{"id":250427,"date":"2021-05-15T10:17:00","date_gmt":"2021-05-15T07:17:00","guid":{"rendered":"https:\/\/en.buradabiliyorum.com\/traditional-finance-has-much-to-learn-from-new-entrant-defi\/"},"modified":"2021-05-15T10:17:00","modified_gmt":"2021-05-15T07:17:00","slug":"traditional-finance-has-much-to-learn-from-new-entrant-defi","status":"publish","type":"post","link":"https:\/\/buradabiliyorum.com\/en\/traditional-finance-has-much-to-learn-from-new-entrant-defi\/","title":{"rendered":"# Traditional finance has much to learn from new entrant DeFi"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_85 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a38311e695fc\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #dd3333;color:#dd3333\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #dd3333;color:#dd3333\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a38311e695fc\" checked aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/buradabiliyorum.com\/en\/traditional-finance-has-much-to-learn-from-new-entrant-defi\/#Real-time_settlement_is_a_game_changer\" >Real-time settlement is a game changer<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/buradabiliyorum.com\/en\/traditional-finance-has-much-to-learn-from-new-entrant-defi\/#Lower_rent-seeking_and_accelerated_bootstrapping\" >Lower rent-seeking and accelerated bootstrapping<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/buradabiliyorum.com\/en\/traditional-finance-has-much-to-learn-from-new-entrant-defi\/#Its_not_just_exchanges\" >It\u2019s not just exchanges<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/buradabiliyorum.com\/en\/traditional-finance-has-much-to-learn-from-new-entrant-defi\/#What_does_this_mean_for_traditional_capital_markets\" >What does this mean for traditional capital markets?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/buradabiliyorum.com\/en\/traditional-finance-has-much-to-learn-from-new-entrant-defi\/#The_opportunity\" >The opportunity<\/a><\/li><\/ul><\/nav><\/div>\n<p>&#8220;<strong># Traditional finance has much to learn from new entrant DeFi <\/strong>&#8221;<br \/>\n<img decoding=\"async\" src=\"https:\/\/images.cointelegraph.com\/images\/840_aHR0cHM6Ly9zMy5jb2ludGVsZWdyYXBoLmNvbS91cGxvYWRzLzIwMjEtMDUvMTgxZmE4YTAtMmQ0ZC00OTI3LWE5ZmEtNDljMGQyNzBjM2ViLmpwZw==.jpg\" \/><\/p>\n<div class=\"post-content\" data-v-5a136f3a>Incumbents in traditional capital markets, as well as new entrants looking to capture market share, should heed the innovations within the crypto ecosystem collectively known as decentralized finance, or DeFi. These innovations present a model for the direction that traditional capital markets are likely to take in the coming years as regulation catches up with the capabilities of distributed ledger <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/technology\/\" data-internallinksmanager029f6b8e52c=\"4\" title=\"Technology\" target=\"_blank\" rel=\"noopener\">technology<\/a>, or DLT, and as the technology itself is refined through \u201cin-the-wild\u201d usage.\u00a0<\/p>\n<p>Decentralized exchange protocols, also known as automated market makers, or AMMs, are one of these innovations that has been widely adopted in the crypto space.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Real-time_settlement_is_a_game_changer\"><\/span>Real-time settlement is a game changer<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Right away, we can see that with AMMs, trades are settled in near real-time. Compare this with the two days (T+2) it takes to settle most liquid securities in today\u2019s advanced capital markets. The near real-time settlement of AMMs brings two key benefits: reduced counterparty risk and improved balance sheet management.<\/p>\n<p>Financial institutions involved in capital markets must reserve cash on their balance sheet to cover their exposure to the risk of non-delivery by their trading counterpart. The reserve requirements are defined by the parties in the trade and, until a transaction is settled, they must tie up cash on their balance sheet to compensate for the risk. With the near real-time clearing and settlement enabled by DLT infrastructure (demonstrated by DeFi protocols), the reserve requirements are a fraction of the amount required to hold in reserve with two-day clearing and settlement. If AMM-like protocols could be adopted in traditional capital markets, the vast majority of capital tied up on the balance sheet today could be put to economic use in the capital markets, turning an opportunity cost into economic gain.<\/p>\n<p>Adopted at a large enough scale, real-time settlement also has the power to reduce systemic risk. Since the 2008 financial crisis, in response to regulations aiming to reduce the risk of systemic failure, large global <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.investopedia.com\/terms\/c\/ccph.asp\">central counterparties<\/a>, or CCPs, were increasingly adopted as inter<a href=\"https:\/\/buradabiliyorum.com\/en\/category\/social-mediaa\/\" data-internallinksmanager029f6b8e52c=\"1\" title=\"Social Media\" target=\"_blank\" rel=\"noopener\">media<\/a>ries. While CCPs deploy complex risk mitigation strategies, they have now become interconnected to the point that they exacerbate the risks they were meant to alleviate. In fact, according to a 2018 report from the Financial Stability Board, the 11 largest CCPs are <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.fsb.org\/wp-content\/uploads\/P090818.pdf\">connected<\/a> to between 16 and 25 other CCPs, and the two largest account for \u201cnearly 40% of total prefunded financial resources provided to all CCPs.