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Decentralizing Traditional Finance: Bridging CeFi and DeFi – FX Empire


The CeFi – DeFi Bridge

With the DeFi market in its infancy, the first step has been to build a bridge between the CeFi and DeFi worlds.

It’s not surprising that one of the crypto market’s most well-known names is involved in bridging the gap…

Binance is amongst the innovators building the CeFi – DeFi Bridge.

Why the need for a bridge?

The goal of DeFi is to reconstruct the banking system in an open, Permissionless, and Trustless space. DeFi advocates see DeFi delivering a more transparent, resilient, and less fragile financial system.

Following all the negative news surrounding Tether, the case for DeFi has become all the more compelling in recent years.

There are some challenges, however. One of the key advantages to DeFi is one of its disadvantages in the early days.

There is no governance in the world of DeFi. Anyone is able to launch a protocol and attempt to raise funds. The lack of oversight means that many projects will boom and bust, leaving investors with material losses. Along with protocols that may not make it, there are also scams to avoid in the space.

While this is the case, there are some impressive protocols that have already garnered plenty of interest.

As the DeFi world maneuvers its way through its early years, some of the crypto market leaders need to carefully woo users across from the CeFi space. This is all the more important with the lack of DeFi awareness today.

Estimates vary on the size of the DeFi community, with the numbers ranging from as low as 400,000 to as many as 5,000,000. Both numbers are small, however, when compared with the CeFi space.

The market caps of stablecoins and non-stablecoins tell the story. At the time of writing, the market cap of stable coins stood at about US$16bn, dwarfed by the non-stable coins market cap of US$310bn.

The Key Steps

In order to fully bridge the CeFi and DeFi spaces, developers will need to bring the offerings of the financial sector to the DeFi space.

Some key steps in bridging the CeFi and DeFi world include:

  • Materially reducing risks currently associated with DeFi platforms. Offering insurance, proper testing and auditing, and preventing hacks are a must. Any adverse news and the DeFi space will take even longer to establish itself as a viable alternative to the banking world.
  • A marked increase in DeFi education to shift the DeFi space from niche to mainstream.
  • Simplifying access to DeFi protocols. At present, there are too many steps to gain access, deterring possible early adopters.
  • Build reputable DeFi communities.

The speed of innovation is working in DeFi’s favor early on.

While progressing through the key steps outlined above, DeFi will also need to deliver key financial services products to build the community.

More importantly, however, will be for DeFi to deliver what the existing financial systems are unable to deliver.

The ultimate goal is for users interacting with DeFi to not even know that it is DeFi. Many leading figures within the DeFi space see this as the inflection point.

At the time of writing, the World Bank estimates that the total number of non-banked sits at 1.7bn.

The Road Ahead

A fully functional DeFi world would materially eat into the 1.7bn, not to mention draw across disgruntled CeFi and bank platform users.

Looking at early entrants and stakeholders, Binance has rolled out a $100m Support Fund for DeFi projects on Binance’s Smart Chain.

The Fund is to drive collaboration between CeFi and DeFi.

As part of the shift towards DeFi, Binance will provide liquidity support to DeFi projects. Binance will also carry out security audits and due diligence processes to deliver some order to a Permissionless and Trustless world.

Through Binance, selected DeFi projects will also have access to Binance’s customer base, media information, knowledge education, financial management, and more. Binance may also list a chosen few.

DEX platforms require all transactions to take place “on-chain”. When considering the trades per second that centralized exchanges(Verified Exchanges) (“CEX”) execute, that’s an incredible burden.

With Ethereum currently the chain on which DeFi exists, 15 second average block times doesn’t cut it. The rapid evolution of DEX platforms has brought Ethereum to its knees. Alarmingly, the number of DeFi users dwarf in comparison to CeFi users. This means that the situation will only become more exasperated without change or alternative.

Another major issue for DEX platforms is the need for all transaction cancellations to be on-chain. That exposes the DeFi community to front running.

It’s also worth noting that many decentralized exchanges position themselves as decentralized rather than centralized exchanges.

In reality, however, the vast majority fit and fulfill the criteria of a centralized exchange. AML/KYC requirements are one simple identifier…

In conclusion, there’s a long way to go. With the guidance of the more reputable to bridge the gap, however, the road will be a shorter one to success.

 



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