Recent technological developments have made distributed and decentralized systems viable alternatives to established practices and institutions. Decentralized finance (DeFi) is defined as the provision of decentralized and decentralized solutions through the use of new technologies, most notably distributed ledger technology (DLT), or blockchain. there is room for issues that the current “traditional financial” (TradFi) institutions are accustomed to resolving through centralized and intermediate actions.

DeFi’s principles and ideas are currently being used by a large number of forward-thinking FinTechs to compete with TRADI firms on their own turf, possibly endangering business models and revenue streams. incumbent. The connection between TradFi and DeFi is frequently portrayed as antagonistic, maybe due to the public’s fascination in novelty assets like cryptocurrencies, but this conceals the situation’s true motivation: a desire to be constructive. A close relationship exists between the two parties, and their shared objective is to develop faster, less expensive, and safer financial markets. They are also committed to using new technology to better address their respective concerns. The complete implementation of these objectives, however, is not without difficulties.

Challenges of DeFi and TradeFi Integration

Despite having similar goals, the stark differences between DeFi and TradFi in terms of agility, risk-taking, and acceptance of disruption stand in the way of their integration. According to Clayton Christensen’s “Innovator’s Dilemma” thesis, incumbents might become weak by acting ethically; as a result, they frequently concentrate more on the bottom end of the market, where their revenue is highest and their customers are most devoted.

The innovative end of the industry may be difficult for them to compete in, but the uncharted end of the market won’t be very protected. DeFi innovators joined the financial markets by creating the framework for the crypto market, but they are now beginning to branch out into other fields, such as cryptography. With the help of this initiative, traditional asset digitization, lending, custodial services, the development of a Distributed Financial Market Infrastructure (dFMI), and more will be covered.

The incumbents haven’t had too much trouble so far since their primary markets are still lucrative and uncontested and because there is a lot of regulatory uncertainty around the ethical and legal handling of DLT and DeFi solutions. However, the aforementioned “insurgents'” activities are undoubtedly catching regulators’ notice, which—when combined with rising client demand and the advancement of others—could pave the way for more official legitimacy and regulation. This can make established players susceptible and unable to keep up with newcomers when they penetrate their established markets.

Furthermore, TradeFi frequently adopts new technologies slowly, particularly in the wholesale financial markets. A further obstacle to the fusion of the two industries is the risks associated with updating or merging legacy systems with new solutions.

Is the market’s convergence of TRAFI and DeFi inevitable?

Despite the aforementioned distinctions, the regulatory agencies’ increased readiness, the rising demand from businesses and consumers, and the core objectives related improvements in the cost, speed, and security of financial markets all indicate that TradFi and DeFi convergence is imminent. It would be difficult to resist the advantages that each can provide for the other.  

Only with complete conformity with relevant authorities and regulatory systems can DeFi attain legitimacy. Full compliance makes it possible for DeFi services and the technology that powers them to be expanded safely, encouraging increased usage and access from a wider range of customers.

The wholesale financial sector, on the other hand, is where TradFi hopes to use DeFi technology like blockchain to reduce settlement times to the same day (T+0). This will take advantage of the risk reduction advantages that come with adopting DLT and reduce the number of intermediaries required between transaction commencement and ultimate settlement. Large banks in particular can better foresee and manage their liquidity needs by utilizing the almost instantaneous peer-to-peer payments technology offers.

For these and other goals, Fnality, a group of top international financial institutions, has used applications on the TradFi system that use DeFi-linked technology. Fnality’s payment technology can save up to 70% in intraday liquidity and enable near-instant payments when working with both TradFi and DeFi partners to get the platform ready for launch in late 2022.

What conditions must be met for DeFi and TradeFi to co-develop?

When DeFi and TradFi successfully merge, new technologies will be used to create new and ongoing goods while streamlining procedures, lowering costs, and ensuring regulatory compliance. fresh market entry Both parties must be confident that the technology is reliable, secure, and interoperable, as well as that the regulatory environment is good, in order to achieve this. Therefore, a platform “layer of trust” that is well-managed and technologically sound is what is actually required to drive this convergence securely and guarantee that both parties completely implement the requirements. their mutual purpose.