Traditional finance leverages CeFi infrastructure for DeFi profit

Friday April 01, 2022 1:40 p.m.

Image Getty

The relationship between traditional finance and the crypto markets had previously been maintained by a few banks allowing customers to use their fiat to convert to cryptocurrency with the safe knowledge that they could cash out at any time. The number of retail banks allowing their customers to use their accounts with crypto exchanges has become smaller at a time when many are looking for alternative investments. Gold has lost its shine as an inflation hedge while Bitcoin has outperformed all other major asset classes, making the crypto market a target for portfolio diversification with recent reports showing that most of institutions are considering investing in cryptocurrency.

How does the CeFi infrastructure benefit institutions?

A centralized financial infrastructure was built to create a secure gateway to fill the void left by traditional banks unable to provide their customers with reliable crypto access. Exchanges such as Kraken and Coinbase have worked with banks and regulators by introducing centralized controls such as KYC and AML compliant integration. Nonetheless, the crypto market has largely grown around retail investing, and with some banks unexpectedly blocking or freezing accounts connected to crypto exchanges, the choice of banking and payment services must be considered. by institutions looking to diversify into digital assets.

CeFi crypto exchanges cemented the first wave of bridges needed to connect traditional finance to crypto markets, though it took the work of a new generation of specialist CeFi players to establish improved banking and payments infrastructure allowing professional investors to buy and hold securely. and trade digital assets. This paves the way for some of the most complex opportunities evolving on blockchain protocols that support unique DeFi (decentralized finance) instruments. Exchanges like SushiSwap and Pancakeswap lack centralized authority, which has given way to greater efficiency and innovation that has fueled rapid growth with total value locked (TVL) in DeFi protocols rising from 1 billion in early 2020 to over $200 billion in 2022.

A catalyst for this unprecedented growth is the profit investors are making by adding liquidity to DeFi exchanges. Lenders can add their funds to liquidity pools to meet the huge borrowing demand that has developed from crypto market participants wishing to trade on DeFi platforms. This peer-to-peer lending and borrowing environment is fully automated with smart contracts. Experienced investors can switch between liquidity pools for the maximum return on their funds. Liquidity is also needed to trade coins and tokens with transaction fees shared among those who have funds locked into the protocols allowing this activity. The returns offered in the DeFi lending market far exceed those found in traditional finance with the CeFi infrastructure now set up to provide a secure pathway for institutional investors to securely access these opportunities.

DeFi brings freedom, control and creativity to the financial investment industry

The traditional finance regulatory framework has provided the building blocks for compliant access by using the values ​​of centralized finance to integrate innovations such as KYC on and off the ramps helping to solidify the widespread adoption of digital assets. The freedoms of decentralized finance have allowed unlimited space for creativity, launching financial instruments not found elsewhere. While KYC and AML compliant ramps can help regulate participants when using fiat to enter and withdraw from a centralized exchange, it is more difficult to account for DeFi counterparties that may have arrived from unregulated platforms. . The liquidity that institutional investing brings to DeFi allows centralized controls to be seamlessly installed so that pools of liquidity can be monitored while smart contracts automate the entire lending process. Institutional investing leverages the best of CeFi infrastructure to access and utilize the incredible efficiency of DeFi smart contracts that are now a proven source of revenue.