Traditional Finance and DeFi: The Inevitable Path from Opposition to Integration

Author: Paradigm; Compiler: Vernacular Blockchain

The current financial system is hampered by inefficiencies, which not only suppress economic growth but also consume a lot of resources. The risks are high, and the cost of inaction is even higher. Many people see decentralized finance (DeFi) as a transformative solution - a way to cut redundancy and unlock real value. DeFi is not just an alternative, but the future that traditional finance is about to embrace. And it all starts with policies that support its thriving development.

 01 More than two-thirds of traditional financial companies are paying attention to DeFi

The technical infrastructure and systems currently used by traditional finance are labor-intensive and require a lot of manual intervention. Therefore, traditional financial companies have been exploring cutting-edge technologies. They actively look for ways to use technology to reduce costs, improve risk management, and streamline operational efficiency. Cryptocurrency is increasingly integrated into their strategies:

1. Traditional financial companies see DeFi as a solution to operational efficiency issues.

2. Almost nine out of ten companies are actively investing or researching how to leverage the benefits of public blockchains.

3. Traditional finance is embracing its own disruption because it understands how much it can gain from moving to DeFi-driven infrastructure.

 02 It is inevitable that DeFi will eventually become critical to most core businesses

Traditional finance clearly believes that DeFi will eventually become critical to its core products and business lines. This all stems from traditional finance's belief that DeFi will bring real improvements to the financial system.

We have come a long way from the days when skeptics believed that DeFi would never be relevant outside of cryptocurrency. Traditional finance now sees DeFi as not only inevitable, but an opportunity.

 03 Traditional finance denies that private blockchains have the same value as public permissionless blockchains

Earlier last year, research showed that central banks are abandoning proprietary blockchains and increasingly turning to open source software and public networks. Most of the traditional finance community now believes that public permissionless blockchains are essential to leveraging advantages such as smart contracts and tokenization.

Securing such systems is critical, and strong incentives are needed to develop and maintain open public infrastructure.

 04 Traditional finance is most interested in stablecoins, tokenized assets, and decentralized exchanges (DEX)

Traditional finance has the greatest interest in stablecoins, tokenized assets, and decentralized exchanges (DEX), which correlates with the increase in on-chain transaction volume in these areas.

These three “pillars” are necessary to accelerate market development, as there is now a settlement asset, a common way to represent other assets, and an extensible protocol that can be used in combination to perform financial transactions on-chain.

In the coming years, expect these charts to continue to develop upward and to the right.

 05 The biggest obstacle preventing DeFi from unleashing true economic efficiency in the short term is the regulatory environment

Policymakers have a golden opportunity to accelerate development. Traditional finance understands that DeFi is inevitable and that it represents an improvement over most current systems. On this point, they are in line with the fundamental view of many cryptocurrency practitioners, who have been working to protect DeFi’s open system so that this innovation is not stifled before it fully matures. The main obstacle for traditional finance to embrace cryptocurrencies is not the need for more powerful infrastructure or lack of practicality, but that many banks and market regulators are preventing traditional financial companies, banks, trading platforms, and funds from touching DeFi.

The patient period of waiting and watching is over. Now four years after the DeFi summer, the global and cryptocurrency markets have experienced a series of events that have demonstrated the anti-fragility of DeFi. It is time for regulators to start opening the gates that separate traditional finance from DeFi and allow traditional financial companies to embrace the possibilities of this innovative technology.