Decentralized and centralized finance requires collaboration

Decentralized finance (DeFi) has become a force capable of subverting traditional systems. Although DeFi still mainly opposes traditional finance, centralized operators are actively looking for ways to integrate into the established system. Institutional interests prompt decentralized and centralized participants to ask questions about DeFi, its role, and possible cooperation with centralized finance or CeFi.

related: During the market crisis in March 2020 and May 2021, DeFi proved to be resilient

Of course, the situation of centralized and decentralized institutions is not uniform, but the main general concern is as follows: can there even be a decent compromise? Does DeFi have any benefits in welcoming CeFi? Can DeFi accommodate institutions? What should be the result of the CeFi/DeFi cooperation?

related: Decentralization and Centralization: Where is the future?Expert answers

The compromise between DeFi and CeFi

The concept of CeDeFi may be a bit far-fetched for some people: how to achieve centralization and decentralization at the same time? However, for institutions and DeFi, CeDeFi may be the solution to two system problems.

The first thing to clarify is the intention of the organization. If the idea of ​​a centralized organization getting closer to DeFi seems threatening, there is one thing to remember: CeFi organizations want to enter DeFi precisely because it is decentralized. Banks, investment companies, and hedge funds are interested in having a higher degree of autonomy. Of course, while increasing profits may be the goal of some people, CeFi is actually full of people who understand the truly revolutionary impact behind the technology. Therefore, CeFi is very happy to welcome DeFi’s values, if there is a way to achieve (at least) three things: 1) full compliance, 2) safe and reliable performance and 3) deep liquidity.

related: CeFi and DeFi will finally meet in 2021-hope they hit it off

DeFi introduces the benefits of CeFi

Institutions cooperate with governments, large companies, research foundations, etc. Their infrastructure has affected the lives of billions of people for hundreds of years. At the very least, the cooperation with CeFi is an important step towards global adoption. Decentralized innovation need not be limited to a limited number of first-time adopters. There are other benefits, such as:

• Prepare for regulatory discussionsIt is foreseeable that the market boom in 2021 will eventually end with the high attention of regulators. As DeFi processes large amounts of funds (About With a total value lock-in of $116 billion, or TVL), the need for a comprehensive legal framework is not only obvious—it is an urgent need. DeFi’s current performance in security, investor protection, safe custody, and beneficial use case development will affect DeFi’s regulatory stance and the next few years (or decades). Rich experience in institutional supervision: The cooperation between CeFi and DeFi is actually an actual case of auditing the existing DeFi infrastructure. Organizations can point out things that do not meet legal requirements and help DeFi avoid making first-hand mistakes.
• Expand DeFi infrastructureIt is impressive that DeFi has now processed billions of dollars in such a short period of time, but CeFi has been processing trillions of dollars for centuries. Institutions have mechanisms for cooperating with big capital, and in DeFi, these methods are just emerging. DeFi is technologically revolutionary, but CeFi is undoubtedly more experienced in responding to market and government pressures. These experiences and practices should be shared with the goal of improving these two systems in the long run.

related: Draft FATF guidelines for DeFi compliance

DeFi’s technical, financial and compliance challenges

In the areas of compliance, reliability, and liquidity outlined, DeFi is inadequate. The lack of KYC and AML makes it impossible for financial institutions to ensure operational safety. Although some people say that KYC and AML have failed, it is worth remembering that these mechanisms were established in response to highly dangerous threats, such as global money laundering, tax evasion, and credit risk. Institutions cannot allow themselves to engage in unverified business, the risk is too high.

Another institutional challenge is large-scale. Large transaction volumes require deep liquidity and reliable infrastructure. DeFi should provide redundancy technology (so that if one module fails, another module can take over), large liquidity pools, and safe trading and custody methods.

related: Once innovators and regulators cooperate, blockchain will flourish

CeDeFi cooperation results and terms

DeFi should be the driving force to initiate collaboration. From a macro perspective, there are still many things that institutional participants do not understand about decentralization. CeDeFi cooperation should definitely be carried out under the conditions of decentralization and under the initiative of DeFi.

• DeFi participants should insist on and protect the value of decentralization as much as possible, as long as it is fully compliant.
• The DeFi team should have full power to build the technology according to the best design and development standards. There is no pressure from centralized players.
• The ultimate goal is always global accessibility and reduction of gatekeepers. DeFi should not accept partnerships that exchange these values.

Regardless of scale and experience, CeFi should choose the path of contribution, not the path of interference. Institutions can share experience, legal networks and established management practices. However, it is important to respect DeFi’s way of doing things. Once compliance, security, and liquidity are brought to financial operations, institutions should not promote additional gatekeeping and centralization.

Therefore, CeDeFi, the new financial system, should be based on these values. DeFi leads, CeFi contributes-this is the correct order. Now is the time for these two systems not to confront each other, but to work together to improve the global financial market.

This article does not contain investment advice or recommendations. Every investment and trading action involves risks, and readers should research on their own when making a decision.

The views, thoughts, and opinions expressed here are only those of the author, and do not necessarily reflect or represent the views and opinions of Cointelegraph.