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Just as communication has evolved significantly, we’re now witnessing the same level of disruption that occurred in web 2.0 in the financial world with cryptocurrencies, often referred to as web 3.0.
In this lightning-speed chase, the disruption is more akin to a decentralized finance movement where borders and rules don’t exist. In this anarchic world lies the much-needed infrastructure to financially service a globally digitized world.
With over $100 billion currently locked in the DeFi landscape, there is every reason to believe that the ecosystem is living up to the hype. The technology itself has delivered a spectrum of applications bordering on autonomy and blockchain composability. However, as innovative as this new financial order looks, DeFi is incredibly risky. With the vulnerabilities of the Ethereum network in mind, the majority of products and services in decentralized finance aren’t safe. Primarily, regulatory oversight and lack of customer protection standards are issues for DeFi.
Hence, the explosion of DeFi and fear of missing out has put businesses at a crossroads. Do they decouple completely from the established financial order and set out to embrace and navigate the uncharted DeFi landscape in hopes of great returns? Or is it more prudent for businesses to stick to the conventional banking systems?
While it is common to view the two financial orders as parallel spectrums, there are instances where they converge for even more desirable effects than DeFi or CeFi alone. This possibility unlocks a third option, the implementation of a hybrid finance (HyFi) architecture.
What is hybrid finance?
Hybrid finance is a financial order that borrows elements of DeFi and CeFi to enable robust solutions. The goal here is to handpick the strengths of both sides of the divide such that the end product is impervious to the limitations of DeFi and CeFi. Therefore, it is ideal for businesses that understand the value proposition of DeFi yet want to preserve the benefits of traditional finance, including compliance and convenience.
With HyFi the user gets the DeFi benefits they’re after for their business. For example, much of the processes to still be executed on the blockchain. Nonetheless, the HyFi solution is different because it’ll opt to comply with regulatory requirements, improve user experience, and provide standard grievance redressal and customer support services.
Why do businesses need to consider hybrid finance?
The introduction of platforms like DeFi.finance brings users the benefits that come with the adoption of HyFi systems. Their automated market maker, AMM, is the system powering most decentralized exchanges and is coming under the purview of regulators to help demystify DeFi.
The project has found a balance between decentralization and compliance such that institutional investors and businesses can now adopt a crypto exchange powered by an automated market maker without worrying about regulatory or security implications. By complying with strict KYC, AML and customer protection requirements, DeFi.finance is the ideal channel for institutional investors to access the decentralized finance market.
This milestone exemplifies the level of versatility that HyFi solutions offer businesses. They get to remain on the right side of the law and still enjoy some of the benefits of distributed financial services. It also helps that users know where to direct their grievances whenever they’re unsatisfied with the services rendered.
As an entrepreneur, it is important to gauge how integrations or a systemic shift could hurt day-to-day operations. Apart from the regulatory standpoint, most businesses are finding it hard to adopt DeFi because it requires an overhaul of their current financial systems. This level of disruption is not acceptable to an average business.
Notably, the best way to approach this conundrum is to opt for seamless integrations of existing systems and new technologies. With HyFi solutions, you do not have to outrightly do away with all legacy financial systems. Remember, that HyFi is that sweet spot where DeFi and CeFi reside. Therefore, adopting HyFi solutions promises less risk or possible disruptions to daily operations, in payroll for example.
In most cases, the core selling point of businesses is convenience. More often than not, users gravitate towards solutions that provide seamless and simple features. Unfortunately, DeFi is not user-friendly. At the moment, DeFi comes with lots of complexities. Hence, it is easy to see why it is less suitable for mainstream users.
In light of this, it makes sense to opt for the more consumer-centric HyFi solutions — since they explore ways to eliminate convoluted processes. Businesses, with the help of HyFi, can maintain the desired level of usability even when utilizing distributed financial mechanics.
DeFi is still very much in its early years of development. It’s impossible to predict when or if open and distributed financial systems will be widely adopted as the standard for businesses. For now, though, the present reality is that not a lot of businesses are willing to overhaul their legacy systems, despite the apparent benefits of DeFi.
And so, opting for DeFi at this time could inadvertently detach a business completely from the global financial market, thereby limiting collaborations to a few other crypto-focused businesses. In contrast, HyFi boosts the collaborative power of a business into the crypto world, brings benefits to payroll, and increases the pool of potential partners embodied by both traditional and unconventional companies.
In contrast to the winner-takes-all mentality that always surfaces in the DeFi versus CeFi conversation, the emergence of HyFi shows that the two financial orders can thrive together. In this HyFi terrain, there is a place for everyone, regardless of the financial philosophies they represent.