When Coinbase went public on April 14 this year, the blockchain and crypto community received it with mixed reviews. Some believed it was a milestone towards making crypto mainstream, as it passed all regulatory requirements and made it to the front pages of all media outlets. Others weren’t so happy. Going public meant the exchange lost sight of the true Bitcoin spirit and somehow betrayed its foundational pillars of decentralization, democratization and fairness.
Decentralization is not only a word: it’s the whole idea behind the DeFi, crypto and the blockchain movement, since Bitcoin was founded in 2008. DeFi, short for Decentralized Finance, is all about “reconstructing the banking system for the whole world in this open, permissionless way,” says Alex Pack, managing partner at Dragonfly Capital, a $100 million crypto fund.
One of the trends of crypto in 2021 is actually going back to that principle of true decentralization. However, from an operational standpoint, we are still in the early phases of DeFi development, and creating a decentralized finance ecosystem is a laborious and complex effort, and one the public is not quite ready for. Until now.
Crypto exchange LocalTrade has come up with an innovative solution. Using a soft approach and focusing on creating a seamless experience for users, they are successfully merging CeFi and DeFi.
To help bridge those two not-so-distant worlds, the LocalTrade ecosystem consists of a full-fledged CEX trading platform and DeFi investment platform — the DeFi Lab, which is a further development of LocalTrade CEX.
The User Journey: From CeFi To DeFi
Most exchanges nowadays are CEXs. These are convenient venues for day traders and crypto investors to purchase and sell crypto as the speed and cost-efficiency of processing transactions is done by a single point of authority.
However, according to CoinMarketCap, “The reliance of CEXs on a central entity does lead to some disadvantages, however. Centralized exchanges do not reveal their internal operations to the users, leading to a lack of transparency that enables malicious practices such as wash trading and price manipulation.”
LocalTrade’s solution is based on a CeFi approach that builds on the idea of a well-developed industry. Most users are familiar with how exchanges or trading platforms work. But instead of just ending that journey in the top levels of day trading or holding crypto in that exchange, LocalTrade aims to offer products and financial services that are within the DeFi space. By improving that user journey, they believe they can become an entry point to DeFi.
“By combining CeFi expertise and tech infrastructure with DeFi opportunities, we drive investments into decentralized finances with the best returns. We utilize the current CEX capacity to make it easy and secure to invest in the DeFi Lab products, Launchpad and tokensales, tokenized securities smart-funds, and yield farming protocol, all from within one payment gateway,” mentioned the company in a white paper.
Solving the DeFi Challenge
On the other hand, DeFi promotes users to interact directly with other users, making the exchange a mere enabler, a plaza that hosts both users as they perform a P2P transaction. In fact, DeFi is an umbrella term for financial services on public blockchains, primarily Ethereum. With DeFi, users can do most of the things that banks support — earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and more — but it’s faster and doesn’t require paperwork or a third party.
DeFi apps have some bigger challenges as of today:
- To ensure true decentralization, other users need to be connected to the app continuously, making it slower than CeFi-based platforms.
- Most DeFis create on-chain order books with tons of data of transactions, which depletes all the network resources and affects throughput significantly.
- On-chain trading is not real-time as all transactions have to be processed by miners.
- Likewise, due to a lower influx of users, most DeFi apps suffer from low liquidity problems.
Users normally access DeFi services through DEXs, short for Decentralized Exchanges, which in turn suffer from slower transaction times, low liquidity and a not so favorable cost-efficiency trading input / output.
“While decentralized exchanges (DEXs) seem to solve the most commonly faced problems in centralized exchanges, they have their own loopholes. Present DEXs still have no way to stabilize prices which means they may charge users more than the real price of a coin. Ethereum is the most commonly used platform for DEXs and these DEXs have failed due to the architectural issues. Decentralized exchanges does not have advanced trading functionalities such as margin trading and different order types (stop losses or limit orders),” said PhD and blockchain researcher Shakil Muhammad.
A New Financial Future
However, DeFi is not only DEXs, but a whole new paradigm shift in the financial system. Decentralized finance is not just technological innovation; it provides freedom, security, transparency that the legacy system simply can’t. Users can do things that are unthinkable in real life – such as take out a loan on a Saturday night without collateral or trade withholding money in a personal wallet.
“We are sure that DeFi’s ecosystem would benefit from increased liquidity and better rates due to institutional money flowing into it. Being so attractive, we look forward to DeFi helping fintech become a driving force for global economic innovation,” mentioned LocalTrade.
Almost all institutional players have begun experimenting with DeFi. The research from Fidelity Digital Assets SM’s 2021 shows that nearly 70 per cent of institutional investors find crypto attractive.
There are three almost equally positive characteristics across Asian and European market investors talk about: uncorrelated to other asset classes (36 per cent); an innovative technology play (34 per cent); high potential upside (33 per cent). European investors are even more optimistic about digital assets, with 82 per cent finding something appealing. Around 7 of 10 institutional investors wish to buy or invest in digital assets in the future, and more than 80 per cent of those interested consider having an allocation in their institution’s or clients’ portfolios within the next five years.
And DeFi’s interest is only rising. DeFi provides financial products available to everyone because they’re doing it fast and low-cost. Without the need for intermediaries, geographical boundaries, or jurisdictional boundaries. DEXs, peer-to-peer lending, stablecoins, prediction markets, and yield farming initiatives are the most popular DeFi products since they not only remove middle-man issues but also increase flexibility and bring breakthrough returns on investment.
Almost $20.5 billion was invested in DeFi as of 2021, and that number is only growing. Investors trust its potential. It’s now the turn of apps like LocalTrade to make sure the public trusts DeFi too.
Note: Investment in cryptocurrency is subject to risk and readers should do their own due diligence. Entrepreneur Media does not endorse any such investment.Internet Explorer Channel Network