Decentralized Finance and Cryptocurrencies: Reviewing the Potential to Disrupt Traditional Financial Services

Context

This bachelor thesis investigates the potential of Decentralized Finance (DeFi) and cryptocurrencies to transform traditional financial services. The aim is to analyze how decentralized technologies can challenge the existing structures of banks and financial institutions. The work draws on the rapid development of the DeFi ecosystem, which has emerged in the wake of the 2008 financial crisis and growing distrust in established financial institutions. DeFi aims to offer alternatives to centralized financial systems and promises increased openness, accessibility, and efficiency.

Goals

The objective of this thesis was to comprehensively examine the disruptive potential of DeFi for traditional finance. First, it sought to clarify how DeFi differs from traditional financial systems in terms of structure, processes, and access. Second, it aimed to analyze the advantages and risks associated with the implementation of DeFi technologies, focusing on both technical and regulatory aspects. Third, the thesis intended to assess whether DeFi applications can be realistically adopted on a broad scale given current limitations and requirements. Finally, it aimed to derive concrete recommendations for stakeholders in the financial sector and provide new impulses for the future design of financial services.

Methods

The methodology of this thesis is based on a qualitative research design, with an emphasis on capturing expert perspectives and synthesizing current knowledge. The core of the analysis is a structured literature review covering academic publications, whitepapers, and industry reports relevant to DeFi, blockchain, and financial innovation. The selection of literature followed strict criteria regarding credibility, relevance, and objectivity.

To complement the literature review, five semi-structured expert interviews were conducted with professionals from academia and industry who have specialized knowledge in the field of DeFi. The interviews were guided by open-ended questions, enabling a nuanced exploration of the opportunities and challenges of decentralized finance. The collected qualitative data were analyzed and integrated with the findings from the literature review to ensure a comprehensive understanding.

Results

The results show that DeFi has the potential to fundamentally disrupt and complement existing financial structures. By leveraging blockchain technology and smart contracts, DeFi can increase financial access, reduce transaction costs, and facilitate innovative new financial products such as stablecoins and decentralized exchanges. The open and modular nature of DeFi also encourages competition and rapid innovation.

However, the analysis reveals that the implementation and scaling of DeFi face significant challenges. Security risks and the absence of established regulatory frameworks present substantial obstacles. The willingness to embrace decentralized models varies among stakeholders, and technical as well as legal uncertainties must be carefully addressed to ensure safe and sustainable adoption.

Based on these findings, the thesis recommends a gradual approach to the adoption of DeFi in traditional finance, with an emphasis on risk management, regulatory alignment, and competence development among both providers and users. It also highlights the importance of ongoing research and dialogue between innovators, regulators, and traditional financial institutions to fully realize the benefits of decentralized finance.