The blockchain industry’s wide adoption in industries worldwide, the consideration of institutional investors as a valuable niche, and governments’ pro-crypto positions have made it one of the most important pillars for future global development.
When we observe the recent relaxations in rules and regulations, we can see that it became possible only by the collaboration of governments with decentralized systems instead of considering each party as enemies. In a broader sense, it is a collaboration between TradFi and DeFi, traditional finance, and decentralized finance.
TradFi and DeFi have been cooperating since the invention of Bitcoin itself. However, we need advanced collab systems to push the sustainability of the economy. This article will get into the pros and cons of combining TradFi and DeFi, citing examples and case studies. Also, we will delve into the ongoing developments within this collaboration. Let’s get started.
What Is DeFi?
Decentralized Finance, shortened as DeFi, is a general term used to describe a spectrum of blockchain-based financial services such as decentralized exchanges (DEXs), liquidity mining platforms, and lending networks. Major examples include Uniswap (DEX), Aave (a lending and borrowing platform), and Dai (a stablecoin).
What Is TradFi?
Traditional Finance, aka TradFi, is an umbrella term for centralized orthodox financial systems such as banks, insurance companies, and stock exchanges. TradFi ecosystems work within the strict regulatory frameworks of governments, employing a complex set of rules with consistent audits.
The Need For DeFi And TradFi Collaboration
TradFi’s main drawback is that it is a slow system. Also, centralized power can sometimes go against the people’s will. Various governments have imposed geographical rules that restrict cross-border transactions. Also, the outdated technology, the lack of people’s trust, and the mountains of documents have made it an inadequate system in front of newly arrived DeFi technologies. However, DeFi has its own shortcomings.
When billions of dollars vanished from the market after the collapse of FTX and the death spiral of Luna, various blockchain experts demanded a hybrid system of blockchain economy where some power would be reserved among the community for those capable of instant decision-making and also the monitoring by a trustable outside agency. It is evident from the failure of Terra Luna and FTX that pure decentralization is not possible in large-scale networks due to inadequate risk management and instability within the community.
The unpredictable nature of the volatile DeFi market and the hacking vulnerabilities because of the lack of monitoring have created a need for its integration with TradFi. On the other hand, TradFi is also looking for advanced technology to evolve as a citizen-friendly economic system.
Examples Of TradFi And DeFi Collab
There are various examples of the collaboration of traditional financial systems with decentralized technology from the early years of blockchain, including the use of stablecoins as a bridge and the tokenization of real-world financial assets. Let’s get into the details.
- Stablecoins: In 2014, a stablecoin called BitUSD was issued by the BitShares blockchain to peg with the US Dollar. This allowed traders to integrate fiat values into the blockchain realm. Later, various stablecoins arrived on the market, including the highly successful Tether (USDT). According to the rules, the issuer should need an equal amount of US dollar backup in the reserve.
- RWA Tokenization: In a traditional sense, the first tokenization of an RWA (Real-World Asset) is Tether USDT. However, since it is a stablecoin, let’s get into other tokenized RWAs. They mostly include real estate, bonds, artworks, and other commodities. Basically, any real-world assets can be tokenized.
- Additional Examples: There are platforms such as MakerDAO and Circle where customers can use traditional financial assets for international transactions and also as collateral for loans. Also, various platforms are in their testnet phase.
Final Thoughts: Emerging DeFi Meets TradFi Systems
Governments are aware that their Empire will collapse if people no longer believe in them. People are aware of the benefits of the blockchain realm, and governments are under pressure to move according to people’s will by giving a green signal to collaborate with the latest decentralization technologies.
This collaboration, colloquially called OneFi by web3 enthusiasts, is expected to give stability to the general economic system that the world is following now. However, economy experts are aware that the financial system we live in is not the only one that’s available to us. TradFi and DeFi should also consider pre-modern economic systems, as opined by the late David Graeber.
