Web3 Infrastructure Solutions: Bridging the Gap Between CeFi and DeFi

By Holger Arians, CEO of Banxa

From Gucci to Microsoft, more businesses are accepting cryptocurrency as payment for goods and services than ever before. According to a recent report from Deloitte, almost 75% of retailers plan to accept crypto payments within the next two years. However, payments infrastructure for this new era is still in its infancy, which means that both crypto and fiat currencies must coexist as the digital economy matures.

The decentralized internet, also known as Web3, is poised to disrupt nearly every sector on Earth, promising to be ripe with opportunities for consumers, creators, and brands. This new iteration of the web will unlock customer experience possibilities we never thought possible, such as exclusive metaverse brand offers and customer loyalty programs through NFT collectibles.

However, many innovative blockchain projects still don’t have the resources to serve consumers globally and with ease. In order for mass adoption of Web3 to occur, emerging blockchain projects need a bridge to the existing financial system.The new decentralized era will be driven by infrastructure solutions that have a foot in both worlds.

Let’s explore the current gaps in the decentralized finance space and how these gaps can be addressed by borrowing aspects of centralized finance that have stood the test of time.

Current decentralized finance (DeFi) blind spots

Decentralized finance (DeFi) is an umbrella term that encompasses applications such as margin trading, stablecoins, decentralized exchanges, and prediction markets This new banking and financial service ideology is based on peer-to-peer transactions through blockchain technology. Via the blockchain, DeFi enables “trust-less” banking, eliminating traditional financial middlemen such as banks or brokers like in the centralized finance (CeFi) system. DeFi has been a powerful tool when it comes to financial inclusion, as it grants underserved markets access to digital assets and financial tools without traditional barriers.

However, given the perceived risk and unregulated nature of DeFi, mass adoption of cryptocurrency and decentralized trading and lending will not gain traction until a more trusted ecosystem is developed to reduce these valid concerns. Many Web3 projects don’t have proper compliance tools in place to meet regulatory requirements, especially across the jurisdictions of various global markets.

Additionally, there is an obvious lack of simplicity in DeFi user experience. Anyone who has attempted to convert an asset from crypto to fiat knows there is much work to be done to streamline the user experience. DeFi is still an emerging concept, and remains a complicated experience for the average consumer. Without adequate education and ease of use, onboarding the mainstream will be near impossible.

How to close the gap

Both DeFi and CeFi both come with a myriad of pros and cons, which has led to a growing desire by many in both financial worlds to connect the two systems for easier access to their respective benefits.

In the recent wake of the insolvency issues that have unfolded at major companies in the space, many crypto novices are now hesitant to embrace DeFi. However, these issues are almost entirely stemming from flaws in the CeFi model, rather than DeFi principles. Much of the problems we are witnessing in centralized businesses today are typical traditional finance pitfalls, which are largely avoided by integrating core DeFi principles and forgoing CeFi principles that have historically failed us.

In spite of this, not all CeFi principles are created equally, and there are huge benefits of not abandoning centralized aspects entirely. Consumers need a simple way to enter and exit the digital asset space. By combining both CeFi and DeFi, digital assets can be stored in one place, allowing users to seamlessly utilize various services without having to switch wallets or jump between blockchains.

Furthermore, traditional financial institutions are often seen as more reputable as they are required to follow a set of strict regulations and laws designed to safeguard the security of funds. Compliant payment infrastructure is vital to ease the minds of Web3 novices. Regulators migrating in from CeFi, with the help of Web3 leaders, will shape sound legislation that creates greater trust and ultimately drives adoption of DeFi.

Best of both worlds

Most of the world’s money still lives in centralized banking systems, meaning that we need to build bridges between CeFi and DeFi to bring new users into crypto.

Closing the gap between CeFi and DeFi will provide increased access to crypto for a larger number of people. Blockchain technology disrupts how we interact with the financial world and it has the potential, if implemented correctly, to break down bureaucratic and institutional barriers.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.