like how the ICOs died,back in 2018.
Seeing DeFi projects and banks as two opposite armies,which are going to war against each other is a big oversimplification.

Yes, there is no threat for banks as two are in different form. Actually people trust bank more than such kind of projects. Banking system will be continuing in future.

Decentralized finance truly has no threat to centralized finance, such as banks. Even DeFI is the best alternative financial solution because people will definitely trust banks more than Defi due to the government's authorization, and it existed a long time ago. But as we continue to develop the same as technology, more people will use DeFi.

[int03h]

On a level playing field, yes. If developers build truely decentralized applications on Defi and regulators do their job well/legally/morally,  CeFi or centralized finance will cease to exist and true DeFi will flourish. I think this will likely happen in a Just Society with people strongly following Just Law.

Humans are still greedy and it will be difficult for them to reach the absolute level of creating an alternative to traditional centralized finance. The infrastructure of blockchain is growing stronger, maybe in the future, we will have new and better DEFI projects but the pump and dump phenomenon will continue to happen at DEFI.
We need more attention from developers and more money from investors to make the crypto market, DEFI strong enough to escape manipulation and organic growth.

[Salamstar]

Decentralized financing, which moves the digital currency market from speculative and project markets to markets that approach real life, but in a decentralized manner. I think it will be a threat to central finance because it is a more flexible and transparent financial system. Currently, there are limitations on technology but in time, laws will adapt to the changing financial situation and DeFi's place in the world will become clearer.

[Findingnemo]

Bank offers non collateral loans like credit card, persona loan, automobile loans,etc which is never possible with decentralized finance so I don't think people are going to choose decentralized finance over banking on these kind of loans.Which means defi can co-exists along with centralized banking system which may give healthy contribution to the consumer over the profits on one side.

[teosanru]

The you think defi a a threat to the future of centralized finance? What's your opinion?

Not at all. Atleast not at the type of pace it's currently at. Once again just like 2017 this is also becoming a scam movement and nothing else. Yes it is a great feature but real life lending isn't merely done for digital assets. This model would terribly fail when it comes to digital assets because there can be no enforcement. Moreover I hope defi also don't end up with a bad image like ICOs ended. Because once everyone thought that IPOs are over and future is ICOs and no good company does direct coin offerings now.

[DooMAD]

The you think defi a a threat to the future of centralized finance? What's your opinion?

Not at all. Atleast not at the type of pace it's currently at. Once again just like 2017 this is also becoming a scam movement and nothing else. Yes it is a great feature but real life lending isn't merely done for digital assets. This model would terribly fail when it comes to digital assets because there can be no enforcement. Moreover I hope defi also don't end up with a bad image like ICOs ended. Because once everyone thought that IPOs are over and future is ICOs and no good company does direct coin offerings now.

I don't think it's the pace that's the problem, but the direction.  The focus is on all the wrong places.  People care more about the speculation than they do about the technology.  Everyone needs to stop treating it like it's a new way to make money.  Just sit back and watch while the legitimate coders make the basic concept work as intended.  Avoid all the projects that are churning out worthless tokens for no real purpose.  Those are just a waste of everyone's time and effort.

DeFi isn't going to become a success by people buying and selling useless tokens.  It's going to happen by finding a viable use-case and providing benefits that centralised finance is unable to offer.  So just keep your distance for now and wait until it functions properly and there's an actual point in using it.

[amishmanish]

DeFi was supposed to be a threat to traditional finance but it has become a kind of conduit for centralized finance to find a way to transform the crypto scene. The crypto crowd is slowly getting involved with the financial. engineering that defines traditional finance. Derivatives, Risk-weighted imvestments and what not. Traditional finance is finding a way to scale its speculative products to the smallest of the investors.

[grabpopcorn536]

DEFI has a small capitalization compared to traditional finance. They are relatively new and do not have the same legal basis as traditional centralized finance.
When everyone is ethical, qualified enough to develop DEFI projects well enough, that is a current financial threat. It will take a while for this to happen, perhaps we will start with the CBDC digital currency issuers.

[tvplus006]

DEFI has a small capitalization compared to traditional finance. They are relatively new and do not have the same legal basis as traditional centralized finance.
When everyone is ethical, qualified enough to develop DEFI projects well enough, that is a current financial threat. It will take a while for this to happen, perhaps we will start with the CBDC digital currency issuers.

This threat to the banking sector will only become noticeable when the majority of people will be able to use cryptocurrency and will have an understanding of how decentralized Finance works. And currently, it is much easier for an ordinary person who is not connected with the cryptocurrency market to contact a traditional Bank.

