In today’s rapidly evolving financial landscape, the traditional banking system is increasingly under scrutiny. Many experts agree that this system is plagued with significant flaws that can lead to instability. These flaws encompass not just systemic risks but also geopolitical challenges, such as restricted borders and reliance on central banks. The issues extend into practical areas like bank wires, international settlements, and the inconsistent availability of credit. A core problem is the imbalance between banks’ balance sheets and their leverage. This discrepancy poses a risk that becomes evident when banks face liquidity or insolvency crises, as seen in the cases of First Republic and Silicon Valley Bank in March 2023. In such instances, depositors can find themselves in the precarious position of becoming creditors during bankruptcy proceedings, often relying on government bailouts, which ultimately places a burden on taxpayers.

This fragility has fueled a growing interest in decentralized financial solutions (DeFi) from both retail investors and institutional players. By eliminating the human errors and poor decision-making often seen in traditional finance, DeFi presents a compelling alternative that has the potential to revolutionize the way we transact, bank, borrow, and invest.

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Three Emerging Trends in DeFi
Here are three key areas where DeFi is poised to create a future characterized by digital, open, always-on, and borderless financial services:

1. Tokenization of Real-World Assets
The tokenization of real-world assets, such as real estate, fiat currencies, and bonds, is emerging as a significant trend within the DeFi space. By converting these assets into digital tokens, they can serve as collateral in innovative DeFi lending markets. For instance, cryptocurrencies like Bitcoin and Ethereum are often regarded as ‘pristine collateral’ because smart contracts can automatically govern their use, eliminating the need for third-party interventions, such as courts, to resolve disputes.

Tokenizing physical assets, like real estate or government bonds, also creates remarkable opportunities. However, this process typically requires the use of oracles to supply real-world pricing and cash flow data. As the ecosystem matures, both individuals and institutions will likely start using a wider array of tokenized assets to access lending services. This will not only unlock liquidity but also broaden borrowing options across global markets.

2. Always-On Lending Marketplaces
Decentralized finance protocols are developing 24/7 marketplaces for lending, borrowing, and asset swapping. These platforms operate continuously, allowing users to lend their assets, such as Bitcoin, Ethereum, and USDC, and earn yields in return. As DeFi continues to evolve, we anticipate the inclusion of tokenized assets like government bonds and real estate in these lending pools.

Unlike traditional financial markets, where risky practices like hidden leverage and rehypothecation can create systemic risks, DeFi utilizes transparent smart contracts. This ensures that collateral management is clear and reduces counterparty risks. A growing number of Bitcoin holders are leveraging technologies such as wrapped Bitcoin (wBTC) to borrow stablecoins on platforms like Aave without the need to sell their Bitcoin, thereby maintaining exposure to its potential price appreciation.

In this structure, loans are secured by digital collateral. If the value of the collateral decreases, borrowers are required to either add more collateral or face liquidation. This ensures a healthier lending environment, minimizing the opaque risks that often accompany traditional financial systems.

3. Becoming Your Own Bank
Perhaps the most transformative aspect of DeFi is the potential for individuals to become their own banks. Historically, banking crises — from the savings and loan crisis to the 2008 financial meltdown and the recent turmoil in 2023 — have prompted savers to move their wealth into physical cash outside the traditional banking system. In today’s environment, DeFi presents a modern alternative.

Advanced technologies, such as multi-party computation (MPC) wallets, enable users to securely store and manage their assets with on-chain verification, ensuring they retain control over their funds. Individuals can now store value in stablecoins, invest in various digital assets, and access decentralized lending and borrowing services, all without depending on traditional banks.

With tools like separately managed accounts (SMAs), users can hold their assets in their own digital vaults, insulating themselves from the balance sheet risks associated with traditional banks. This unprecedented level of autonomy allows people to engage in financial strategies previously limited to traditional finance, extending these concepts into the realm of cryptocurrency.

Conclusion: A Decentralized Future
Looking ahead, it is clear that decentralized finance will become the backbone of financial services over the next few decades. The term “DeFi-based banks” may eventually lose its relevance as DeFi becomes the standard infrastructure for financial services worldwide. In this envisioned future, the tokenization of real-world assets will unlock new avenues for borrowing and lending. Decentralized platforms will provide continuous banking services, and individuals will gain the power to manage their own financial destinies — all while maintaining full ownership and control over their assets.

If we aspire to create a future where financial services are transparent, secure, and democratized, it is essential to pay close attention to the innovative developments occurring within the DeFi space 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.