How do I use web3? DeFi Limitations of Banks

Limitations of Banks

Traditional banks are the lungs of the financial world.

A key part of what they do as an intermediary is connect borrowers and lenders together.

If something goes wrong, you can call (or go to) your bank for assistance. Just like any other intermediary, they exist to establish trust and help parties find and deal with each other.

Without banks, access to reliable and safe access to loans, savings, or other financial services would be limited or nonexistent.

So, if they’re here to help us carry out safe and reliable transactions, what’s the problem?

Here’s the first issue.

When you open an account with a bank, you trust them with your money and private information.

You do so because banks are typically trusted institutions in society, and because there aren’t many alternatives.

Now, even though the account belongs to you, it is still controlled by the bank.

So why is that a problem?

Banks have the power to close your account at any time without a reason or explanation if they have concerns about the activity taking place.

It’s similar to Instagram, Twitter, or other social media platforms. If either of these social media platforms believe you are violating a rule in the content you post, they might close your account.

And there’s not much you can do but appeal for them to give your account back to you. If they say no, well, you lose all your followers and the content you have made.

Pretty unfair if you spent hours a day producing and writing content, eh?

The same applies to banks.

If they think you are violating a regulation, they might freeze or close your account even if you’re not aware of the violation you have made.

You would then need to appeal to get your account back which can take weeks, if not months.

What’s the other issue then?

Well, banks hire humans, and all humans make mistakes from time to time. Even in our personal lives, we sometimes drop our phones, forget where we left our keys, or trip ourselves when walking.

In the work setting, we might make an input error on a datasheet, forget to do a task we were assigned, and there might be miscommunication when talking to customers or colleagues.

But what happens if it’s not just an input error on a datasheet? What happens if hiring the wrong people ends up leading to mismanagement, bad investments, or corruption?

Banks are not immune to mispractice. The limitations we just talked about were evident in the Global Financial Crisis of 2008 and many previous market crashes.

The economic crash of 1929 was largely caused by uncontrolled stock market speculation. Something similar happened in 2008 because of real estate speculation and fraudulent behavior by greedy actors.

Loose regulations failed to keep everything in check, so there was a lot of excessive risk-taking.

Many borrowers couldn’t repay their loans they had taken out, putting the banking system under severe stress.

The lack of transparency in the financial system resulted in bad investments and malpractice. This was a watershed moment for DeFi.

Shortly after the housing market crash, was registered.

While some have speculated that this was in response to the financial crisis, it appears to be a mere coincidence as work on Bitcoin began in early 2007, before the market crash occurred.

On October the 31st, 2008, the mysterious Satoshi Nakamoto released a whitepaper titled: “Bitcoin: A Peer-to-Peer Electronic Cash System.”

This invention started a chain of events that ultimately led to the creation of DeFi on the Ethereum years later.

Discover our sources and find out where information is coming from.

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