Collaborative infrastructure saves DeFi-TradFi cooperation

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We are all used to hearing about crypto projects appealing to traditional finance and huge investment firms resorting to funds traded on crypto exchanges. But it’s easy to forget how hostile and combative the DeFi-TradFi relationship once was.

Of course, these two different financial systems will never completely agree. However, when they realized that they could not eliminate the other, hostilities decreased and lines of communication were opened.

TradFi understands the potential of blockchain technology and decentralized finance’s operational efficiency and ability to create innovative financial products and services. Similarly, crypto has realized that TradFi’s infrastructure, vast resources, and customer base are key to expanding its ecosystem.

Although common ground is found, technological, ideological and operational gaps remain, creating a rift that, if left unaddressed, will ultimately limit productive collaborations. Keep in mind that Bitcoin (BTC) is only celebrating its “sweet sixteen” this year, and cryptocurrency as a whole still has a lot of momentum to gain. On the other hand, mainstream banking is so ingrained in society, thanks to centuries of growth, that it’s not going anywhere anytime soon. Therefore, the absence of a meaningful cooperation and coexistence mechanism will ultimately harm the world economic order.

As the crypto movement has effectively incorporated itself into the financial order, the onus falls primarily on it to adapt to TradFi, which operates on the same principles it has for centuries. This is not something TradFi cannot change; it’s just that the industry as an economic gatekeeper is progressing much more slowly. Expecting change on this scale to happen so quickly is like a four-year-old wanting to graduate from college.

As it stands today, common tools like debit cards are still disconnected from the DeFi protocols and tokenized real-world asset platforms that TradFi is interested in. Purchasing crypto from a centralized exchange and then staking from the DeFi protocol with a separate wallet contradicts crypto’s narrative of “efficiency”; especially when banks allow customers to log into a single app and buy, sell or trade stocks with a few taps.

It underlines the urgent need for interoperability infrastructure that can seamlessly connect TradFi systems with blockchain-based applications and protocols, including various currencies and permissioned chains. Overcoming this hurdle will allow institutions to expand their interactions with DeFi and crypto, while also providing new crypto users with a seamless onboarding experience.

DeFi protocols have increased their compliance with KYC and AML processes to some extent, but more is needed to get banks on board. For example, intense auditing and enhanced security measures supported by automated monitoring tools will go a long way in increasing TradFi’s confidence in DeFi.

Maximizing broad collaborations between TradFi and DeFi will require the former to do more heavy lifting, while the latter must be willing to lend support to develop common infrastructure solutions with better risk management models and expertise in custody and liquidity provision.

Infrastructure that takes into account the needs of both ecosystems is the only sure way to ensure that the dialogue continues. And some projects are taking the initiative to make this mix more seamless.

Vixichain, for example, is a young project with big ambitions to encourage greater TradFi participation in DeFi by inviting financial institutions to serve as validators on the compliant Layer-1 blockchain. Vixichain creates a secure environment for financial institutions to interact with DeFi protocols on public blockchains through a stablecoin that uses NFT technology to ensure traceability and authenticity. Its stablecoin is backed by fiat reserves and backed by its native VIXC token to increase real-world utility in an integrated and compatible environment.

As Bitcoin surpasses $100,000 for the first time, there is great hope that TradFi and DeFi together can create not only a path to constructive collaboration, but also an integrated system that meets the financial needs of billions of people. Making this happen requires both the innovative potential of DeFi and the resources and infrastructure of TradFi to lay the foundation for a new, more efficient financial era.