DeFi: the escape route from TradFi

How does DeFi differ from TradFi (traditional finance) and what is the difference for the user?

DeFi (decentralized finance) aims to disrupt the finance market by cutting out the middleman, for example, your bank. It focuses on borrowing, lending an market making and allows investors to directly interact with each other on a peer-to-peer (P2P) basis by providing loans or liquidity for trading and assume those roles/functions in return for generating fees. Marc Bernegger,  tech entrepreneur and AltAlpha Digital crypto hedge fund co-founder, describes what has happened, “The disruption of the banking sector, which we have seen in the recent years driven by FinTech players, has now escalated to the next level with DeFi laying the groundwork for a peer-to-peer ecosystem.” 

There are four ‘tools’ that have enabled DeFi to grow. They are:

  • Artificial intelligence
  • Big data
  • Cloud
  • Distributed ledger technology (smart contracts & blockchain)

What is the problem with TradFi?

The TradFi space, while well established, presents some significant barriers to entry for portions of the population. For example, in emerging economies there are large portions of the population (50-70%) that have no access to banking.

By contrast, DeFi is a digital assets space that can be accessed 24/7/365, with services and global network coverage being constantly expanded and improved. Its accessibility has drastically increased with the spread of Internet coverage and cheap smartphones in all economies.

However, while DeFi sounds great in theory and has been shown to work in practice, there is still a long way to go. The topic remains complex and hard to grasp for many potential users. User interfaces and processes still have plenty of room for improvement and simplification, fees can vary, resulting in unreasonably high charges for smaller transaction amounts.

How you can make money with DeFi

There are two ways: you can either invest in the DeFi projects/protocols by buying the respective tokens while expecting capital gains through price increase based on a superior platform offering, user and asset growth. Or, you can actually use these platforms as an “operator” and generate income from the various activities available. These are:

  • Staking
  • Lending
  • Liquidity provision
  • Yield farming

What you should look for in a DeFi project

When doing your due diligence on any DeFi platform, the key things to look at are:

  • Team
  • Technical
  • Tokenomics
  • Insurance
  • Pools

This is a new industry that is growing in front of us, and while it still has to mature, it is changing the face of finance, especially if you want to obtain a loan, or want to make money by lending yours. No TradFi service offers you this with such ease.

Why the world needs DeFi

One of the compelling reasons the world needs decentralized finance (DeFi) is the corruption in the financial system. I have just been reading an opinion piece by RTR Crypto in Cointelegraph, which highlights the issue of remittances. Around the world there are a considerable number of people who work in another country in order to send money home. This is a finance sector known as ‘remittances’. The issue for these people is that those companies known as ‘remittance providers’ take a chunk of the workers’ hard earned money, and it could be as much as ten percent, or even 20%.

When migrants send home part of their earnings in the form of remittances, they represent a large source of foreign income for many developing economies. They can represent as much as 4% of the GDP in a low-income country, and 1.5% for middle-income countries. Furthermore, remittances are important because they tend to be stable, and instead of decreasing during economic downturns or after a natural disaster. They actually increase, while private capital in-flows decline at these times.

DeFi solves the remittance pain

As RTR points out, credit card companies and personal loan services charge high fees, as do remittance services. By contrast, a DeFi platform could radically cut the fees workers pay to send money to their home country. Workers pay the high fees because they have no choice – their families depend on this money to keep them out of poverty. The amount sent annually is in the hundreds of billions of dollars, which makes it an appealing sector for DeFi platforms.

DeFi platforms offer everyone, not just the world’s migrant workers, a way to have greater control of their money. In addition to paying much lower transfer fees, users would have access to borrowing, lending, trading on margin and so much more. Plus, DeFi coupled with stablecoins is a powerful combination, especially for the unbanked. And those who receive the remittances can also take advantage of the products offered by DeFi, such as reward systems like liquidity pools or staking. It’s a win-win solution – and that is why the world needs DeFi.

Fireblocks advances DeFi in capital markets

You may have noticed mentions of Fireblocks across a range of crypto-related articles. Now the crypto custody market has partnered with FIS, the Fortune 500 technology provider to banks and capital markets firms, to offer crypto services.

