From DeFi to TradFi; how decentralisation can be core in development of traditional finance

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Decen­tralised finance cur­rent­ly seems to have cap­tured a lot of mind space, in the Fin­tech sec­tor. So much so that expert­ers believe that use of decen­tralised finance (DeFi), as an emerg­ing finan­cial tech­nol­o­gy (fin­tech), can help to devel­op the glob­al finan­cial sce­nario. In terms of tra­di­tion­al finance, DeFi is expect­ed to have an impact on the future of banks and how finan­cial struc­tures will func­tion at a macro­eco­nom­ic level.

Insights pro­vid­ed by Sta­tista, a mar­ket research-based com­pa­ny, showed that DeFi’s total val­ue locked (TVL) grew by around $100 mil­lion between April and March of 2021, which dou­bled its mar­ket share since 2020.  “DeFi is a sys­tem devel­oped on blockchains which makes its pos­si­ble for all mar­ket­place par­tic­i­pants, sell­ers and buy­ers, bor­row­ers and lenders, among oth­ers, to inter­act with each oth­er, on a peer-to-peer basis with a soft­ware-based enti­ty facil­i­tat­ing the trans­ac­tion,” Rajagopal Menon, vice-pres­i­dent, WazirX, a cryp­tocur­ren­cy exchange, told FE Blockchain.

More­over, use of DeFi can help pro­vide advan­tages for economies such as India with devel­op­ing tra­di­tion­al finan­cial ser­vices since its sup­ports small and medi­um-sized enter­pris­es. As per ana­lysts, the intro­duc­tion of a cen­tral bank dig­i­tal cur­ren­cy (CBDC) is the first step towards accep­tance of tokeni­sa­tion and decentralisation. 

Mar­ket-ori­ent­ed research has shown that finan­cial plat­forms such as spot trad­ing-backed decen­tralised exchanges, non-fun­gi­ble token (NFT)-based lend­ing pro­to­cols, among oth­ers, car­ry the poten­tial of incul­cat­ing DeFi-based devel­op­ments towards the tra­di­tion­al finan­cial sys­tem. Accord­ing to Vis­tra, a cap­i­tal mar­ket com­pa­ny, DeFi as a form of tra­di­tion­al finance can make real-time trans­ac­tions, ensure trans­paren­cy between finan­cial par­ties, help users retain cus­tody of their assets, and ensure finan­cial pro­to­cols are open source in nature.

“Tech­niques such as smart con­tract-based com­pli­ance, auto­mat­ed mar­ket mak­ing, tokeni­sa­tion, smart con­tract-ori­ent­ed col­lat­er­alised debt pools, among oth­ers, can be help­ful. Blockchain-backed cus­tomer data plat­forms (CDPs) can help cre­ate short-term liq­uid­i­ty against tra­di­tion­al­ly illiq­uid assets,” Srini­vas L, CEO and CTO, Rooba.Finance, a dig­i­tal asset-based plat­form, stated. 

Report­ed­ly, finan­cial insti­tu­tions such as BNY Mel­lon, JP Mor­gan, Gold­man Sachs, Inter­na­tion­al Mon­e­tary Fund (IMF), World Bank, and Nas­daq, have start­ed to explore the poten­tial of blockchain in the finan­cial ser­vices sec­tor. In recent devel­op­ments, Uniswap, a cryp­tocur­ren­cy exchange, Coin­base processed 30% of Coinbase’s vol­umes with 27% head­count and 2.6% ven­ture fund­ing. Accen­ture, an infor­ma­tion tech­nol­o­gy (IT) com­pa­ny, high­light­ed that blockchain could help glob­al invest­ment banks cut their infra­struc­ture costs by eight to 12 bil­lion dol­lars a year by 2025 and reduce expen­di­ture on com­pli­ance by 30–50%. 

More­over, report-backed data believe that that DeFi is still nascent in nature, and has a long way to go before its emer­gence as a seri­ous form of finance once clar­i­ty in reg­u­la­tions is achieved. As per Grand View Research, a mar­ket research and con­sult­ing firm, the glob­al DeFi mar­ket size was val­ued at $11.78 bil­lion in 2021 and is expect­ed to expand at a com­pound annu­al growth rate (CAGR) of 42.5%  from 2022 to 2030. 

“DeFi is con­stant­ly evolv­ing. Its ecosys­tem is rid­dled with mishaps, inef­fi­cien­cies, scams, and hacks, at the moment. Mov­ing for­ward, DeFi is expect­ed to con­tribute towards tra­di­tion­al finance with the ben­e­fits of being a decen­tralised net­work. Tra­di­tion­al trans­ac­tions such as lend­ing, remit­tances, mar­gin trad­ing, com­modi­ties trad­ing, among oth­ers, as DeFi are expect­ed to open new oppor­tu­ni­ties for users in a cost-effi­cient way,” Aman­jot Mal­ho­tra, coun­try head – India, Bitay, a cryp­tocur­ren­cy exchange, mentioned.

Also Read: Coin­switch Kuber plans to go live with its wealth tech plat­form by year end

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