\u201d The default of a single CCP will adversely affect most accounts, and could result in cascading defaults even worse than those associated with the 2008 financial crisis.<\/p>\n<p><strong><em>Related: <\/em><\/strong><strong><em>Will crypto and blockchain shape the future of finance? Experts answer<\/em><\/strong><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Lower_rent-seeking_and_accelerated_bootstrapping\"><\/span>Lower rent-seeking and accelerated bootstrapping<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Beyond near real-time settlement, decentralized exchange protocols (AMMs) reduce operational costs and lower rent-seeking through disintermediation. The infrastructure that makes up the exchange is reduced to code and distributed across participants, with the participants themselves providing the needed liquidity. The latter feature has the power to bootstrap capital formation and democratize access to capital \u2014 which is exactly what we are now seeing in the burgeoning crypto-native AMM space.<\/p>\n<p>AMM protocols have exploded in popularity in the \u201cWild West\u201d of cryptocurrency markets, where self-custody and anonymity are the default. By April, spot volume traded through AMM protocols <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.theblockcrypto.com\/data\/decentralized-finance\/dex-non-custodial\/dex-volume-monthly\">exceeded<\/a> $164 billion in a single month, <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.theblockcrypto.com\/data\/decentralized-finance\/dex-non-custodial\/dex-to-cex-spot-trade-volume\">representing<\/a> greater than 10% of the total spot trade volume in the wider cryptocurrency markets.<\/p>\n<p><strong><em>Related: <\/em><\/strong><strong><em>The rise of DEX robots: AMMs push for an industrial revolution in trading<\/em><\/strong><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Its_not_just_exchanges\"><\/span>It\u2019s not just exchanges<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Other DeFi products have also been gaining steam over the last year. One example is lending, where users lock up digital assets in collateral pools where they can be borrowed from. Compared with traditional lending, automated management of custody, settlement and escrow reduces the rent charged to perform those actions. Debt outstanding in DeFi lending (a key metric for tracking adoption) <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/debank.com\/ranking\/lending?date=1Y\">rose<\/a> from $500 million in mid-2020 to exceed $25 billion by May 2021, led by the Compound, Aave and Maker protocols. <\/p>\n<p>Beyond lending, more complex derivative instruments including options, futures and synthetic assets are being deployed. In short, DeFi protocols are rapidly forming a mirror-image version of traditional capital markets, but one with significant advantages.<\/p>\n<p><strong><em>Related: <\/em><\/strong><strong><em>The new digital, decentralized economy needs academic validation<\/em><\/strong><\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_does_this_mean_for_traditional_capital_markets\"><\/span>What does this mean for traditional capital markets? <span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Of course, DeFi \u2014 as it currently exists in the crypto world \u2014 is noncompliant from a regulatory standpoint, due to its pseudo-anonymity as well as the reliance on self-custody. However, this fact should not dissuade traditional finance incumbents and startups. There\u2019s already a clear roadmap for how innovations in the DeFi space can be adapted to traditional capital markets infrastructure.<\/p>\n<p><strong><em>Related: <\/em><\/strong><strong><em>DeFi is the future of banking that humanity deserves<\/em><\/strong><\/p>\n<p>Big players in the traditional capital markets have already recognized the shift and are making moves. For example, they are aggressively piling into the digital asset custody <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/game\/\" data-internallinksmanager029f6b8e52c=\"7\" title=\"Game\" target=\"_blank\" rel=\"noopener\">game<\/a>. Take for instance, Standard Chartered\u2019s investment in Switzerland-based digital asset custody solution provider Metaco, which just <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.financemagnates.com\/cryptocurrency\/metaco-raises-17m-in-series-a-funding-round\/\">closed<\/a> out a twice-oversubscribed $17 million <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/watch-movies-tv-seriess\/\" data-internallinksmanager029f6b8e52c=\"8\" title=\"Watch Movies &amp; TV Series\" target=\"_blank\" rel=\"noopener\">Series<\/a> A.