woman thinking about blockchain and it's impact on lending
ComplianceFinanceJuly 21, 2022

Blockchain and decentralized finance's impact on lending

Touted as the next game-changer — much like the World Wide Web for internet banking — blockchain technology is poised to unlock a radically new decentralized finance system known as DeFi.

While it might be easy to dismiss this as another tech fad, as of 2022, DeFi platforms have already amassed over $200 billion in value. Meanwhile, the global blockchain market is projected to grow steadily to a whopping $163.83 billion by 2029.

The major difference between DeFi and traditional services is the “De” part, where the services exist in a decentralized fashion, without the need for an intermediary. This peer-to-peer model could dramatically change financial services as we know them.

Decentralized finance system will redefine P2P lending

Peer-to-peer (P2P) financial transactions are not new and predate the evolution of banking in our society. Current financial transactions likely grew out of the necessity to have a systematic way to verify the identities of individuals and businesses, thereby creating trust between transacting parties. This ultimately produced a system of laws that govern the enforcement of a financial contract between parties — which comes with its own set of problems.

Blockchain technology offers new ways of addressing these issues with lending by offering:

  • A tamper-proof, virtual, global network that can span borders and regulatory regimes
  • “Smart contracts” where actions can be taken automatically, based on the current metrics of the contract

As a result, P2P transactions can occur without the current guardrails of having trusted clearinghouses or a host of intermediaries. DeFi apps look to take advantage of all these features to enable financial transactions in a whole new way.

Decentralized finance lending: 5 changes to prepare for

Let’s look at the DeFi features that may require changes in established lending practices:

1. Geographical coverage and scale

A blockchain, by definition, is a shared ledger, and a shared ledger can be global in scale. The system providing the necessary replication and immutability of transactions requires that the nodes are geographically distributed and not controlled by a single entity. This means that DeFi applications running on a global network can be accessed by users worldwide. It is a marketplace always open for business, and participants can transact 24/7, giving lenders access to a global clientele and exploring new lending opportunities.

2. Turnaround time

Given the purely online nature of transactions, the time to make lending decisions is significantly compressed. Traditional ways of conducting due diligence that can take weeks to complete will not be efficient enough work in this marketplace.

3. Regulatory compliance

The financial services industry is very familiar with having service providers register and comply with local and regional regulations. While the good news is that financial service providers can extend their services beyond traditional geographic borders, compliance and regulatory requirements may exponentially increase.

4. Collateral management

Blockchain and DeFi will lead to financial transactions that deal with a new set of digital assets. As the tokenization of products and services in the “metaverse” environment grows, lending will bring in a new set of collateral that can be instantly authenticated and evaluated on the blockchain and thereby used as collateral. Another Blockchain concept of maintaining a digital “chain of custody” will also help devise new collateral management methods.

5. Enforcement

Blockchain and DeFi leverage smart contracts that can build a lot of measurement and intelligence into the contract, where predetermined, automated actions can take place based on the measurement and covenants of the contract. This capability will require a new way of thinking about lending contracts.

The future of banking and blockchain

Despite the uncertainties, blockchain technology is quickly maturing into a viable platform poised to create significant changes in the financial services industry. Even without buying into the hype, blockchain applications are here to stay. From the financial industry’s future perspective, it is wise to understand and adapt to stay relevant in the marketplace.

How to prepare financial services industry for the future

Those working in the financial services industry should pay close attention to these innovations. While these technologies won’t solve all the issues and challenges immediately, DeFi presents the potential to positively disrupt the status quo and unlock many new possibilities.

Make the right moves with Lien Solutions. We help you navigate the evolving complexities in lending with solutions tailored to your specific business needs. Contact Lien Solutions to do business with confidence — always.

Nasser Ansari of Lien Solutions
Director of Product Management

Nasser Ansari is Director of Product Management for Wolters Kluwer Lien Solutions. Ansari’s responsibilities include serving as lead for Core Products and Platform Strategy. Prior to joining Lien Solutions in 2016, Ansari held leadership positions at various companies including CA Technologies, Platinum Technology, and Deere & Co.


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