Assets Under Management AUM

The fusion of decentralized and traditional finance is inevitable

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When decentralized finance, or DeFi, first appeared a few years ago, it was more of a curiosity and certainly not a serious form of competition for mainstream finance.

However, in 2021, that is changing rapidly. From now on, DeFi is becoming a major player in the economic world, and the big names are starting to notice it. What was once an experimental niche has grown into a thriving ecosystem for disintermediated financial services.

And TradFi now has two choices: adopt DeFi and its new opportunities, or fight against it, and risk alienating a whole population of new users flocking to these services? However, in the end, DeFi and TradFi may actually need each other to move forward.

The rise of DeFi

Decentralized finance protocols define their growth by a metric known as Total Locked-In Value, or TVL. This is the sum of all the assets related to a given platform or smart contract. TVL is perhaps best compared to how traditional financial firms measure their growth in assets under management (AUM). As of this writing, the entire DeFi industry has amassed an impressive $ 165 billion for all of its services, including decentralized exchanges, liquidity pools, lending platforms, and more.

Given the current trajectory, it is reasonable to assume that this trend will continue. In addition, it is more than plausible that the various interfaces to access DeFi will only continue to become more user-friendly and general awareness will spread.

Just compare the series of developments that led to the rise of the Internet itself, from a highly technical novelty to the force that literally powers global commerce today, and in just a few decades.

Part of the reason for this growing wave of DeFi adoption comes from the profound benefits of decentralized technology. Thanks to the underlying blockchains that power the ecosystem, transactions in DeFi are trustless, completely verifiable, and, when done correctly, very difficult to interfere with.

They also come without barriers, apart from internet access, and as such, they offer their wide range of financial services to anyone, without discrimination for history or capital. It’s miles away from TradFi, which often reserves some of its most lucrative opportunities for accredited investors.

Old vs New

In the perfect future, DeFi could do away with the majority of the legacy financial world. The more accessible, affordable and convenient platforms become in the digital sphere, they will simply outperform their counterparts with lower fees and high returns for investors.

Realistically, however, the banking system, governments, and regulators aren’t going anywhere anytime soon.

It is likely that the future will be one where these two systems become more and more interconnected. Purists on both sides will scoff at this notion. Many in TradFi don’t see the benefits of DeFi and vice versa. However, once products start to emerge that can demonstrate the potential benefits to both the consumer and the supplier, minds can begin to change. Ultimately, where the average person puts their money will decide what the future holds.

This puts the two industries at a certain impasse, but also on the brink of a substantial opportunity. Traditional finance already has a large market share and global infrastructure.

There’s no need to flush it out from the inside and start over, especially when it provides the basic advancements needed for DeFi to work. Likewise, DeFi may be in its “wild west” phase, but the ideas put forward and the opportunities created are too innovative to ignore.

The way forward is difficult but necessary

Regulators around the world are struggling to figure out what to do with DeFi. The time to ignore the sector is over, banning the ecosystem is unrealistic and embracing it is complicated. One need only look at the recent events surrounding the SEC’s attempts to regulate stablecoins, and these problems are obvious.

Unfortunately, for the SEC the way forward is likely to be complicated. The benefits of integrating this new technology are too great to ignore and as such consumers will increasingly demand exposure to it.

If the institutions in place do not help facilitate access for consumers, they will seek it themselves.

Therefore, it is really in everyone’s interest that members on both sides start to find ways to work together, as the future will need both. Nothing less, and the global financial world will only become more volatile in the years to come, not less.

Guest post by Will Hamilton from TCM Campital

Will Hamilton is Head of Trading and Research at TCM Capital. Will has been heavily involved in the cryptocurrency industry since 2016, and prior to that, he worked at Pitt Capital Partners, the inside investment bank of the Washington H. Sol Pattinson investment house (“ASX: SOL “).

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