[zasad@]

DEFI has a small capitalization compared to traditional finance. They are relatively new and do not have the same legal basis as traditional centralized finance.
When everyone is ethical, qualified enough to develop DEFI projects well enough, that is a current financial threat. It will take a while for this to happen, perhaps we will start with the CBDC digital currency issuers.

This threat to the banking sector will only become noticeable when the majority of people will be able to use cryptocurrency and will have an understanding of how decentralized Finance works. And currently, it is much easier for an ordinary person who is not connected with the cryptocurrency market to contact a traditional Bank.

https://www.forbes.com/sites/billybambrough/2020/05/30/jp-morgan-bitcoins-biggest-enemy-suddenly-appears-to-be-going-all-in-on-crypto/#7a4c3a3523a6
JPMorgan—Bitcoin’s ‘Biggest Enemy’—Suddenly Appears To Be Going All In On Crypto

Banks have already realized that if it is impossible to fight against such an enemy, then bitcoin can be bought and managed.
There will be services like PayPal, where you can buy bitcoin or other cryptocurrencies, but you can no longer transfer funds to your decentralized wallet.

[ChiBitCTy]

I work in finance so I've paid especially close attention to the "Smart Contract Finance" bullshit.  I looked in to DeFI and other types of coins/tokens in this "Smart Contract Finance" world.  I did a write up under scams where I go in depth about his this is an unsustainable bunch of nonsense and it isn't real.  Smart Contracts are highly limited and offer to upside to what computer programming can already do and has been able to do for some time.  I would LOVE for someone to prove me wrong, but that's yet to of happened.

https://bitcointalk.org/index.php?topic=5282731.msg55401331#msg55401331

[Johnyz]

The you think defi a a threat to the future of centralized finance? What's your opinion?

No its not because there’s no big changes in the market right now despite of having the presence of DeFi and still CEX are being used by many traders and investors. If DeFi keeps on working as a hype project and very few are delivering good service then I think its hard for a DeFi to be on top and still people’s choice is CEX.

[Twentyonepaylots]

On a level playing field, yes. If developers build truely decentralized applications on Defi and regulators do their job well/legally/morally,  CeFi or centralized finance will cease to exist and true DeFi will flourish.

It won't cease as long as there are people who is not comfortable using Defi, or even trust it as much as they do with centralized finance. And to be honest, having decentralized finance is hard it's like letting people do whatever they want with their money they can even evade taxation with it. Defi will only be a threat if wealthy people starts to quit using centralized financing which I highly doubt.

I think this will likely happen in a Just Society with people strongly following Just Law.

I don't think so, I guess it's too early to think of this way. Let's see.

[grabpopcorn536]

This threat to the banking sector will only become noticeable when the majority of people will be able to use cryptocurrency and will have an understanding of how decentralized Finance works. And currently, it is much easier for an ordinary person who is not connected with the cryptocurrency market to contact a traditional Bank.

Bitcoin is being supported by banks in the US. Regulations related to Bitcoin are being finalized. Bitcoin is being accepted at multiple locations across the United States and globally. The number of people using Bitcoin is increasing over time, and big companies are putting bitcoin in their reserves.

https://www.forbes.com/sites/billybambrough/2020/05/30/jp-morgan-bitcoins-biggest-enemy-suddenly-appears-to-be-going-all-in-on-crypto/#7a4c3a3523a6
JPMorgan—Bitcoin’s ‘Biggest Enemy’—Suddenly Appears To Be Going All In On Crypto

Banks have already realized that if it is impossible to fight against such an enemy, then bitcoin can be bought and managed.
There will be services like PayPal, where you can buy bitcoin or other cryptocurrencies, but you can no longer transfer funds to your decentralized wallet.

Bitcoin is becoming a global currency with the growth of the internet. Bitcoin is the harmony of economy and technology, which is the product of human economic development. Many economists and financial experts have criticized Bitcoin, but its value continues to rise. This is a reflection of the world's demand for Bitcoin.
Paypal sees the potential of Bitcoin and is trying to make a profit from Bitcoin transactions by including it in their payment system. It is a concession because they understand how big Bitcoin will be. They cannot go against the trend of money, they rotate to survive.

[7788bitcoin]

I work in finance so I've paid especially close attention to the "Smart Contract Finance" bullshit.  I looked in to DeFI and other types of coins/tokens in this "Smart Contract Finance" world.  I did a write up under scams where I go in depth about his this is an unsustainable bunch of nonsense and it isn't real.

It is a spot on analysis, it is really unsustainable and i knew people could make a ton of money in the beginning but then everything comes crumbling down, the hype will burn out eventually and it is funny to see that people are making a lot of money in a short period of time doing substantially nothing . I am expecting the hype to burn out once the bitcoin rally starts to push for the old all time high valuation.