Buying House on Ethereum. How DeFi Replaces Traditional Banking Sector
14.09.2022 | 4 min read
Don't worry about having to wait very long for a bank to finish its verification process. When dealing with property finances, switching to DeFi might be better for you. When you read it now, it probably seems impossible, but there are signs that this will soon be a way to get a loan for your dream home.
Since 2019, the DeFi market has been growing at a very fast rate. A new report from Amberdata says that the total value locked in DeFi went from $601 million at the beginning of 2020 to $239 billion so far in 2022. This is an increase of nearly 40,000%.
It's Like Traditional Banking System But Better
DeFi applications use cryptocurrency to mimic traditional financial systems, like banks and stock exchanges. Most of them are based on Ethereum's blockchain. For example, through DeFi lending, users can lend out cryptocurrency, just like a traditional bank does with fiat currency, and earn interest as a lender.
Getting a loan is easier than in a traditional system because there aren't as many requirements. Most of the time, the only thing you need to do to get a DeFi loan is to be able to put up other crypto assets as collateral.
"Foundational DeFi benefit is that it simplifies borrowing for personal purposes. It’s a hassle to borrow money from a bank," said billionaire investor Mark Cuban on the growth of DeFi.
But there are more ways to use DeFi. Cryptocurrency interest products are already being used as an alternative to fixed-term accounts. Other use cases include derivatives and trading.
Long Way Towards Bankless Society
Many people say that DeFi applications will still shake up the traditional space, but will they automatically kill banking? Well, no, not always.
First of all, DeFi is a lot riskier than a regular bank for many reasons. When you use DeFi, your money isn't regulated or insured, and because cryptocurrency is so volatile, investors would have to be okay with big price swings.
If there is a downturn, the value of the crypto assets used as collateral may drop sharply, and some investors' positions may be sold off. Experts warn investors not to spend more than they can afford to lose.
Also, even though more money is going into DeFi protocols, hackers can still get in. Chainanalysis says that hackers stole $3.2 billion worth of cryptocurrency in the year 2021.
Last but not least, the DeFi market is still young. Especially when it comes to long-term loans, it's easy to see. If you're not the son of a millionaire and you want to buy a house, you'll probably have to borrow money from a traditional bank.
“DeFi is nice because it's free flowing and it's beautiful because the protocol and the money can move between protocols. But it doesn't make it very useful. Let's say if you want to take a 30 year home loan on a DeFi bank, you couldn't even take a loan for one year because you don't know what that debt is worth. So if we look at the DeFi credit markets, it's extremely, extremely early,” said Darren Cama, CEO of IPOR Labs.
DeFi wants to replace everything about how banks work now. Loans and mortgages are no exception. With DeFi, it's possible that people will be able to get a loan or mortgage in a matter of seconds. In fact, USDC.homes, a decentralized finance project, offers DeFi mortgages to US homebuyers. This means that users can buy homes with cryptocurrency without having to first sell it. At the moment, the project only lets people in Texas get crypto mortgages, but it plans to expand to other states.
Since 2022 is a development year, 2023 could be a good time for growth and competition. In addition to Ethereum, which is the most popular platform for decentralized finance, there are more and more decentralized ecosystems around Cardano, Polkadot, and Solana that are making a growing number of projects and applications possible.
Still, it's natural to think of traditional "centralized" banking infrastructure and DeFi as competing or opposing forces. But the best thing they can do is find ways to work together in the future. DeFi could make currency institutions stronger by getting rid of the problems and barriers that come with centralized financing.
The blockchain-based ideas of DeFi are likely to become part of the basic structure of global finance. Some of the many possible benefits of DeFi include making money work faster, making it easier to get loans, and being open to new ideas.