TradFi (traditional finance) to decentralization isn’t just a matter of flicking a switch, says Motti Peer, the CEO of ReBlonde.
When people discuss the need to bridge the gap between DeFi and TradFi, they look at the modern online banking system and wonder what’s stopping crypto projects from mirroring the same functionalities. Can’t we all take out mortgages on the blockchain without an intermediary, cancel miscalculated transactions, or walk into a convenience store and pay for groceries with cryptocurrencies? For the most part, we can’t, and not just for a lack of a coherent regulatory framework.
It’s true that selling a fraction of the house you put on the blockchain as a security token won’t quite legally fly in most places yet. A proper regulatory framework is important, but the problem with creating blockchain use cases that replicate traditional finance runs as deep as the technology itself.
Let’s start with DeFi, an industry of blockchain use cases that lacks some of the basic functions available in traditional finance. DeFi is web-based, and in many ways an ecosystem independent from outside industries, so the potential to build use cases is infinite and pure. As such, it’s fruitful to look at the technical challenges plaguing the industry, such as the need to adapt real estate law to allow for tokenizing properties.
TradFi vs Defi: The limiting aspects
Smart contracts are at the core of DeFi and most blockchain applications. A total of 1.45 million smart contracts have been created in Q1 of 2022 alone. Creating any kind of DeFi protocol necessitates deploying a smart contract, a time-consuming process that can cost between $7,000 and $45,000 in development. The audit phase can reach a maximum of $100 thousand, and all that before touching on the deployment costs.
Regardless of whether you’re a small crypto project or a legacy corporation looking to adopt smart contracts, this is no small price—especially in the current economy. Companies are laboriously working to find ways to make the most out of smart contracts and reduce the necessity for new ones every step of the way. Examples include Spool, a DAO that recently launched its Smart Vault creation tool allowing users to create customizable yield protocols for building diversified DeFi portfolios on top of their platform. Otherwise, such protocols would necessitate the creation of new smart contracts.
Beyond the cost associated with deploying smart contracts, we have to look at the basic architecture of the blockchains on which use cases are being built. The industry still hasn’t fully solved the problem of siloed blockchains that are unable to communicate with one another. With different blockchain networks operating in isolation, several cross-chain interoperability solutions were developed to address the issue. But each solution found comes with weaknesses and technical complexities.
Alone and understaffed
The lack of fool-proof, cross-chain interoperability solutions stymies liquidity transfer and trading possibilities. Derivatives platforms like GMX or Perpetual Protocol have to rely on a centralized trade execution mechanism and feature only a limited number of assets available for trading. Currently, Primex Finance seems to be the only cross-chain prime brokerage protocol that enables cross-DEX spot margin trading.
The slow progress in seamlessly connecting blockchains in a way that fosters industry growth largely stems from a lack of the very people who are able to build the solutions to do so. A quick search for blockchain developers on LinkedIn will reveal over 90 thousand job openings worldwide, emphasizing the short supply. The dire lack in Web3 developers emerges from the need to know specific Web3 coding languages, such as Solidity or Vyper, and the shift in mindset needed to create decentralized protocols a reality.
To address the developer-shortage issue, efforts must be made to better onboard programmers to the world of DeFi without overcomplicating the process. Innovations like Kirobo’s Smart Transactions (ST) technology, an API allowing web2 developers to build web3 protocols and projects on the blockchain without needing smart contracts or coding, need to be embraced and nourished.
With a growing number of projects looking to bridge the gap between DeFi and TradFi, it is important to remember that a bigger set of tools will only get us so far. The dream of decentralization ultimately goes through mass adoption and the more freedom users have to leverage their assets the better the whole ecosystem will fare. Moreover, projects must work to implement a bigger arsenal of cross-chain interoperability possibilities to truly grant users that freedom.
About Author
Motti Peer is the CEO of ReBlonde, a Tel Aviv-based global PR firm with an award-winning team that represents clients across the spectrum of tech, from AI and medtech to crypto, fintech, blockchain, and venture capital.
