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It’s widely accepted that our current banking system has significant flaws. Beyond systemic and geopolitical risks — like restricted borders, time zone barriers, and central bank dependencies — there are challenges with bank wires, international settlements, and the inconsistent availability of credit. A fundamental issue lies in the mismatch between banks' balance sheets and their leverage. When a bank faces liquidity or insolvency issues, as seen with First Republic and Silicon Valley Bank in March 2023, depositors risk becoming creditors in a bankruptcy unless the government intervenes — leaving taxpayers to cover the fallout.
This fragility has led to growing interest in decentralized solutions from both retail investors and institutions. By removing human error and poor decision-making from the equation, Decentralized Finance (DeFi) offers a compelling alternative. We believe DeFi has the potential to fundamentally transform how we transact, bank, borrow, and invest.
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Here are three emerging ways in which DeFi is poised to create a future where financial services are digital, open, always-on, and borderless.
1. Tokenization of Real-World Assets
The tokenization of real-world assets, such as real estate, fiat currencies, or bonds, is becoming a key trend. These tokenized assets can act as collateral in next-generation DeFi lending markets. Bitcoin and Ethereum, for instance, are considered pristine collateral because their use can be automatically governed by smart contracts without needing a third party, like a court, to adjudicate disputes.
Tokenizing physical assets like real estate or government bonds creates similar opportunities, although it requires oracles to provide real-world pricing and cash flow data. As this ecosystem evolves, individuals and institutions will increasingly use a broad range of tokenized assets to access lending services, unlocking liquidity and expanding borrowing options across global markets.
2. Always-On Lending Marketplaces
DeFi protocols are creating 24/7 marketplaces for lending, borrowing, and asset swapping. These platforms operate continuously, allowing users to lend assets like Bitcoin, Ethereum, and USDC, and earn yield in return. In the future, we expect to see tokenized assets such as government bonds and real estate added to these pools.
Unlike traditional markets, where hidden leverage and rehypothecation, the risky banking practice of lending out your assets multiple times,can create systemic risks, DeFi’s transparent smart contracts ensure that collateral is clearly managed, reducing counterparty risks. A growing number of Bitcoin holders are utilizing technologies like wBTC (wrapped Bitcoin) to borrow stablecoins on markets like Aave without selling their Bitcoin, maintaining exposure to its price appreciation.
In this setup, loans are secured by digital collateral, and if the value of the collateral decreases, the borrower either adds more collateral or risks liquidation — ensuring a healthier lending environment without the opaque risks present in traditional finance.
3. Becoming Your Own Bank
Perhaps the most revolutionary aspect of DeFi is the ability for individuals to become their own banks. Throughout history, we've seen multiple banking crises — from the savings and loan crisis to the 2008 financial meltdown, and most recently, the 2023 crisis caused by rising interest rates. Historically, during times of instability, savers moved their wealth into physical cash outside the banking system.
Today, DeFi offers a modern solution. Advanced multi-party computation (MPC) wallets allow users to store and manage their assets securely, with on-chain verification ensuring they retain control. Individuals can now store value in stablecoins, invest in digital assets, and access decentralized lending and borrowing services — all without relying on traditional banks.
With tools like separately managed accounts (SMAs), users can hold their assets in their own digital vaults, free from the balance sheet risks of banks. This level of autonomy mirrors traditional financial strategies but extends them to the realm of crypto, giving people unprecedented control over their financial future.
Conclusion: A Decentralized Future
In the coming decades, DeFi will become the backbone of financial services. The term "DeFi-based banks" may fade away as it becomes the standard infrastructure for financial services. In this world, tokenized real-world assets will unlock new possibilities for borrowing and lending, decentralized platforms will provide always-on banking services, and individuals will have the power to be their own banks — maintaining full ownership and control over their assets.
If we want a future where financial services are transparent, secure, and democratized, we must pay attention to the innovations taking place in DeFi today.
Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.