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We’ve all become accustomed to hearing about crypto projects that cater to traditional finance and massive investment firms applying for crypto exchange-traded funds. But it’s easy to forget how hostile and combative the DeFi-TradFi relationship was.
Of course, these two different financial systems will never completely agree. But by understanding that they cannot eliminate the other, hostilities calmed and the lines of communication opened.
TradFi understands the potential of blockchain technology and operational efficiencies and the ability of decentralized finance to create innovative financial products and services. Likewise, crypto has realized that TradFi’s infrastructure, vast resources, and customer base hold the key to expanding its ecosystem.
Despite the search for common ground, technological, ideological and operational gaps remain, creating a divide that will ultimately limit successful collaborations if not bridged. Remember, Bitcoin (BTC) only turns “sixteenth” this year, and crypto as a whole still has a lot of momentum to gain. On the other hand, traditional banking is so ingrained in society over centuries of growth that it is not going away any time soon. Therefore, the absence of a mechanism for meaningful cooperation and coexistence will ultimately harm the global economic order.
Since the crypto movement has effectively inserted itself into the financial order, it is primarily responsible for adapting to TradFi, which operates under the same principles it has applied for centuries. It’s not that TradFi can’t change; it’s simply that as a gatekeeper to the economy, the sector moves at a much slower pace. Expecting change on this scale so soon is the equivalent of a four-year-old demanding to get a college degree.
As it stands, common instruments like debit cards are still disconnected from the DeFi protocols and real-world tokenized asset platforms that drive TradFi’s interest. And buying crypto on a centralized exchange and then staking on a DeFi protocol with a separate wallet contradicts the narrative of crypto’s “efficiency”, especially when banks allow customers to log into an app and buy, sell or trade stocks in just a few clicks.
This highlights the desperate need for interoperability infrastructure that can seamlessly connect TradFi systems – including various permissioned currencies and chains – with blockchain-based applications and protocols. Overcoming this obstacle would allow institutions to expand their engagement with DeFi and crypto while providing new crypto users with a painless onboarding experience.
DeFi protocols have, to some extent, improved their compliance with KYC and AML processes, but more is needed to engage banks. Intense auditing and enhanced security measures powered by automated monitoring tools, for example, would go a long way in boosting TradFi’s confidence in DeFi.
While maximizing broad collaborations between TradFi and DeFi requires the former to do heavier lifting, the latter should be willing to provide support to improve joint infrastructure solutions with better risk management models and subject matter expertise. conservation and provision of liquidity.
An infrastructure that takes into account the needs of both ecosystems is the only surefire way to continue their dialogue. And some projects take the initiative to make this mix more fluid.
For example, Vixichain is a young project with big ambitions to encourage greater TradFi involvement in DeFi by inviting financial institutions to serve as validators on its compliant layer 1 blockchain. Vixichain creates a secure environment for financial institutions to interact with DeFi protocols on public blockchains via a stablecoin that uses NFT technology to ensure traceability and authenticity. Its stablecoin is backed by fiat reserves and supported by its native VIXC token to power real-world utility in an integrated, compliant environment.
As Bitcoin surpasses $100,000 for the first time, there is great hope that together TradFi and DeFi can chart a path not only for constructive cooperation, but also for an integrated system that meets the financial needs of billions of people. Achieving this requires both the innovation potential of DeFi and the resources and infrastructure of TradFi to lay the foundations for a new, more efficient financial era.
