Horizons Newsletter – week 48 // 2021

Horizons Newsletter – week 48 // 2021

In this Horizons, we shed light on two forces influencing the financial sector. First, we discuss the consolidation of the European banking landscape. Second, we argue the recent growth of decentralized finance could blaze a trail for other Web 3.0 applications.

Overbanked Europe is starting to consolidate

In June 2014, the European Systemic Risk Board concluded in a report that Europe is overbanked. Since then, the European banking landscape has become even more crowded, with the number of neobanks growing to more than 100 at the beginning of 2021. Meanwhile, incumbent banks are having a hard time. Profitability is under structural pressure, especially among smaller and medium-sized institutions. The persistently low interest rate is putting a strain on the traditional revenue model, while complying with regulations requires ongoing large investments. To improve economies of scale and stimulate consolidation among banks, the ECB and EBA have removed M&A obstacles. With some success: the number of mergers and acquisitions in 2021 is about to surpass the total in 2020, with domestic deals making up the lion’s share. Cross-border mergers however, lag behind due to slow progress in implementing the European banking union. Additionally, governments still have their own rules to protect their national banking systems, thus preventing a level playing field in Europe. As long as these structural barriers are not removed, the emergence of a truly European bank remains unlikely.

Broaden your horizon?

In this section we share content that may be of interest to you:

  • In Wyoming, a decentralized autonomous organization called CityDAO has purchased land in the state in an experiment to build a blockchain-based city.
  • This Business Insider article highlights Klarna’s move from a Buy Now, Pay Later (BNPL) platform to a super app. Klarna now competes with other apps, such as PayPal, to create a ubiquitous super app.
  • South Korean entertainment company Hybe partnered with a crypto exchange operator to create a NFT trading platform. This new initiative shows how NFTs offer a new take on fandom and go beyond sports.

Web 3.0 is taking off with DeFi

Decentralized finance (DeFi) is a blockchain-based financial infrastructure that has gained traction with its efforts to create an alternative to the centralized financial system. By automating intermediaries (such as custodians, central clearing houses or escrow services), DeFi can provide lower costs, higher degrees of security and privacy, resist censorship, increase accessibility and promote a decision-making democracy. While DeFi is a niche market in comparison to the traditional financial system, the value of the funds locked in DeFi is growing fast (see graph). Naturally, this growth is related to the cryptocurrency market: boosting it and benefiting from it at the same time. DeFi’s growth, however, is also an indication of the takeoff of Web 3.0. Similar to how DeFi aims to address the weaknesses of the centralized financial system, Web 3.0 tries to fix the issues of the centralized Web 2.0. Blockchain technology is an important component of Web 3.0, but it also employs artificial intelligence, machine learning, IoT, and edge computing to build a more decentralized and trusted web. With DeFi taking off, it is blazing a trail for other Web 3.0 applications.

Horizons is a bi-monthly Dasym Research initiative to show you how the Dasym themes have been in the news. We publish the Horizons on our website and as an email newsletter. If you wish to receive the email, sign up here.

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