The Intersection of CeFi and DeFi will Happen in 2021
For all the explosive hype that DeFi has received, we can all agree the industry is nascent and quite immature when compared to centralized (aka traditional) finance. However, ultimately the two finance spaces are destined to converge and we think it is going to happen sooner than anticipated.
Centralized Finance (CeFi) and Decentralized Finance (DeFi) have a long way to go before they can effectively cooperate. But when they do, their joint effort will no doubt create synergistic, large-scale adoption in the crypto space. If the current $24 billion TVL in DeFi is any indication, the potential for decentralized finance is off the charts. Even if the industry looks vastly different in a year, all the countless new projects that are being announced as well as new features being tacked onto “veteran” projects the interest is undoubtedly real.
DeFi includes everything that is fundamentally important in the crypto community: democratic, borderless, transnational banking capabilities, a truly global sharing economy. However, given that there has never been a true banking utopia in the past, the chances of the crypto industry changing CeFi overnight is slim to none. Rather, only when we are able to effectively balance the positives of CeFi and DeFi can both “factions” mutually benefit from each other. This in turn, allows crypto to be more mainstream in its adoption.
What can CeFi offer to DeFi?
With all the glitz and glamour of DeFi in 2020, there were few incidents that have stained the industry’s reputation. Hacking incidents prevented a few projects from reaching their full potential. But, projects were quick to adapt, making large scale changes in their security measures and technical approach. Large DeFi projects and their communities have increasingly realized the importance of improving auditing capabilities and their overall understanding of security methodologies. Through this, we have seen an increase in the growth of DeFi tech audit as an entirely separate industry.
There currently isn’t a baseline for tech auditing(there’s still plenty of room for change and improvement), but our bet is that it will likely become a new sub industry within DeFi with standards and certifications to solve the biggest security challenges. For the industry to mature, security audit models and best practices can be directly borrowed from CeFi and adjusted to suit the needs of DeFi. Even beyond tech auditing, there is also the need for financial auditing. The need to close potential off-chain risk loopholes will require the cooperation between traditional finance and digital finance to come together to solve.
It is no secret that the meteoric rise of Bitcoin prices is partially due to the involvement of institutional and corporate investors joining the fray. DeFi must do the same, attracting institutions to ensure long term development and adoption. Although currently the anonymity nature of DeFi prevents large scale capital inflows due to the fact that institutional investors cannot sign contractual obligations with anonymous parties. We believe that better security and reputation management along the blockchain will help ease this problem and promote better adoption between CeFi and DeFi.
In retail investing, the name of the game is all about ease of use and fast access. Even in Fintech, user friendly applications are king and the user experience is imperative to the success of any Fintech company. The complexity of DeFi platforms and the extensive technical knowledge that the industry requires before users can partake is preventing the lay user from coming in. This inability to “simplify” the industry prevents many DeFi platforms from expanding their user base which in turns diminishes the possibility for DeFi to break into the mainstream. On the other hand, DeFi products that do incorporate ease of use and closer resemblance to traditional digital banking tools see higher rates of adoption. Thus, the next batch of tools must emphasize the user experience in order to enhance user acquisition and retention.
The majority of wealth in DeFi is already being held in stablecoins. Which, frankly speaking, is already an example of where DeFi has already successfully adopted centralized components. So it is not to say that DeFi can’t adopt CeFi, but more so, where and when they should is the bigger question.
What can DeFi offer CeFi?
Listing out all the things that DeFi can bring to CeFi feels like an exercise best done over a long weekend and a six pack — there are simply too many to list.
The biggest reason is that DeFi provides the unbanked people with a massive opportunity to obtain banking services all the while democratizing the entire sector itself. DeFi will be and is the future in closing the 2.5 trillion global credit gap.
A prime example of effective democratization of DeFi is flash loans. By allowing anyone to operate like a whale and take advantage of market conditions that were otherwise only available to large scale investors, flash loans help eliminate the advantage of financial tools and liquidity that only the wealthy have. Allowing the less affluent and “everyday Joe” to participate in a more leveled playing field. Moreover, with CeFi’s higher security and user friendliness, opportunities will be amplified and presented to the entire unbanked community.
Even in defunct DeFi projects, the positives that we can glean from their existence is that the industry promotes a “right to fail” mindset, which is important in the learning process. This understanding will allow DeFi to be more resilient and fast moving as vulnerabilities will be addressed. Whereas traditional finance hardly changes due to the intervention of government and central banks sweeping banking errors of all sizes under the rug. The CeFi industry has never needed to learn from its mistakes as they have all become too big to fail. This is a fundamental flaw in our current banking system that will continue to haunt us every few years.
On the contrary, the DeFi field has demonstrated that they are willing to own up to their mistakes and learn from them. Projects such as Harvest, Value DeFi and Yam have clearly pointed out their mistakes and are actively working to atone for them. This is what maturity and growth looks like.
Though we have seen a sharp rise in interest and TVL, DeFi is unlikely to cross over its own niche market without “maturing.” While projects come and go, we do think that the industry will stabilize in the nexts year or so. Some projects will adapt, whereas others will initiate self regulating mechanisms and adopt a more sustainable operational method that is more consistent with CeFi.
Our Goal at NAOS
We do think that the combination of DeFi’s immense promise of no vertical authority, community democracy and transparency will be keys to the success of future(and our) project. When these DeFi keys are married with the security measures and the understanding of customer-first experiences from CeFi, only then will large scale adoption of DeFi will happen.
At NAOS we are creating a truly democratized marketplace in which we are connecting needy SMEs with access to on-chain liquidity. Our hope is that our project will generate innovation and promote societal growth by leveraging the immense potential of DeFi with traditional CeFi experiences.
About NAOS Finance
NAOS Finance is a DeFi lending protocol allowing lenders and SME borrowers to facilitate permissionless and borderless loaning/borrowing transactions on the blockchain. Built on Ethereum, our platform lets users tokenize real-world assets and subsequent lending.
We operate compliantly and legally in top markets around the globe, maintaining safety as a top priority and fostering enhanced trust in the lending/borrowing process.
To remain informed on everything about our project, be sure to visit our website and join the family by following our social media platforms:
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