DeFi and TradFi, Two Worlds Apart?

Transcript

oops so hello everybody my name is uh thomas i'm the head custody at signum we are a fully licensed bank but with an exclusive focus on digital assets but today i don't want to talk about signum but i would like to talk about d5 and traditional finance and how the two worlds might evolve will maybe one replace the order so that's what i would like to explore today with you so obviously d5 has seen explosive growth over the last one two

years at the beginning of last year the total value locked the tvl stood at around 20 billion us dollar then at the end of last year it sort of jumped to 250 billion and today we stand at around 100 billion obviously those are impressive numbers we have seen really really explosive growth but if we compare that to traditional finance where the market cap of the equity markets alone is around 100 trillion us dollar it's clear that there is still really a lot of

room for growth so the question is really so will default just continue on that growth trajectory will basically defy coexist with traditional finance will maybe traditional finance just embrace d5 or will maybe defy completely replace um traditional finance so that is the question but maybe before we dig a little bit deeper let's uh look at the opinions of some influential leaders that are working in sort of different corners of our industry the first one on the left is

christine lagarde the president of the european central bank and yeah i'm sure many of you are aware she is uh quite against crypto she basically says crypto is based on nothing um defy is worthless because it has no intrinsic value and basically she thinks it will just um go away again obviously she is also not maybe entirely neutral because she is a big fan of central bank digital currency uh the european central uh bank plans to launch their own sort of digital euro um so that's certainly one uh reason why maybe she is um

against crypto then the second person is michael su he is a senior official in the u.s treasury department so he basically says what is happening at the moment in d5 very much reminds him of the financial crisis of 2008 or of the run up to the financial crisis as i'm sure many of you are aware at the time banks and other financial institutions they were selling a lot of mortgage-backed securities and other very opaque financial instruments and basically their value collapsed to more

or less zero overnight and this gentleman thinks the same will happen to defy basically it will just collapse and and will go away again then in the middle we have mark kubin he is like not exactly a crypto native person but he's just a very successful entrepreneur and investor and he takes a slightly different angle he says banks obviously have been around for a long time but they have not innovated they have not automated maybe because there was no pressure um they've become complacent and basically he's saying that

traditional finance is so stuck in their sort of legacy operations that they are just simply unable to compete with fintech or d5 then the fourth person is and now we are sort of uh entering the more crypto friendly uh spectrum of people um so this gentleman is uh the cto of robin hood crypto and um as i'm sure many of you are aware robin hood became famous because they sort of popularized the concept of zero fee uh stock trading and they recently really went in or went all in on crypto and

as it has been mentioned uh announced for example a non-custodial wallet for crypto and basically um he says that dfi is creating a new kind of financial services system that works without intermediaries um and and there is basically no no place for um sort of traditional institutions anymore and then on the right i'm sure many of you know him cc he's the founder and ceo of finance and his view is very simple he basically thinks d5 will replace traditional finance and and yeah that's

what's going to happen um but so obviously there are a lot of opinions out there from basically d5 it's just a lot of hot air to yeah defy will replace traditional finance completely and to dig a little bit deeper let's remind ourselves um about some of the underlying principles of dfi and traditional finance and the first one obviously is decentralization decentralized finance the name says it already is has no intermediaries um like if multiple parties want to transact they can do so directly without

intermediary maybe there's just an autonomous piece of code in between that sort of matches the supply with demand but there's no intermediaries that basically take or capture some of the value very different of course with traditional finance it's all built on centralized systems um you have the banks that are an intermediary you have systems like swift or obviously also central banks um so you have a lot of um central authorities that sort of control um the system then composability um in decentralized finance it's all programmable at least if it runs on on

the same chain like like on an evm chain or some other smart contract enabled chain there you can for example write a new piece of smart contract that takes um for example takes out a flash loan in some place and maybe does a trade on a tax or takes data from an oracle and that's also why peop some people call dfi money lego because you can basically mix and match existing pieces together to create completely new products of course in traditional finance it's quite different banks or sort of closed systems even though the regulator is trying to push sort of open finance but it hasn't

really gone very far uh mostly um in traditional finance your account is not kind of programmable you can't compose or multiple elements to create something new then transparency obviously dfi operates on public blockchains where everything is public you see the price or the fee that you pay you see where the fee is going to all the transactions it's all public in traditional finance it all happens behind closed doors for example if you submit a loan application to a bank a few days later you will get the result

but you have basically no idea on what day on based on what data this decision was taken how they came up with the pricing so you can just basically accept or not accept it and that's it and the last but certainly and not least important is permissionless versus permissioned one very important principle in d5 is that it's permissionless if you have um an internet connection and a wallet then you can interact with dfi nobody can stop you from doing so whereas banking is permissioned a bank may or may not take you as a client maybe they take you or not

accept you based on your domicile they may also terminate the relationship with you whenever they want so it's basically permissioned certainly not open for everybody [Music] that begs a bit the question so if we see that the principles on on which traditional finance operate are so different to how d5 works the question is does traditional finance really have let's say can they adapt to this new world of d5 or basically will just the same happen to them

what happened to kodak a few years ago as i'm not sure how familiar you are still with kodak but they were basically the global market leader in analog photography you could buy an kodak film in almost every shop everywhere and within a few years they have gone to absolute global market leader to more or less inexistent um because they were just unable to keep up and to develop the capabilities needed to compete in the new world of digital photography and yeah so the question is will the same happen to um traditional finance

so i think it will not happen to them in in the same way of course some traditional finance institutions will struggle to adapt some will maybe not make it but i think there are a few reasons why some may basically embrace the new world of defy and the first one is regulation so regulation creates barriers of entry so that is maybe not one of the intended consequences of regulation but but i think it's just it's just a fact obviously traditional finance institutions are much more used to deal with the regulator whereas

for example d5 protocols for them it's it's quite a new thing to deal with regulators so i think that is one element that will help traditional finance institutes to deal with the change the second is customer loyalty [Music] when you buy a new camera maybe you don't care so much about the brand but it's quite clear that in banking customers are quite loyal they're quite sticky especially in wealth management you even have the case that sometimes the same bank serves multiple generations [Music] of the same family and the bank

basically remains when the wealth is handed over from one generation to the next um so so that will certainly help traditional finance institutions to um adapt and the third one is user experience um and we have also seen that in the previous talk i think it's quite clear that in terms of user experience d5 and also crypto to some extent still has a lot of room for improvement and some fintechs and not so much banks but some of them yes i think they have really managed to build very good user experiences and that's something that i think will also help

with the mass adoption of decentralized finance so as we sort of continue the journey of decentralized violence towards hopefully much greater adoption still so what what is important or what needs to be taken care of for this to happen and and i think what i find extremely important and key to the sustainable success of defy is that we don't compromise sort of on the underlying principles that i've mentioned things like decentralization permissionlessness and so on and for example already today we have a lot of

d5 protocols um that call themselves defy but in reality they are not decentralized at all and and the same goal goes also for uh for open or being open or permissionless access like today there is a tendency to basically start closing d5 protocols that basically you need to be white listed by some kind of central authority in order to be able to access certain d5 protocols and um and and often this is uh to um to make it more uh regulatory compliant

but i'm convinced that we can build fully decentralized permissionless d5 solutions even without compromising on uh sort of the core principles of d5 and so if there's one thing that i would like you to remember from my talk today then it's really this that we should make sure that as we go sort of towards greater adoption of d5 that we don't compromise on the core principles of dfi like permissionless or decentralization thank you [Applause] thomas thank you so much