<\/p>\n<p>What\u2019s more, a number of forward-thinking jurisdictions have already set up regulatory sandboxes, encouraging experimentation and innovation with DLT-based solutions for capital markets. Examples include the Monetary Authority of Singapore with its FinTech sandbox and Sandbox Express, Europe\u2019s regulator sandboxes and innovation hubs for FinTech, and Saudi Arabia\u2019s Capital Market Authority\u2019s FinTech lab and the ADGM RegLab in Abu Dhabi.<\/p>\n<p><strong><em>Related: <\/em><\/strong><strong><em>Europe awaits implementation of regulatory framework for crypto assets<\/em><\/strong> <\/p>\n<p>Out of these sandboxes, a growing number of new entrants are leading the way. Singapore-based regulated digitized securities platform iSTOX graduated from the MAS\u2019 FinTech Regulatory Sandbox. This made it one of the first DLT-based capital market platforms to be <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/download-scripts-themes-apps\/\" data-internallinksmanager029f6b8e52c=\"9\" title=\"Download Scripts &amp; Themes &amp; Apps\" target=\"_blank\" rel=\"noopener\">app<\/a>roved and licensed by a major regulator.<\/p>\n<p>ISTOX <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/techcrunch.com\/2021\/01\/20\/digital-securities-platform-istox-closes-50-million-series-a-to-make-private-equity-accessible-to-more-investors\/\">closed<\/a> a $50 million Series A in January, bringing investments from a number of Japanese state-owned entities, including the Development Bank of Japan and JIC Venture Growth Investments, the venture capital arm of the Japan Investment Corporation. Such investments are another strong signal that capital markets incumbents see DLT-based infrastructure as a winning play.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"The_opportunity\"><\/span>The opportunity<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Naturally, with a complex and structurally critical system such as modern capital markets, changes will be incremental. Consider the example of custodians, which are legally and practically entrenched in the structure of capital markets. It will likely take a decade before disintermediation of custodians can occur at scale since 1) regulations need to change and 2) DLT-based market infrastructure needs to be developed, tested and broadly adopted, as is <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/content.settlemint.com\/blockchain-in-capital-markets\">stated<\/a> in the report dubbed \u201cOpportunities for Blockchain Technology in Capital Markets.\u201d<\/p>\n<p>This means that there is plenty of opportunity for incumbents and new entrants alike to establish themselves in the present-day world of DLT-based capital markets. For forward-thinking traditional finance players, now is the time to make moves.<\/p>\n<p class=\"post-content__disclaimer\"><em>This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.<\/em><\/p>\n<p class=\"post-content__disclaimer\"><em>The views, thoughts and opinions expressed here are the author\u2019s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.<\/em><\/p>\n<div>\n<div style=\"background: rgb(239, 239, 239); border: 1px solid rgb(204, 204, 204); padding: 10px;\"><strong>Matthew Van Niekerk<\/strong> is a co-founder and the CEO of SettleMint \u2014 a low-code platform for enterprise blockchain development \u2014 and Databroker \u2014 a decentralized marketplace for data. He holds a BA with honors from the University of Western Ontario in Canada and also has an international MBA from Vlerick Business School in Belgium. Matthew has been working in fintech innovation since 2006.<\/div>\n<\/div>\n<p><template data-name=\"subscription_form\" data-type=\"defi_newsletter\"><\/template><\/div>\n<blockquote><p><strong><span style=\"color: #ff6600;\">If you liked the article, do not forget to share it with your friends. 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These innovations present a model for the direction that traditional capital markets are&#8230;<\/p>\n","protected":false},"author":1,"featured_media":250428,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"fifu_image_url":"https:\/\/images.cointelegraph.com\/images\/1200_aHR0cHM6Ly9zMy5jb2ludGVsZWdyYXBoLmNvbS91cGxvYWRzLzIwMjEtMDUvMTgxZmE4YTAtMmQ0ZC00OTI3LWE5ZmEtNDljMGQyNzBjM2ViLmpwZw==.jpg","fifu_image_alt":"","footnotes":""},"categories":[1],"tags":[74894,74983,74877,75239,74868,117,4965],"class_list":["post-250427","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general","tag-blockchain","tag-decentralization","tag-decentralized-exchange","tag-decentralized-finance","tag-defi","tag-business","tag-technology"],"_links":{"self":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/250427","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/comments?post=250427"}],"version-history":[{"count":0,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/250427\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media\/250428"}],"wp:attachment":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media?parent=250427"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/categories?post=250427"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/tags?post=250427"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}