The Challenges and Opportunities of Blockchain in Financial Systems: A Deep Dive Into Decentralized Finance (DeFi) and its Impact on Traditional Banking

Abstract

The subject of discussion has become the effects of the blockchain and decentralized finance (DeFi) on the conventional banking, as well as the perspectives and threats of such solutions. By adopting PageRank analysis, Sharpe ratio evaluation, Gini Index measurement and K-means clustering the study explores the impact, risk-adjusted returns, inequality features and transaction characteristics of the DeFi platforms with the incumbent banking systems. The PageRank analysis revealed that traditional banks generally hold higher influence scores (JPMorgan: Comparing it with other DeFi platforms such as Uniswap, Curve has slightly lower cash cow coefficient equal to 0. The result of Sharpe Ratio analysis revealed that overall DeFi platforms like Uniswap has a Sharpe ratio of 0.60, which is higher than the Sharpe ratio of US Treasury Bonds 0. The Gini Index measurement indicated greater inequality in transaction distribution among DeFi platforms (Compound: Further, there is the fee per transaction charged to the client which varies where in the case of PayPal it is $ 0. 45 whereas in traditional banks, it is $ 0. According to the K-means clustering, the existing financial behaviors were analyzed and traditional banks were dominating in the aspect of transaction volumes and market capitalization as compared to the DeFi platforms. These research highlights the benefits of blockchain applications and DeFi in improving the financial systems, at the same time identifying the barriers that people would encounter when applying them including fluctuation and imbalance. Thus, the conclusion of this research calls for the further investigation of the possibilities of the consultation of decentralized systems within the current framework of regular banking.