The financial industry has evolved significantly, introducing new technologies, business models, and products. However, its core structure remains centralized, with a few organizations holding significant control and economic power. This centralization stems from the need to maintain stability and trust within the economy. Yet, this model also has downsides, such as limiting innovation, high costs, and concentrated power.
The traditional financial system was built on the technology available at the time. However, with the advent of blockchain technology, DeFi offers a paradigm shift. It promises a transparent, efficient, and interoperable financial ecosystem. By introducing a decentralized model where trust is embedded in code, DeFi reduces the need for intermediaries, streamlining financial processes, enhancing transparency, and lowering costs.
With smart-contracts, code is law!
There is no turning back: DeFi is here to stay
After the 2018 ICO bubble burst (and several times before), many questioned the relevance and longevity of the crypto market. At that time, the total crypto market cap was around $800 billion, the stablecoin market cap was below $3 billion, and only 11,000 developers were actively working on open-source blockchain projects.
Fast forward to today, the crypto market cap has surged to nearly $3 trillion, the stablecoin market cap has reached $160 billion, and the number of active developers on GitHub has doubled. Tokenization has become a trend, stablecoins are now transacting at levels comparable to Visa, Bitcoin ETFs have been approved, and both large companies and governments are starting to explore blockchain technology.
Despite its advantages, traditional finance (TradFi) will not transition to DeFi overnight. The first steps will involve incorporating the Blockchain technology into the existing centralized solutions for several reasons.
CeFi is a bridge for DeFi
Many immediate problems that Blockchain can solve, require a level of centralization. For example, due to current regulations, tokenization initiatives only become feasible with legal institutions overseeing the assets. Beyond this, the most effective approach to onboard the first billion users might be using established banks and financial institutions as distribution channels.
Recently, BlackRock entered the U.S. Treasury tokenization market. By leveraging its brand and distribution channels, the company successfully brought over $500 million to the market, securing more than 23% of the market share.
Furthermore, blockchain currently lacks widespread trust, it still has an image of scams and a cassino. In this context, financial institutions can play a crucial role in seamlessly introducing people to the technology. Which is correlated with regulatory clarity, that is still evolving. Most governments are discussing blockchain regulation from a centralized finance perspective, so, in the short to medium term, regulations will primarily encompass traditional financial players.
Therefore, initially operating through regulated entities such as banks or fintechs might be the most viable way to bring blockchain to the masses. However, this is just the first step toward transitioning from TradFi to DeFi. Tokenization, stablecoins, and Central Bank Digital Currencies (CBDCs) serve as bridges in this journey, drawing in financial players and governments while creating compelling use cases to attract consumers. As the financial system and consumers become more familiar with the technology, and as infrastructure and user experience improve, a full migration to a DeFi world becomes possible.
The current zeitgeist centers on decentralization, open access to information, and a more frictionless financial system. Initiatives like Open Banking aim to decentralize information in the financial sector, and regulations like the General Data Protection Regulation (GDPR) grant users greater control over their data. In Brazil, resolution 264 gives ownership of credit card receivables to retailers. Transparency and ownership seem to be the natural progression for the market.
Final Thoughts
This is not a revolution that is impacting only the financial system, this will impact the whole internet. Tokens are a new primitive that works as a digital representation of ownership, they are the first form of money truly digital and governed by code. Naturally, they go beyond the boundaries of the financial market and can transit to take over the internet, and this too seems as a natural evolution.
Currently, Blockchain is going through what the late 90s were for the internet, its infrastructure was in development, most people didn’t have access to a broadband connection, and the most used interface to access it, the smartphone, would only appear almost two decades later. Similarly, blockchain infrastructure is in development, networks such as Ethereum and Solana are evolving, and tokenization, the first abstraction of the infrastructure layer, is gaining traction.
Blockchain is more than a new infrastructure, it represents a new model to build solutions and ultimately a new way in which value is created and distributed. It will and without a doubt be able to make financial products easier and cheaper to build, which ultimately can lead to a more accessible financial system. And we believe that this will present a huge impact in Latin America, a region that despite its size and economic power has a lot of challenges regarding financial accessibility, both for people and small and medium businesses.
If you like this content, you can find a deeper discussion about the state of DeFi on our TradFi to DeFi Paper, or if you are an entrepreneur with a Web3 / Fintech / Embedded Finance product, contact us, we are investing!
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