Change is constant. Sometimes it’s incremental – perhaps a product launch or a new administrative requirement – but sometimes it’s seismic.
The arrival of PCs and the invention of the internet were two examples of these massive changes that completely shake up the way we do business.
There’s another massive change coming down the line, with decentralised finance (DeFi) having the potential to bring a whole new way of working to all our financial behaviour, including the way your organisation’s finance team works.
What is decentralised finance?
The broad concept of DeFi involves blockchain and cryptocurrency, which are the core technologies behind it. Blockchain-powered apps take the middleman out of the traditional and established financial services industry.
Applications built to facilitate this new form of intermediation are called decentralised apps (or Dapps) and are built on open-source blockchain infrastructure – Ethereum in particular.
Instead of the legacy financial institutions – such as banks, card issuers and other lenders – that have played a central role in finance, DeFi involves peer-to-peer relationships that can provide the whole spectrum of financial services, ranging from day-day banking to asset-trading.
It challenges the existing, centralised financial system and empowers both sides of a financial transaction through peer-to-peer exchanges.
The benefits of decentralised finance
There are a number of potential benefits to organisations that embrace DeFi, including:
- Speed and efficiency
The costs of lending money will be cut as there is no middleman to take a slice as a profit. Charges will be non-existent as DeFi comes with built-in verification mechanisms and smart-contract integration that do away with the need for third-parties to monitor transactions.
There will be greater transparency. As all the financial activities take place on a blockchain network shared by everyone, all the data is publicly available. This can boost due diligence and help people spot fraud and dodgy business practices.
And because of the lack of costs and the removal of third-party due diligence, financial transactions can be carried out with much more speed and efficiency, with transactions being settled instantly.
The risks of decentralised finance
It’s a new and emerging concept, so there are going to be issues that need to be overcome, or at least reassurances that need to be given to users. After all, it’s not been seriously stress-tested yet.
The governance and compliance of Dapps is something that might concern some new adopters. Regulators, ombudsmen and trade associations tend to cover most aspects of the traditional financial world, and the idea of a Wild West-style new landscape can seem a risky thing to embrace.
There are no consumer protection laws in DeFi in the way there are with most traditional finance.
Financial cybersecurity is likely to be front and centre for businesses looking to move into the world of DeFi – but then again, this is already something that businesses should already be addressing with their current systems.
Blockchain itself is extremely secure, but the software that DeFi runs on needs to be protected, too.
There is also a potential issue surrounding money laundering. At the moment, banks and other middlemen have a duty to stop it from happening.
But when you take the middleman out of the equation, it could be harder to maintain the checks you need to do.
What’s next for decentralised finance?
DeFi could transform the whole world of financial relationships.
The biggest impact will be felt by the financial sector, with the accepted order coming under threat as this whole new way of dealing with finance evolves. But it is likely also to impact on the finance teams within organisations, and how they manage supply chains, payments, invoices and even, one day, payroll.
Training will be the key here. Even if you run a conservative operation and you aren’t inclined to take a risk and be a trailblazer with the latest cutting-edge tech, make sure that when DeFi takes off, you have made provisions in place to train your team properly.
For DeFi's ecosystem to flourish, institutions will have a significant role to play. DeFi's existing ecosystem and infrastructure offer financial opportunities, including the launch of new products and services, as well as operational efficiencies.
In the evolution of digital assets and financial services, DeFi is a major milestone.
Decentralised ecosystems and their participants will gradually converge with well-established institutions, that are the trusted gatekeepers of the traditional financial system.
In this emerging digital economy, how institutions prepare to embrace new technology and forms of intermediation will have a significant impact on how their operations will shape the future of their success.
Prepare for decentralised finance with Advanced
When it comes to decentralised finance, having a reliable, market-leading FinTech provider as a partner will give you a leg up.
As your finance team adapts, its composition, work, and challenges might change much in the same way as when they moved from pen and paper to computers.
Keeping an eye on the ball and monitoring developments in DeFi is essential.
Working closely with an expert like Advanced gives you the benefit of having a third party guide you through all the changes, both good and bad.
As a result, you'll have the assurance that when it's time to adopt new technology and embrace change in your team, we'll be there.
Stay in tune with market changes using Advanced Financials accounting software. Spot issues, track business growth, and keep your finance team at the forefront of your organisation's growth.