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We’ve all gotten 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 once was.
Of course, these two different financial systems won’t ever see eye to eye entirely. But by understanding that they can’t eliminate the other, hostilities have died down, and lines of communication have opened up. TradFi understands the potential of blockchain technology and decentralized finance’s operational efficiency and ability to build innovative financial products and services. Likewise, crypto has come to realize that TradFi’s infrastructure, vast resources, and customer base hold the key to expanding its ecosystem.
Despite finding common ground, technological, ideological, and operational gaps remain, creating a rift that will ultimately limit fruitful collaborations if not addressed. Don’t forget that Bitcoin (BTC) is only celebrating its “sweet sixteen” this year, and crypto as a whole still has a lot of momentum to gain. On the flip side, mainstream banking is so entrenched in society through centuries of growth that it’s not going anywhere soon. Therefore, the lack of a mechanism for meaningful cooperation and coexistence will ultimately harm the world’s economic order.
Since the crypto movement effectively inserted itself into the financial order, the onus is primarily on it to accommodate TradFi, which operates on the same principles it has had for centuries. It’s not that TradFi can’t change; it’s just that as the economic gatekeeper, the sector moves at a much slower pace. Expecting change at that scale so soon is akin to a four-year-old demanding to graduate college.
As things stand today, common instruments like debit cards are still disconnected from the DeFi protocols and tokenized real-world asset platforms that pique TradFi’s interest. And buying crypto off a centralized exchange to then stake on a DeFi protocol with a separate wallet contradicts crypto’s “efficiency” narrative, especially when banks allow customers to log into one app and buy, sell, or trade stocks with a few taps.
It highlights the desperate need for interoperability infrastructure that can smoothly link TradFi systems—including various currencies and permissioned chains—with blockchain-based applications and protocols. Addressing this barrier would empower institutions to expand their engagement with DeFi and crypto while providing new crypto users with a pain-free onboarding experience.
DeFi protocols have, to some extent, upped their compliance with KYC and AML processes, but more is needed to get banks on board. Intense auditing and enhanced security measures powered by automated monitoring tools, for example, would go a long way to boost TradFi’s confidence in DeFi.
While maximizing broad collaborations between TradFi and DeFi requires the former to do more heavy lifting, the latter should be willing to lend its support to enhance joint infrastructure solutions with better risk-management models and expertise in custody and liquidity provisioning.
Infrastructure that takes the needs of both ecosystems into account is the only surefire way to keep their dialogue ongoing. And some projects are taking the initiative to make this blend more seamless.
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 safe environment for financial institutions to interact with DeFi protocols on public blockchains through 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 fuel real-world utility across an integrated and compliant environment.
As Bitcoin soars past $100,000 for the first time, there is great hope that together, TradFi and DeFi can forge not only a path to constructive cooperation but an integrated system that addresses the financial needs of billions of people. Making this happen requires both DeFi’s innovative potential and TradFi’s resources and infrastructure to lay the foundation for a new and more efficient financial era.