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

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

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

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 collateralised debt positions (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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First published on: 18-10-2022 at 08:26 IST