March 2024

The traditional finance industry is rapidly converging with that of decentralized finance, which offers a superior alternative in many aspects, such as financial management, transaction efficiency and storage of assets. While DeFi was initially derided when it first emerged last decade, some of the biggest players in TradFi have come to recognize how its innovations can reshape the way money markets work. Institutional giants including JPMorgan Chase, Mastercard, Goldman Sachs and BlackRock have already started to incorporate elements of DeFi in their TradFi products and services, while DeFi has adopted many aspects of TradFi Why DeFi Can Improve TradFi These institutions are looking to take advantage of DeFi’s potential to improve financial systems in many ways. Because DeFi is automated and uses smart contracts to facilitate peer-to-peer trading, it provides a foundation for more efficient transactions. DeFi is entirely hosted on the blockchain, which eliminates intermediaries, meaning transactions can be completed much more quickly and at much lower costs. What’s more, blockchains are fully accessible and online 24/7, which breaks down the traditional barriers of time and geography associated with conventional banking. Beyond its greater efficiency, DeFi is also about equal opportunities, opening the door for anyone to participate, including those who have traditionally been excluded from existing banking systems. This is significant, as the World Bank estimates that around 1.4 billion people across the world are currently unbanked, which means they’re excluded from financial ecosystems and have no easy way to save money and invest in their future. The number of unbanked in some countries is truly staggering. For example, a July 2022 study revealed that less than a year after El Salvador became the first nation in the world to make Bitcoin legal tender, more than 70% of its households didn’t have a bank account, while around 90% had no access to mobile banking. For economies such as these, which are still based on cash, DeFi’s ability to increase the accessibility of financial services can be a game changer. It’s for these reasons that the convergence of DeFi and TradFi can be so revolutionary. It can potentially lead to the creation of a more just and equitable financial system that empowers everyone to participate and explore opportunities to grow their wealth. In What Ways Are DeFi & TradFi Converging? Most people still view TradFi and DeFi as exclusive, independent financial ecosystems but in reality, the convergence of these two systems has been gathering pace for some time already. Increased Liquidity With Bitcoin ETFs One of the most recent examples of this is the recent approval by the US SEC of multiple Bitcoin Exchange Traded Funds, or ETFs, which have opened the door for institutional investors to buy into the world’s most valuable cryptocurrency. Bitcoin ETFs enable investors to gain exposure to the price of Bitcoin without the complications and hassles of owning Bitcoin directly. These hassles, which include creating and securing a wallet, setting up an account with a crypto exchange and so on, all have big security implications that institutions cannot ignore. In contrast, Bitcoin ETFs live on highly-regulated stock exchanges and can only be accessed via investors’ existing brokerage accounts, which are also governed with strict oversight. ETF structures therefore increase accessibility for institutional investors, many of whom are legally prohibited from investing in digital assets. The impact of Bitcoin ETFs is believed to be one of the major drivers of crypto’s early 2024 bull run, which saw BTC hit a new all-time high of $73,750.07 in early March. Real World Asset Tokenization So-called real world assets, which refers to digital tokens that live on the blockchain as a representation of physical assets, are another transformative element of DeFi. Tokenization facilitates the integration of numerous traditional financial investments with blockchain, enabling old markets to take advantage of DeFi’s unique benefits. By tokenizing stocks and shares, real estate, commodities, vintage wine and fine arts, these markets become much more accessible thanks to the concept of fractional ownership, where a property, for example, can be split into 100,000 tokens and sold to 100,000 individual investors. The DeFi protocol Aave has already embraced RWAs, partnering with the Centrifuge protocol to bring tokenized assets such as real estate, cargo and freight invoices to the blockchain. Businesses can now use these assets as collateral to obtain loans in crypto stablecoins, meaning they have an alternative source of credit and financing that doesn’t involve traditional banks. Another example is ArtFi, which buys up artworks from famous artists and converts them into NFTs that represent a share in that painting. Its decentralized marketplace has provided an opportunity for thousands of retail investors to access what has traditionally always been an exclusive investment opportunity. Advancing DeFi Trading Strategies DeFi is also embracing advanced trading mechanisms that were honed to perfection in the traditional financial world, enabling crypto users to formulate more sophisticated trading strategies than was previously possible. One of the primary examples of this is Orbs, the Layer-3 blockchain infrastructure network, which has integrated its dTWAP protocol with a number of popular decentralized exchange platforms or DEXs, giving their user’s more options for trading profitably. dTWAP stands for “decentralized time-weighted average price” and it’s a technique that can help to minimize the effects of slippage on larger orders. It has been a key strategy in TradFi for years, but until recently it wasn’t available in DeFi markets. TWAP is an algorithmic trading strategy that helps to mitigate the impact of large orders on markets by breaking down trades into smaller components, executing them over an extended timeframe. This approach reduces the effect of slippage, which is the difference between the expected price of a trade and the execution price. It’s an important development for DeFi because most markets are extremely fragmented and characterized by low liquidity, making slippage a big problem for crypto traders. Orb’s dTWAP protocol has been integrated by nine DEXs so far, most recently Lynex, and before that PangolinDEX, SpookySwap and QuickSwap. The success of dTWAP highlighted the demand for more TradFi features in DeFi, and Orbs has since launched a new protocol called dLIMIT, which enables the reliable and optimal execution of limit-based orders to enhance traders’ profitability. Enhancing TradFi Transactions Traditional giants in the banking world have launched their own blockchain initiatives in order to boost the efficiency of their internal operations. One of the first to embrace digital assets was JPMorgan Chase, which launched its blockchain subsidiary Onyx in 2020, Using Onyx’s infrastructure, JPMorgan has been able to improve the efficiency of its global fund transfers by using blockchain-based stablecoins such as JPM Coin. It launched a pilot project of this in 2021, collaborating with several of its banking partners in Taiwan. The initiative resulted in lower cost global transactions from the elimination of intermediaries, with fewer rejected or returned transactions that result from mismatched payment details, further reducing costs. In addition to exploring blockchain technology with Onyx, JPMorgan has also explored providing its wealth management clients with access to crypto funds, alongside other big banks such as Morgan Stanley and Goldman Sachs. Bringing Real-World Data On-Chain One final way in which DeFi and TradFi are converging is with the growing prominence of so-called data oracles, which act as a bridge between blockchains and real-world data sources. These oracles give DeFi platforms a reliable, trustless way to access external information that can be used to automate the execution of smart contracts. In other words, they enable the creation of more sophisticated dApps that can provide real-world utility. Oracle data feeds such as Pyth Network and Flare’s Time-Series Oracle enable dApps to access information such as price feeds, not only for crypto but also stocks and shares, Forex, interest rates and so on. Financial Freedom For Everyone The convergence of TradiFi and DeFi is an immensely promising and ongoing development that can enhance the way everyone interacts with the world of finance. It will lead to greater accessibility in both TradFi and DeFi, more sophisticated DeFi markets, and enable almost any kind of traditional asset to live on-chain where it can be traded more efficiently. As this trend picks up steam, it will be crucial for stakeholders in both TradFi and DeFi, plus regulatory authorities and innovators to collaborate and ensure everything works as seamlessly as it should. Although challenges remain, especially in terms of regulation, the benefits of a more accessible and equitable financial ecosystem are well within reach, and it has been made possible exclusively by the marriage of DeFi with TradFi.