There is a lot of discussion around the one or the other, but I actually see use cases for both sides in collaboration. For me, it's less a question about what is possible with CeFi vs DeFi, but more about individual preferences regarding new potential financial services.
DeFi is peer to peer, where everything is direct. There is no middleman involved and it is fully smart contract based, so it is transparent, peer to peer and with no trust needed.
On the CeFi side, everything works through an intermediary. You have either a bank or a centralized exchange that acts as the platform to bring parties together. There is always somebody to talk to or write to in the centralized ecosystem. Plus, if you lose access, you would be able to recover you account with your ID card. This is obviously not possible in the DeFi space, where you basically act as your own bank.
In addition to personal preference, fees are also a key part to consider when looking into DeFi, especially when using the Ethereum blockchain for swaps (essentially trading one cryptocurrency or token for another) or staking to access higher yields. Fees can go up to significant numbers, especially for smaller trades. If you look at Uniswap, during the high-fee times, you're easily talking $100 just to deposit assets in a liquidity pool.
For those new to the space: In DeFi a liquidity pool allows participants to swap crypto currencies from one to another, for example from USDT to Ether (ETH). As there is no middleman, no market maker, users can provide liquidity to create the basis for an “automated market maker” (AMM).
By providing both currencies (USDT and ETH in our example) to a pool, there is always liquidity available to swap. Somebody who exchanges USDT to ETH would add USDT to the liquidity pool crypto and take ETH out. Liquidity pool providers get a fee for providing liquidity.
First of all, DeFi gives full control to the user, plus obviously the tech (the protocol, the smart contracts) that is underlying it. In addition, it opens new investment opportunities and new financial services. You get access to staking participation in liquidity pools, and by that open up an entirely new universe of opportunities.
I would highly encourage everyone to dive in, explore, learn and get involved.
Further, we see amazing growth in the DeFi ecosystem. Looking at Total Value Locked, the amount of money allocated to staking pools, this number reached 250bn USD at the end of 2021. And is now getting significant when compared to the assets under management of even bigger banks.
There are a few forces at play.
In terms of money, DeFi allows you to get access to higher yields in an environment of very low or even negative interest rates.
To give a bit more perspective here, in the DeFi space you can get up to 20% per year in interest on US dollar, versus 0% to 2% on the bank account, so this is a big driver attracting people to DeFi.
Second, self-control. More and more people, especially younger generations, want to be in control of how their data is used, where their money goes, etc...
Third, Web 3.0, metaverse and blockchain gaming require users to get involved with DeFi and the future of financial tools, such as a web wallet to connect to the virtual space, play to earn game, or store NFTs as digital art or utilities.
The short answer would be no. Yes, the more standardized the transactions are, the easier to replace on a decentral platform, through the usage of smart contracts.
However, the more complex transactions become, the more a central organization will need to be involved, just to make sure everything is executed as desired. In addition, even when we talk about DeFi and the future of finance, centralized players still have a role to play.
The biggest assets of established banks and insurance companies are their client base and the trust they have built over many years. With this strong starting point, CeFi organizations are in an excellent position to educate and advice their clients when exploring DeFi, but also offer supporting services to clients who are not able or willing to take on all the risks in DeFi on themselves. Obvious examples would be offering custody of private keys.
The biggest impact and benefit will be generated, when DeFi and CeFi players work together. Each focusing on their strengths and assets. In a perfect world, this would mean I can go to a bank and get DeFi products offered, fully integrated into e-banking and m-banking.
You get access to a different asset class, risk profile but also return potentials. In addition, banks could work with insurance companies and provide additional coverage for e.g. exploitation of smart contracts.
I would like to point out three of the best fintech startups in the DeFi space that have recently gone through F10's incubation programs:
Starting with STOverse, a Geneva-based company that is currently in the incubation batch VIII in Switzerland. They want to reimagine the fundraising for small businesses and medium sized companies. They are really offering an all-in-one platform to raise funds based on a token offering and based on that give access to a decentralized finance trading secondary market of those tokens and make a very illiquid asset class totally liquid.
The second would be onChain custodian. They are a Singapore based company that were also part of our F10 program. They allow companies to have custody for their crypto assets. With that, they make the hurdle low to get involved in the crypto space and also hold crypto tokens in their wallets.
A third one, Valk, is a UK based company. They are building decentralized infrastructure for capital markets and allow financial institutions to digitize their deal making process by tokenizing their assets. In addition, they are currently building DeFi tools like a dashboard to extract information from DeFi protocols. Interesting for both, retail and institution investors.
For financial institutions looking to learn more about the DeFi space and the opportunities for collaboration with startups, get in touch with us.
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