Decentralized finance (DeFi) emerged as one of the most potent innovations to stem from blockchain technology’s approach to decentralization. While the goal is to offer financial services to every unbanked and underbanked individual, the ins and outs of most DeFi applications and protocols are beyond the scope of the very consumers they are designed to help.
Not only is there a steep learning curve involved, but the lack of easy-to-use interfaces and regulatory uncertainty are among the primary hurdles that have continuously thwarted mass adoption.
On the other hand, traditional finance (TradFi) has its own set of shortcomings. Besides being riddled with intermediaries, this model is becoming increasingly expensive in terms of accompanying fees. At the same time, it is still incredibly early for DeFi to disrupt a multi-trillion-dollar ecosystem of products and services.
The question then comes down to the best approach to help DeFi thrive. Does it mean co-existence, competition, or something in between?
To better understand the elementary difference and similarities between DeFi and TradFi, how DeFi can improve on TradFi, and how new DeFi initiatives are adopting a more user-centric approach, we sat down with the CEO of TideFi, Daniel Elsawey.
An expert in financial markets, Daniel specializes in fixed-income and foreign exchange structuring, fintech, corporate foreign exchange solutions, digital asset allocation, and trading, having held high-profile positions in some of the largest global financial institutions.
As someone with extensive finance experience, could you help our readers understand the fundamental differences between Decentralized Finance (DeFi) and Traditional Finance (TradFi)?
Daniel: Traditional finance is built on a centralized model where financial services providers or banks are the gatekeepers of access to investments and products. In contrast, DeFi is a form of finance where no centralized entity controls the access and disbursement of the product or asset. This helps eliminate the costs of doing business in the traditional finance structure, where you would pay intermediaries a fee to gain access to products and services.
Where do you think traditional finance falls short relative to its newer peer?
Daniel: Traditional finance has limited the scope to the traditional definition of investment assets. It covers fixed income (bonds), commodities, FX (foreign exchange), and equities (stocks). Due to its centralized nature, it is not easy to give the wider client base access to the new world of DeFi, where users can access many new types of investments, such as staking, yield farming, and tokenized real-world assets.
Businesses are going to usher in the new change, which will likely start with small and medium-sized enterprises (SMEs) using tokenization to reach and retain a wider audience. This will manifest itself in new opportunities to interact and earn for their clients.
Despite its potential, DeFi is yet to find its place among peers in the broader investments sector. What, according to you, are the main reasons behind sluggish DeFi adoption rates, especially across retail investors?
Daniel: DeFi is still in its infancy. Currently, you have multiple blockchains offering some sort of DeFi product, but, in my opinion, there have been three major barriers to mass adoption: decentralized know-your-customer (KYC) compliance practices, regulation, and real-world use cases.
To me, DeFi is not the same as being completely anonymous. DeFi is about taking ownership and financial empowerment. Decentralized KYC means a company never stores user data, and there is no potential for a data breach that we have seen in traditional companies. An identification that the user has gone through a form of KYC and is verified will help further integrate into our day-to-day financial system.
Regulation has been a key area for centralized finance, and if DeFi is to really expand mainstream, it will need to find a way to evolve and adapt to work together with regulation to be successful.
DeFi for the average user is not so accessible; it needs to become a seamless interaction with normal user products. I liken it to Apple or Google Pay; when using those products, most users are unaware of the underlying tech, but it serves two purposes: easy to use and secure. DeFi needs to head down the same path.
Many traders, especially institutional investors, are still on the sidelines regarding DeFi investments. Do you think DeFi projects need to build upon TradFi primitives to attract more participation? What do you feel needs to change so more parties join DeFi protocols?
Daniel: That’s a tough question. It touches upon some of the areas I discussed above, KYC and regulation. Traditional Finance is not going anywhere, and DeFi is here to stay, but the integration of the two will likely require the latter to mold into the former. This is simply due to the nature of how much capital is in traditional finance versus DeFi. DeFi needs to offer new products in a safe and secure manner that can be easily accessed by traditional finance rather than attempting to take over the financial market.
Traditional over-the-counter (OTC) trading and central limit order books (CLOB) have been around for decades. However, experts say that these methods aren’t well-suited for DeFi. Do you agree? Could you please shed some light on the downsides of these activities in the context of DeFi?
Daniel: Having worked in traditional finance in trading and also having been in the digital asset space since 2016, I have seen the advent of liquidity pools on decentralized exchanges (DEXs) and more traditional central limit order books (CLOBs).
In my opinion, liquidity pools in DeFi have suboptimal forms of price discovery. Let me explain. A CLOB in a market has market makers posting buy and sell prices for a particular asset, for example, Bitcoin against USD (BTC-USD). They can react to changing market conditions by adjusting prices instantly. This means the users will have a true representation of the market price most of the time. Combined with high volume, this is a true price discovery venue, meaning this is where you would go to have a good idea of the price of BTC/USD at this particular point in time.
Liquidity pools used in DeFi are priced according to an equation that has a constant. In the example above, a user can deposit BTC and USDT and get a return on providing this liquidity. The equation then sets a price based on demand and supply. The problem with this model is it doesn’t react to market news. The only way the price will adjust is if a user is buying or selling in this pool to change the price.
In essence, liquidity pools are good for bootstrapping liquidity to new ecosystems but are not optimal for price discovery. What is needed is a DeFi solution that uses a CLOB on-chain to give the benefits of DeFi and price discovery.
Your projects are heavily focused on open-source code and high-end security, among other things. What pushed you to opt for open-source code, and how does it benefit your growing list of products and services?
Daniel: Our project has a lot of contributors from the open-source community. One of our first decisions was to build our DEX in an app as opposed to a web browser for security reasons.
Our main purpose in building this project was to make a secure, safe, and easy-to-use DEX (TIDEFI) built upon a blockchain Tidechain which could handle on-chain CLOB trading, allow us to create real-world tokenized assets, and make them usable for clients in their day-to-day lives. By building each piece of our system, we can adapt it for many use cases outside of purely trading.
What exactly are TIDEFI and the Tidechain Network? Are there any special prerequisites for using your products and services? Most importantly, how do TIDEFI and Tidechain Network aim to make DeFi more equitable and transparent?
Daniel: TIDEFI is our crypto-agnostic DEX, and it runs on Tidechain, our blockchain built on Substrate. Our ecosystem is powered by $TDFY, the native token of the chain. It allows the users to access staking on the native chain and other assets such as Bitcoin.
It is important to note that TIDEFI is not competing with other protocols. Rather it is embracing them and allowing users to store their favorite native asset, such as bitcoin, in their wallet and send it to another user within seconds for a nominal fee as long as they are in the TIDEFI ecosystem.
Besides, we have not done a pre-sale or initial coin offering (ICO) and are distributing the tokens to the community based on our rebate program (300%) and other competitions. We want the average user to have the same opportunity to support the project and get access to the token at the ground level. We have not seen this in the years since ICOs first began.
