Why should my firm transition to defi?

By Taylor Engstrom in
Finance
Published or Modified on
May 4, 2021

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This article was a writing exercise for an interview process with a leading B2B blockchain company. Hope it's informative!

Blockchain is at the forefront of many in the financial industry’s mind today. It represents a golden promise of increased efficiency, lower costs and more accessibility. It also represents something substantially larger than the Bitcoin craze or more frictionless finance.

Increasingly more institutions, investors, and banks are looking to blockchain solutions and decentralized finance (or defi for short) as the antidote to their woes - but why?

To begin, let’s talk about what blockchain is (and what it isn’t). A blockchain, at its most basic, is a chain of “blocks” that contain information. It is a distributed ledger that keeps track of transactions, exchanges, and interactions from when the blockchain was first established until the end of time. It is a decentralized system that is - thanks to advanced cryptography - secure, transparent, and trustless. Because of these attributes, blockchain technology presents a viable solution to many of the problems plaguing traditional financial institutions today.

Interacting with other businesses

In today’s globalized world, large corporations and institutions interact with each other across borders, time zones, and currencies hundreds or even thousands of times per day. These firms often have separate systems, software tools, and corporate policies that enable and/or dictate how they interact. 

In the financial sector, these interactions often include exchanging confidential information such as contracts. In the world of decentralized finance, these same firms could make use of blockchain technology to ensure their confidential data was accessible only to those privy to it in a secure, transparent, and immutable way. Contracts would be secure on the blockchain, their details could not be manipulated or changed, and they could be shared across a distributed, global network that didn’t require the additional engineering and maintenance of trying to join two disparate systems or processes.

Cost savings

Many of today’s financial processes and applications are costly, in both hard costs like software upkeep and cloud storage, and soft costs like labor and human capital. With blockchain technology, many of these costs can be drastically reduced. 

To start, thanks to blockchain’s trustless, permissionless nature, firms can build on top of existing protocols, integrate features from other projects or customize existing interfaces. This enables businesses to get a head start on their blockchain implementations and save valuable time and money otherwise spent on developing their own internal systems and tools. Firms can even create a private blockchain for their customers and/or partners. With blockchain technology, businesses can do more with less.

Lastly, traditional finance firms can greatly reduce the people-hours required to perform basic services by deploying what are called “smart contracts”. Smart contracts are essentially programs with built-in rules and codes that run autonomously and without bias. These smart contracts, in a retail bank example, can be deployed to handle actions such as managing and accepting deposits, handling collateralized loans and liquidating collateral assets as per the terms of the contracts should values fluctuate. Thanks to these smart contracts, these actions are completed only when certain conditions are met and cannot be manipulated by any entity, thus effectively removing the traditional person or team from being involved in delivering the service(s).

Looking ahead

As promised, blockchain technology can deliver increased efficiency, lower costs and more accessibility to those who choose to build with it. In an increasingly competitive global marketplace, institutions, banks and other financial firms are prudent to consider transitioning their businesses away from traditional finance towards a more decentralized model and future.

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