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— In traditional finance, all processes are handled by a central authority, while DeFi automates all operations through smart contracts. — DeFi platforms are powered by blockchain technology and crypto. — There is no outside control over users' funds or assets in DeFi.
DeFi replaces the intermediary with smart contracts, and users trust the public blockchain to deliver the services promised. Unlike DeFi, Traditional Finance (TradFi) relies on centralization, relying on governing bodies and regulators to establish a trustworthy system.
Faulty smart contracts are among the most common risks of DeFi. Malicious actors eager to steal users' funds can exploit smart contracts that have weak coding. Most decentralized exchanges enable trading through the use of liquidity pools.
It eliminates the need for centralized intermediaries—banks, brokerage firms—and establishes stable Peer-to-Peer (P2P) networks for secure transactions.
Using DeFi allows for: Accessibility: Anyone with an internet connection can access a DeFi platform, and transactions occur without geographic restrictions. Low fees and high interest rates: DeFi enables any two parties to negotiate interest rates directly and lend cryptocurrency or money via DeFi networks.
DeFi stands for decentralized finance, which means everything from simple transfers to complex financial functions are facilitated without any third-party involvement. To help you understand DeFi, let's first cover traditional, centralized finance.
DeFi is revolutionising the sector by eliminating intermediaries, empowering individuals to have greater control over their assets, and enabling seamless cross-border transactions. While TradFi brings years of industry knowledge and established regulations, fostering trust and mitigating risks.
Another benefit to DeFi is that because it uses blockchain, everything is more transparent. This could help to improve due diligence and reduce financial scams and negative business practices. With every part of the blockchain easier to identify, it's a big deterrent for fraudulent behavior.
Advocates of DeFi assert that the decentralized blockchain makes financial transactions secure and more transparent than the private, opaque systems employed in centralized finance.
After recapitulating the “five flaws of traditional finance” — inefficiency, limited access, opacity, centralized control and lack of interoperability — they go on to explain how DeFi improves upon the status quo. Take the problem of centralized control.
Without a comprehensive understanding of the mechanisms underlying DeFi, users are susceptible to making errors, which could lead to substantial financial losses. Another major disadvantage of DeFi is the high number of risks associated with it.
1 Smart contract bugs. One of the main risks of DeFi is that smart contracts may contain bugs or vulnerabilities that can be exploited by malicious actors or cause unintended consequences. ...
Centralization offers better control, efficiency, and standardization, while decentralization provides greater flexibility, responsiveness, and innovation. In practice, many organizations adopt a hybrid approach, combining elements of centralization and decentralization to optimize their AP function's performance.
Decentralization: Unlike traditional financial systems that rely on centralized institutions like banks, DeFi operates on decentralized networks, typically using blockchain technology. This means there's no single authority controlling the system, enhancing transparency and reducing the need for intermediaries.
Responsiveness and speed – The pace of decision-making impacts the speed at which the organization can deliver value to its customers. This is often the most significant advantage of decentralized decision-making in complex solution development tasks.
DeFi is a financial system focused on creating decentralized applications for Blockchain technology. DeFi allows users to send, receive and even lend money without the help of third parties.On the other hand, traditional finance is centralized finance that manages assets on behalf of users.
CeFi has similarity to traditional forms of centralized finance, where banks and exchanges manage currency and transaction flows. DeFi enables peer-to-peer transactions without the need for a centralized exchange. CeFi and DeFi have some similarities, as well as advantages and disadvantages.
What is TradFi? Traditional finance, or TradFi, is defined as the mainstream financial system and the conventional institutions such as retail, investment, and commercial banks, insurance companies, brokerages, and other regulated entities that operate within it.
Through decentralized lending protocols, borrowers looking for loans for personal or corporate endeavors can interact with investors worldwide, expediting the borrowing process and possibly lowering costs. Open finance can also enhance customer experiences by enabling secure data sharing among financial institutions.
Introduction: My name is Rueben Jacobs, I am a cooperative, beautiful, kind, comfortable, glamorous, open, magnificent person who loves writing and wants to share my knowledge and understanding with you.
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