Decentralizing traditional finance is not as easy as it seems

TradFi (traditional finance) to decentralization is not just a matter of flipping a switch, says Motti Peer, CEO of ReBlonde.

When people discuss the need to bridge the gap between DeFi and TradFi, they look at the modern online banking system and wonder what prevents crypto projects from reflecting the same functionalities. Can’t we all take out mortgages on the blockchain without a middleman, cancel miscalculated transactions, or walk into a convenience store and pay for purchases with cryptocurrencies? For the most part, we can’t, and not just for lack of a consistent regulatory framework.

It’s true that selling a fraction of the house you put on the blockchain as a security token still won’t work legally in most places. A proper regulatory framework is important, but the problem of creating blockchain use cases that replicate traditional finance is as deep as the technology itself.

Let’s start with DeFi, a blockchain use case industry that lacks some of the basic features available in traditional finance. DeFi is web-based and in many ways an ecosystem independent of outside industries, so the potential for building use cases is endless and pure. As such, it is fruitful to look at the technical challenges besetting the industry, such as the need to adapt real estate law to allow property tokenization.

TradFi vs Defi: The limiting aspects

Smart contracts are at the core of DeFi and most blockchain applications. In the first quarter of 2022 alone, a total of 1.45 million smart contracts were created. The creation of any type of DeFi protocol requires the implementation of a smart contract, a time-consuming process that can cost anywhere from $7,000 to $45,000 to develop. The audit phase can reach a maximum of $100 thousand, and all that before touching the implementation costs.

Regardless of whether you are a small crypto project or a legacy corporation looking to adopt smart contracts, this is no small price to pay, especially in today’s economy. Companies are working hard to find ways to take full advantage of smart contracts and reduce the need for new contracts every step of the way. Examples include Spool, a DAO that recently launched its Smart Vault creation tool that allows users to create customizable performance protocols to build diversified DeFi portfolios on top of its platform. Otherwise, such protocols would require the creation of new smart contracts.

Beyond the cost associated with implementing smart contracts, we need to look at the basic architecture of the blockchains on which the use cases are built. The industry has yet to fully solve the problem of isolated blockchains that cannot communicate with each other. With different blockchain networks operating in isolation, various cross-chain interoperability solutions were developed to address the issue. But every solution found comes with technical weaknesses and complexities.

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The lack of foolproof cross-chain interoperability solutions hampers liquidity transfer and trading possibilities. Derivatives platforms like GMX or Perpetual Protocol have to rely on a centralized trade execution mechanism and have only a limited amount of assets available to trade. Currently, Primex Finance appears to be the only major cross-chain brokerage protocol that allows cross-DEX spot margin trading.

The slow progress in seamlessly connecting blockchains in a way that fosters industry growth is largely due to a lack of the very people who can build the solutions to do so. A quick search for blockchain developers on LinkedIn will reveal more than 90 thousand job openings worldwide, emphasizing the scarcity. The severe lack of Web3 developers stems from the need to learn about Web3-specific coding languages, such as Solidity or Vyper, and the mindset shift needed to make decentralized protocols a reality.

To address the developer shortage issue, efforts should be made to better onboard programmers into the world of DeFi without overcomplicating the process. Innovations like Kirobo’s Smart Transactions (ST) technology, an API that allows web2 developers to build web3 protocols and projects on the blockchain without the need for smart contracts or coding, need to be embraced and nurtured.

With a growing number of projects looking to bridge the gap between DeFi and TradFi, it is important to remember that a larger set of tools will only get us so far. The dream of decentralization eventually passes through mass adoption and the more freedom users have to leverage their assets, the better off the entire ecosystem will be. Additionally, projects must work to implement a larger arsenal of cross-chain interoperability capabilities to truly grant users that freedom.

About the Author

Motti Peer is he CEO of ReBlondea Tel Aviv-based global public relations firm with an award-winning team representing clients across the technology spectrum, from artificial intelligence and medical technology to crypto, fintech, blockchain, and venture capital.

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