The convergence of decentralized finance (DeFi) and traditional finance (TradFi) we are witnessing today was not a foregone conclusion. Initially, traditional financial institutions viewed decentralized upstarts with frosty skepticism, as much of the formative DeFi narrative focused on disrupting legacy players. But over time relations warmed and the two explored greater opportunities for cooperation.
Today both financial sectors are hyper-focused on the practicalities of bridging centralized and decentralized systems and a robust infrastructure layer is emerging, opening the door to greater institutional participation onchain. A number of web3-native companies are driving this trend, creating the AWS-like infrastructure for institutional adoption to accelerate.
The success story of Amazon’s retail empire is commonly known, but the tale of AWS is less familiar despite being arguably even more transformative.
In the early noughties, Amazon CEO Jeff Bezos noted his software engineers were continually facing the same sticking points in each development cycle as Amazon’s retail empire scaled and new features rolled out. Engineers’ time and effort were wasted developing the infrastructure layers and storage systems rather than the feature itself.
The solution was to build a common infrastructure layer. From 2003 to 2006 Amazon set about creating its web services business, and cloud computing was thrust into the mainstream.
For its clients, AWS and its cloud computing services ushered in a new era of on-demand scalability and cost efficiency. Before AWS, each online business or service would need excess (and often redundant) computing capacity to meet peak demand. Now, that same operational requirement could be outsourced. AWS proved highly scalable and reliable, supporting clients with a comprehensive and powerful suite of service tools.
Trading protocol Orderly Network is among the projects making inroads in TradFi. Built on NEAR initially before going omnichain, it operates as a backend service across decentralized platforms, with deep liquidity and powerful trading tools. Its key features include Orderly Omnichain, an institutional-grade order book supporting all major EVM chains, and Orderly Omnichain SDK, a toolkit empowering developers to access Orderly’s APIs, account management capabilities, and smart contracts.
Fireblocks is another leader in the space, providing applications and tools for developing crypto payment solutions. Its treasury management system employs a direct custody model so users retain control. It also streamlines settlement and automates workflows, eliminating the need for repetitive manual approvals.
Elsewhere, the trading infrastructure built by Talos enables the safe, secure, and seamless trading of digital assets, while Copper offers prime brokerage, collateral management, and custody services.
DeFi now offers institutional investors the same high-tier functionality available in traditional finance. For instance, security is woven into Fireblocks’ infrastructure. Transactions can be screened in real-time according to adaptable compliance policy rules, allowing each Fireblocks client granular compliance control. AML is served by Know Your Transaction (KYT) protocols preventing interactions with risky wallets.
Trading platform Talos offers advanced risk management across spot, perp, futures, and options markets. Orderly Network offers deep liquidity pools with support from professional market makers. Since launching in 2022, it’s supported $65 billion in transactions via its decentralized liquidity layer.
Meanwhile, Copper prioritizes security by adhering to international standards including NIST Cybersecurity Framework, ISO 27001, and SOC2. The protocol is further supported by a 24/7 operations center and the joy of regular penetration testing.
Thanks to the efforts of institutional-grade platforms such as Orderly Network, Fireblocks, Talos, and Copper, it is now increasingly possible to integrate decentralized and traditional financial systems.
Hybrid CeDeFi protocols, where CeDeFi means a blending of centralized and decentralized systems, make it possible to work with traditional and crypto assets simultaneously. And since DeFi now provides backend solutions incorporating comprehensive APIs and SDKs, the platforms built upon them can have granular customization options.
A comprehensive DeFi infrastructure is closer today than ever. Orderly Network’s shared order book technology incorporates liquidity from multiple sources, offering liquidity deep enough to support spot and perpetual future markets. This backend solution now supports at least 25 independent decentralized exchanges.
While Orderly Network offers deep liquidity, multichain solutions such as Axelar and LayerZero solve decentralized fragmentation by enabling cross-chain transactions, and market-making tools including 0x Protocol offer powerful APIs to secure settlement of digital assets in web3. Combined these systems create a comprehensive DeFi infrastructure to usher in institutional adoption.
The success of these platforms can be measured by the institutions leveraging them. Talos is integrated with 60 service providers worldwide including CME, Cboe, Binance, Coinbase, and Cumberland. Fireblocks is used by Temenos, Avaloq, and FIS. Copper powers services for State Street Digital and the hedge fund Promontory Technologies.
While DeFi has entered the institutional fold and vice-versa, decentralized solutions still retain a unique flavor that sets them apart. DeFi remains highly accessible, borderless, cost-efficient, and transparent thanks to blockchain technology.
TradFi may be moving to embrace decentralized systems, but challenges still need to be met. Due to the decentralized nature of blockchain technology, questions about regulation and compliance have had to be answered. Traditional KYC and AML solutions are not so easily applied to DeFi, necessitating innovative new solutions.
The lack of intermediaries in blockchain also increases the risk profile. Banks and other centralized financial services have customer safety features, allowing them to query and reverse transactions, while DeFi transactions are permanent. Historically, DeFi has lacked these guardrails and oversight.
Lastly, decentralized systems introduce new complexities and fragment liquidity across blockchains. To truly integrate into the TradFi world these problems need solutions.
Institutional involvement means DeFi is now a credible force in finance. As decentralized infrastructure’s integrity, reliability, and robustness have improved, it has become more trustworthy.
This encourages further institutional involvement, resulting in a positive feedback loop. With institutions now actively engaging in DeFi, further expansion into decentralized systems is inevitable.
There are still some regulatory hurdles for DeFi to leap, but there are promising signs here too. Thanks to significant lobbying efforts of the industry during the U.S. presidential election, a more favorable political climate is beginning to emerge in North America. If this leads to a lighter-touch regulatory environment as many expect, innovation and competition in the space will also increase.
DeFi is now at a key stage in its evolution as decentralized protocols mature. A number of projects have emerged to provide AWS-style services that will elevate the onchain landscape to new heights and support greater institutional adoption.
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