DeFi or Decentralized Finance has the ability to alter and develop the financial world stated Bahaa Abdul Hussein. The services it offers are easier to use, understand, and efficient. There are also noticeable risks associated with DeFi like challenges of regulatory compliance, safety vulnerabilities, and systematic risks.
It is also the time for traditional finance to adjust to the changing circumstances and evolve accordingly. It must employ new technologies, launch attractive initiatives, or/and work along with Decentralized Finance platforms.
Relationship between DeFi and Traditional Finance
At present, there is a debate about the likelihood of convergence, collaboration, or competition between the two types of finance:
- Convergence: There has been an ongoing effort to bring traditional finance and DeFi closer. Traditional financial institutions are no longer shy of adopting blockchain technology. They are looking at possible ways to incorporate DeFi principles in their existing infrastructure too. With this convergence, we could be looking at a hybrid model combining the best of the two worlds. Traditional finance can go into a partnership with DeFi platforms and offer DeFi services.
- Collaboration: Traditional finance has regulatory oversight, stability, consumer trust, and above all, vast industry knowledge. DeFi brings to the table decentralized decision-making and easy access. Therefore, a collaboration between the two will create opportunities for innovative solutions. In this partnership, traditional financial institutions will add consumer reach and credibility, and DeFi will supply agility and state-of-the-art technology.
- Competition: There is obvious competition between the two financial forms. Consumers feel protected as traditional banking follows strict regulatory norms and is stable. Though DeFi offers more freedom, there are issues related to fraud, security, and compliance. Again, DeFi is more cost-effective and efficient which is driving traditional institutions to become more adaptive and innovative. DeFi platforms do not need any intermediaries and allow peer-to-peer transactions.
Conclusion
If the stakeholders can see through the risks and use all the opportunities correctly, DeFi can be smoothly integrated into the worldwide financial system. In fact, DeFi and the traditional finance industry must work together, following regulatory rules strictly. Both TradFi and DeFi can improve with each other’s support. Though DeFi is giving competition to traditional finance, it is becoming clear that the way ahead for a better future is convergence.
To bring in a balance and adopt DeFi into mainstream finance, the regulators must work with DeFi to establish self-regulatory solutions. TradFi and DeFi must agree and establish a framework containing standards that they need to follow. This is essential to bridge the gap between traditional finance and DeFi and build a new unbeatable HyFi or hybrid financial infrastructure.
The blog has been authored by Bahaa Abdul Hussein and has been published by the editorial board of Fintek Diary. For more information, please visit www.fintekdiary.com
