Jul 19 2022

How Financial Firms Can Make Use of Decentralized Finance

Instead of fearing DeFi, firms should take advantage of the blockchain-enabled trend in financial services.

Decentralized finance, or DeFi, is rapidly becoming mainstream. For example, according to Bloomberg, trading powerhouse Jane Street Capital is now using a DeFi framework to borrow up to $25 million in USD coin (USDC), a cryptocurrency that’s pegged to the U.S. dollar. If all goes well, the company plans to scale up its investment to $50 million.

This opens the floodgates for even more widespread DeFi, but raises a question for legacy institutions: Is DeFi the beginning of the end for traditional banking, or can financial firms make use of this technology to maintain their market position?

Here’s what companies need to know about this blockchain-based alternative.

What Is Decentralized Finance?

DeFi uses a network of decentralized computers to conduct financial transactions via blockchain. In practice, this means that rather than leveraging a single, onsite data repository that’s directly under the control of financial firms, DeFi deployments use multiple computers to process transactions and record them on a shared public ledger.

Each transaction is then stored as a block in an immutable, digital chain — hence the name blockchain. Any attempt to modify or reverse transactions on one computer will trigger notifications of a mismatch on other devices, in turn making it almost impossible to change transactions after the fact.

It’s also important to recognize that DeFi is not cryptocurrency. While cryptocurrencies like Bitcoin, Ethereum and USDC are traded using blockchain for increased visibility and security, blockchain itself is not tied to any crypto coin. Instead, it’s a transactional framework that supports anonymous and immutable transactions across a shared, publicly visible ledger.

Click the banner to unlock exclusive cloud content when you register as an Insider.

What Does DeFi Mean for Financial Firms?

DeFi systems can help reduce the number of transactional intermediaries required, in turn decreasing the time needed to verify and process transactions. Instead of taking two or three days, transactions happen almost instantly and are naturally secure thanks to the use of public ledgers.

While current regulations around DeFi remain in their infancy, the overall regulatory risk for banks and capital market firms is low. Although cryptocurrencies have seen significant market fluctuations over the past few years, in turn leading to hesitancy on the part of regulators to approve them as mainstream transactional options, the underlying concept of the decentralized blockchain has proved itself time and time again to be reliable and accurate. As a result, many organizations are now working with regulators to prepare for larger-scale DeFi adoption.

LEARN MORE: See what's next for banks when they adopt cloud technologies.

How Can Financial Firms Get Ahead With DeFi?

When it comes to creating a DeFi network, there are two broad options: build or buy.

While building a blockchain solution from scratch is entirely possible (because most of the required components are open source), this approach requires both significant time and resource investment. For organizations with larger IT teams — such as large banks or insurance companies or major trading houses, as well as fintech firms on the leading edge of technology adoption — building may be the best option since they already have a solid idea of what they’re looking for and how it should work.

For smaller banks and more conventional brick-and-mortar financial firms, however, it may be worth partnering with industry leaders who have expertise in this area. This is also a viable option for companies with more specialized services, such as niche trading firms or hedge funds. By adopting pre-built blockchain frameworks designed to meet financial compliance expectations, companies can leverage the power of public ledgers without disrupting current operations. CDW has helped multiple finance customers implement a full blockchain solution.

EXPLORE: See how financial institutions can stay secure on the cloud.

Armed with an in-depth understanding of key concepts such as hyperledgers, tokenization, wallet solutions and NFTs, CDW can help organizations understand the use cases and outcomes of DeFi for their businesses, highlight the advantages and disadvantages of these technologies and then design and build solutions that meet businesses’ specific use cases.

It’s worth noting that DeFi doesn’t require companies to do a rip-and-replace of their existing infrastructure. While blockchain solutions benefit from the scalability and agility of the cloud, firms can incorporate any on-premises data centers as part of their larger, decentralized network. The DeFi approach also makes it possible to build applications and services with different providers and then stitch them together to create a cohesive whole.

Put simply, DeFi doesn’t spell doom for conventional or cutting-edge operations. Instead, it offers an opportunity for financial firms to boost security, increase visibility and reduce transaction times across their network.

This article is part of BizTech's EquITy blog series. Please join the discussion on Twitter by using the #FinanceTech hashtag.


ipopba/Getty Images

aaa 1