One of the internet's favorite investors thinks it's a bad time to be a bank. In a recent interview with CNBC, Ark Invest's CEO, Cathie Wood, confidently said banks have a big problem called crypto. Wood explained the rapid rise of decentralized finance or DeFi applications enabled by blockchain technology is rapidly changing the way people save or borrow.
The popularity of DeFi apps is growing so fast that stodgy old banks are rapidly becoming obsolete relics. That's partly because banks are built on reputations that aren't nearly as important as they used to be. DeFi apps employ distributed ledgers or blockchains that are nearly impossible to manipulate, which makes trusted intermediaries unnecessary.
DeFi is on the rise
The popularity of decentralized finance is probably growing a lot faster than you think. At the end of 2020, there were only around 1 million unique addresses that had purchased or sold a DeFi-related asset. By March 21, this figure exploded to around 4.5 million.
At first glance, it might look as if DeFi app uptake is slowing down. If you look closer, you'll see all the blue bars in the chart above are for the first three weeks of March while each red bar represents an entire month going back to December 2017.
Games and gambling are some of the most popular ways people use their crypto assets, but earning a return to stake tokens is a big draw as well. For example, PancakeSwap (CAKE) is an automated market maker that builds liquidity from a rapidly increasing pool of individual investors who can earn significant returns by staking their tokens.
In March, PancakeSwap and the price of its token, Cake, got a big boost from a new agreement with Binance, the largest cryptocurrency exchange by volume. Thanks in part to Binance, around 2.9 million users interacted with PancakeSwap's DeFi app over the past 30 days.
PancakeSwap is the most popular DeFi app at the moment but it's just one of many. At the moment, DappRadar lists 59 DeFi apps with at least $100 million in assets at work and this figure keeps climbing.
It's been two and a half years since JPMorgan Chase (JPM 1.10%) launched its own digital coin and the giant bank is still leading the pack when it comes to crypto. In his latest letter to shareholders, JPMorgan's CEO, Jamie Dimon reminded investors that "decentralized finance and blockchain are real, new technologies." He also pointed out that their role in finance isn't necessarily nefarious or secretive.
JPMorgan already uses a blockchain network called Liink to share complex information between banks, but the rest of the world's financial service institutions probably aren't prepared for the seismic shift toward decentralized finance currently underway. In a 2021 survey, Deloitte, a consulting business, contacted over a thousand financial services industry executives and practitioners to gauge overall attitudes regarding blockchain technology. The key takeaway was that the industry wants to do more but its hands are tied.
A surprising 73% of respondents said their ability to maintain a leg up on the competition relies on adopting blockchain and digital assets. Unfortunately, the vast majority also complained that cybersecurity, regulatory barriers, and financial infrastructure were their biggest obstacles. While infrastructure and security are solvable problems, governments don't always move as fast as they should to support the adoption of innovative new financial services.