DeFi vs TradFi: Why the Future of Finance Will Be Hybrid

Decentralized finance (DeFi) is quickly transforming the way we move and handle money. With rapid innovation and new developments coming every so often, it might seem like DeFi is poised to replace the traditional financial system (TradFi). This is certainly what the most hardcore blockchain and crypto proponents look forward to.

However, it's highly unlikely that will happen. The traditional financial system is deeply ingrained in a lot of the functions and processes of the modern world, with some of the largest banks boasting balance sheets worth trillions of dollars. Digital currencies on decentralized networks are not going to overthrow them.

Generally, experts agree that in the coming years, DeFi will emerge as a tool to upgrade the current financial system rather than replace it. This is already underway, with some major banks and financial institutions, like J.P. Morgan, HSBC, and Goldman Sachs, taking steps to embrace cryptocurrency and blockchain-based technologies.

At the same, a crypto banking space consisting of institutions like OneSafe, which are built like traditional banks but with Web3 and crypto integration is emerging. This shows that the future financial system will harness the synergistic potential of both traditional and decentralized banking.

How will this unfold, and what will it look like?

A World Without Borders

While the globe is still the same size it was 4.5 billion years ago, the world has gotten significantly smaller since the start of the 21st century.

Improved transport infrastructure has made traveling the easiest it has ever been. Today, wherever peace and democracy prevail, people can cheaply and efficiently move across borders for business and pleasure.

However, the biggest impact has arguably come from the internet, which has allowed people from all corners of the world to connect with unprecedented ease. In recent years, this has fueled the remote work revolution. Today, people don’t have to be in the same office or in the same country to work together.

Thanks to these phenomena, there is a growing demand for financial institutions that aren’t bound by borders. People want to be able to conveniently pay for goods and services wherever they travel. Businesses, too, want the same when it comes to paying their overseas employees.

Existing solutions, like SWIFT and overseas ATMs, are costly and inefficient, though, and this is where DeFi-inspired solutions step in.

DeFi services tend to be global. Being built on blockchain technology means normal operations aren’t restricted by national boundaries, making them easily accessible by anyone, anywhere in the world.

So, with increasing demand for globally accessible services at the same cost and efficiency, financial institutions will have to embrace DeFi solutions in a push to become borderless. This includes processing transactions on-chain for faster completion times of cross-border payments, using crypto-assets as bridge currencies for faster and cheaper conversions, and supporting cryptocurrency transactions and payments.

The Desire for a Better User Experience

Assets like bitcoin (BTC) and ether (ETH) have proven themselves worthy long-term investment instruments, while non-fungible tokens (NFTs) left a lasting impact during their 2022 peak. All this has made digital assets appealing to the public, with many individuals increasingly open to owning crypto.

Tokenization is also becoming more widespread. As the cost and efficiency benefits of blockchain technologies become more apparent, real-world assets (RWAs) like stocks, bonds, and even fiat currencies are being made available to users and investors on-chain.

Unified Platforms

In the coming years, many people will have diversified portfolios featuring multiple or even all of these asset classes.  And ideally, most would prefer the ability to manage all their assets in one place. This makes things such as managing balances and tracking profits/losses convenient.

Unfortunately, DeFi isn’t known for its user experience. It's full of technicalities that make it unintuitive for the average person to navigate. Different blockchains, consensus mechanisms, and token standards also make it difficult to develop unified asset management platforms.

TradFi might have the upper hand in this regard since it's generally easier to use TradFi platforms than DeFi protocols. With a headstart in the decades, it has had the time to perfect its user experience, evidenced by how easy traditional banking and payment platforms are to use.

Leveraging this, financial institutions can develop asset management platforms from where users can manage all their assets, fiat currencies, cryptocurrencies, NFTs, and RWAs, in one place. These don’t have to be fully custodial; they can implement features like multi-sig wallets to give users some level of custody and control over their assets, like in DeFi.

A New Financial Frontier

The coming years will see more people adopt cryptocurrencies, RWAs come on-chain, and a growing demand for globally accessible financial services. This will forge a new financial frontier, one where traditional and decentralized finance converge.

As a result, a new breed of banks and financial institutions that leverage Web3 technologies will emerge to meet the growing demands of users in regard to both traditional assets and cryptocurrencies.