The end goal for crypto and DeFi (Decentralized Finance) in relation to traditional finance (TradFi) is not about cryptocurrencies like Bitcoin and Ether replacing fiat currencies. Instead, it is the rails created by public blockchain networks that will revolutionize the distribution of financial assets.
At the core of this transformation is the concept of token abstraction, which currently powers utility tokens, stablecoins, and NFTs (Non-Fungible Tokens). While cryptocurrencies will continue to thrive, stablecoins are likely to dominate in the realm of TradFi.
Stablecoins are not only tied to fiat currencies like USDC but can also track other financial instruments or commodities. The “stable” in their name refers to the fact that their price is dictated by the underlying asset.
Although stablecoins tied to assets other than currencies are just starting to appear on-chain, developments such as Backed Finance’s ERC-20 tokens that track treasury bonds, high yield bonds, and the S&P500 are already paving the way. Backed Finance ensures that these tokens are redeemable for the underlying assets, which are ETFs in this case.
The model of stablecoins, whether tied to fiat currencies or traditional financial assets, represents the future of asset distribution. It will fundamentally change the way people hold and trade their assets. Public blockchain networks enable holders to choose where they store their assets, whether with a custodian, exchange, broker, or in their own cryptocurrency wallet. Additionally, these assets can be traded on centralized or decentralized exchanges and even loaned out.
This newfound freedom goes beyond what is currently available in TradFi, where trading is often constrained by market hours. Crypto exchanges operate around the clock, providing constant access to markets. This creates opportunities for global participation and empowers both users and issuers of these assets.
Furthermore, this paradigm shift extends to traditional financial assets themselves. By embracing tokenization on public blockchain networks, these assets gain the same benefits as cryptocurrencies. Consequently, the focus is on transforming traditional financial assets to leverage this technology, with cryptocurrencies potentially playing a supporting role.
While DeFi currently allows users to stack protocols to maximize yields, this frontier opportunity entails significant risks that may not be suitable for mainstream investors. Clear accountability and understanding of downside risks are crucial for investors. Trustworthy organizations, such as asset managers, ETF providers, and exchanges, must play a role in offering fully collateralized tokenized securities that prioritize investor protection.
Additionally, compliance with existing legislations, including KYC (Know Your Customer) and AML/CFT (Anti-Money Laundering/Countering the Financing of Terrorism) requirements, is essential. Collaboration with regulators and governments is necessary to ensure that the technology reaches a broader audience and follows established safeguards.
Public blockchains offer global reach and standardized representation of financial assets in tokenized forms. These rails are accessible to anyone with an internet connection and provide individuals with the choice of intermediaries or self-custody. The foundations for these rails have already been deployed and proven, leaving existing institutions with the choice to embrace this innovation or miss out on its potential.
In conclusion, the end goal for crypto and DeFi in relation to TradFi is not about replacing fiat currencies but rather leveraging the rails created by public blockchain networks to transform the distribution of financial assets. Stablecoins are a crucial component of this transformation, enabling individuals to hold and trade assets with newfound freedom. However, compliance with regulations and the involvement of trusted organizations are necessary to protect investors and ensure widespread adoption of this technology.