The traditional banking system relies on “trust.” You trust the bank to hold your money, and they use that money to provide loans, taking a large cut of the interest. DeFi protocols like Aave or Compound automate this process using code.
In a DeFi “bank”:
- Borrowers provide collateral (like ETH) to take a loan instantly.
- Lenders provide the liquidity and earn the interest directly.
- No Bias: The protocol doesn’t care about your credit score or where you live; it only cares about your collateral. While we aren’t at total replacement yet, commercial banks are increasingly looking at how to integrate these “liquidity layers” to lower their own operational costs.