This deal will enable FIS’s 6,400 clients to access large crypto trading venues, liquidity providers, lending desks and decentralized finance (DeFi) applications. Who are FIS’s clients? A mixture of asset managers and hedge funds, as well as banks and brokers.

Adam Levine, Fireblocks’ Head of Corporate Strategy, said, “This is going to be a great opportunity to empower FIS’s clients to access all the weird and wonderful things of digital assets. Whether that’s holding a variety of cryptocurrencies, making payments on stablecoins, accessing lending and borrowing platforms, or accessing permissioned DeFi, which is appropriate for the regulated institutions that we’re talking about.”

It may seem like just another day, another deal. But, when you look at how regularly we are seeing similar stories in the crypto-related media, it is a clear indication that institutions are edging closer to crypto – provided the right sort of know-your-customer (KYC) is made available to them. In this case they will have been reassured by Fireblocks’ close relationship with Aave Arc to provide just this kind of support. Levine said, “FIS clients would absolutely have the opportunity to participate on Aave Arc; obviously, they will have to go through the KYC-related whitelisting process, which we don’t anticipate being a challenge.”

FIS is in a strong position as the big banks explore crypto products, even if they just dip their toes in the water with crypto derivatives. John Avery, FIS head of product for digital assets explained that since FIS is a fintech provider with 30 years of experience, they are well-placed to provide what the big banks are seeking. Avery said, “There are investors who will seek out synthetic exposure as their only means of access to crypto and digital asset investing. But for the market makers and the brokers, they will need access to the underlying physical assets.” He added, “The appetite of traditional clients to control their own wallet technology and get exposure to different types of these assets will grow over time, either for their own portfolios or to support their structured products or derivatives businesses on top.”

Big banks in the crypto space

It was inevitable that banks would be unable to resist entering the cryptocurrency space, and more of the biggest US banks are in it than you might think. So, who exactly is taking such a ‘risk’, as the US banking regulator put it?

It seems that Bank of New York Mellon was the first to enter the fray in February 2021 with its offer of holding, transferring and issuing Bitcoin for asset management clients. The clients will be able to store BTC and ETH in BNY Mellon wallets, which have been created in partnership with Fireblocks. The service hasn’t launched yet, but is expected this year.

Bancorp’s Bitcoin custody service went live in October 2021, with NYDIG, a Bitcoin company, acting as sub-custodian for the bank. And State Street Corp said in March this year that it intends to offer crypto custody services in partnership with infrastructure platform This, according to the bank, is subject to regulatory approval.

Deutsche Bank is planning to develop a service to hold and trade crypto for institutional investors, and has already completed a proof of concept, although it is keeping this move very quiet indeed. Similarly, BNP Paribas has also completed a proof of concept with wallet provider Curv. The plan is to develop a secure method to transfer tokenised securities.

Wealth Management Clients

Banks have been rushing to offer their wealth management clients exposure to crypto, starting back in 2021. Morgan Stanley is the pack leader, according to CNBC. It reported in March this year that Morgan Stanley is enabling access to three Bitcoin funds for clients with at least $2 million in assets held at the bank.

JPMorgan Chase is allowing its financial advisers to accept buy/sell orders for five crypto products from its wealth management clients, and Wells Fargo has been offering something similar since 2021. Indeed, both JPMorgan and Wells Fargo have registered private Bitcoin funds with NYDIG.

Citigroup now has a digital assets group, and Goldman Sachs is offering wealthy clients access to an Ethereum fund via Galaxy Digital.

Trading and Research

You will find the same names in trading. Goldman rebooted its crypto trading desk in March 2021, and in March this year became the first US bank to carry out an over-the-counter crypto trade in partnership with Galaxy Digital.

The big banks are also putting a lot of money into research, particularly Bank of America, Citicorp and Morgan Stanley, with all of them creating new departments and opening up new job roles.

And there you have it – big banks aren’t really as crypto-averse as you might have thought.