TL;DR CeFi is critically important to DeFi, and will be for the foreseeable future, but the relationship will change—with stablecoins providing a kind of DMZ between the two.
Welcome to 2028, where it's all good news. North Korea leads the world in blockchain technology, following the prosperous nation's economic pivot from nuclear terrorism to Web3 software and NK-Pop. Back at home, President Bieber has just announced inflation is firmly back under control, with the latest CPI print running well below the Fed's target of 1,200%.
It's a beautiful day, with the sun just peeking through the thick banks of rust-colored clouds, and radiation levels are back under the mutation threshold for the third day running. While ChatGPT puts the coffee on for you, you sit back and pull up an article you first read five years ago...
Ruby's "DeFi In The Future" is a series of blogs where we gaze into our crystal ball and take a shot in the dark at describing what DeFi might look like towards the end of the decade.
In the first installment, we looked at how real-world assets (RWAs) and NFTs are set to on-ramp trillions of dollars of collateral to DeFi, providing much-needed liquidity and (without exaggeration) revolutionizing the global economy in the process.
The Future Of DeFi Is CeFi. Just Not As We Know It.
If there’s one thing that 2022 taught us once and for all—again—it’s that centralization doesn’t do the blockchain space any favors.
Managing your own crypto is still hard for most people. Engaging with DeFi dApps is harder still. The industry’s simplistic solution was to go back to what people know and throw crypto in a TradFi wrapper: Centralized exchanges like FTX for crypto trading, and apps like Celsius for yield farming. “CeDeFi” promised much, and served a useful purpose for millions of users, but ultimately reintroduced the catastrophic single points of failure that blockchain is designed to eliminate.
It's depressingly understandable that TradFi would have taken this approach, for at least two reasons. Firstly, reaching outside your comfort zone and challenging the current orthodoxy is hard, for both TradFi businesses and users. Centralized, corporate-controlled platforms are familiar to billions of customers. Centralizing crypto access was the easy answer.
Secondly, and less charitably, it's in the nature of TradFi to seek to capture value, gate it, and silo it. DeFi is about co-ownership and collaboration. TradFi or CeFi (we'll use the terms interchangeably) is about competition and control. In short, TradFi takes broadly the same approach to DeFi that Gollum takes to rings of power.
CeFi isn't going away, not least because fiat money isn't going away—got to raise funds and pay taxes with something—and neither is the vast labyrinth of infrastructure around it. TradFi and DeFi can and will coexist, but, like oil and water, they are fundamentally different. You can mix them if you work hard enough, but—to mix metaphors as well—they have a habit of coming apart at the seams after a while. The way for them to work together is for each to stay in its own lane.
Think of CeFi and DeFi as two countries. CeFi has large quantities of users and capital. DeFi, meanwhile, is populated by a smaller number of citizens who have different laws and a culture that often seems bizarre to those who haven't been naturalized, but who also enjoy opportunities the likes of which makes CeFiers salivate.
To date, CeFi’s approach has been to annex or absorb DeFi, aka shoehorning its tech and products into CeFi's familiar frameworks. Instead, the relationship in the future will—ideally—be more like separate countries with a porous but clearly-defined boundary. Funds and users flow between the two frictionlessly, but each will maintain its own distinct identity.
In such a scenario, users will engage with CeFi in the process of exchanging fiat for crypto, but once they've passed through customs and are in DeFiLand, they get to make their own decisions. (Either that, or they stick with a CeDeFi approach that will necessarily exist within the same regulatory frameworks as TradFi apps, and will have all the same drawbacks.)
On-ramps are a significant pinch point in the current DeFi landscape. Not that what we have doesn't work well enough, or that exchanges aren't an important part of the blockchain landscape. It's just that they're not, on their own, enough to drive meaningful adoption of a robust DeFi economy.
In five years time, "on-ramping" will mean more than "buying crypto with fiat". We need to get better at on-ramping within DeFi, too. Current and future methods might include:
- Fiat-to-crypto exchange
- LPing and yield farming
- GameFi (Play-to-Earn, Play-and-Earn)
- Freelancing for crypto (including in DAOs), growth of crypto payments for remote workers
- Regular salary payments (part or full) in crypto tokens/stablecoins
- E-commerce and in-store payments
- Crypto loyalty solutions, gift cards, and vouchers
- Growth in personal and charitable gifts in crypto
- More options to access DeFi from within current TradFi apps (bearing in mind the need for distinct boundaries)
Ultimately, DeFi needs to be involved in all of the many ways in which value (not just money) changes hands. And, as we wrote in the first post in the series, the more assets move onto the blockchain, the more options users have to use as collateral, creating a virtuous liquidity cycle.
Driven By Stable Growth
One of the biggest drivers of DeFi adoption has been, and will continue to be, stablecoins. Stable assets provide a crucial bridge, and a kind of common language or standard, between TradFi and DeFi.
Stablecoins are the ideal solution for cross-border settlement, including paying remote employees and for e-commerce. The growth of reliable stablecoins—which in practice means either regulated fiat-backed tokens (e.g. USDP) or decentralized collateralized ones (e.g. DAI), and not some form of algorithmic alchemy—is a prerequisite for DeFi's own growth.
A handful of organizations have gone above and beyond in using stablecoins and similar approaches to bridge TradFi and DeFi. New initiatives are offering accounts, via regulated banking partners, where your balance can be seamlessly converted to digital tokens and then deployed on-chain. Tokens can be converted back for use in TradFi just as frictionlessly. These aren't exactly "stablecoins" in the traditional sense; instead, the tokens are more like IOUs that can be redeemed for funds locked in a ring-fenced, regulated bank account.
Peyya is building one such platform on the SKALE Network, enabling payments with regular fiat currencies like dollars and euros to take place natively on-chain. For the end user, there is no difference between shopping on Amazon or on OpenSea: It's the same Web2-style experience.
This kind of financial middleware, which enables frictionless switching between fiat and stablecoins, provides the ultimate on-ramp for DeFi. Essentially, with these applications your balance is digital cash, seamlessly usable in either the TradFi or DeFi world.
The next wave of DeFi adoption may well be powered by such apps, which make crossing the border far easier and act as a kind of financial DMZ between CeFi and DeFi.
Finishing the article, you open your wallet. Your UBI payment (no work required, since AI takes care of that for you now) has just landed in your hybrid NorbanK account. You insta-bridge a few thousand dollars to the blockchain, and convert it to Salvadorean Bukeles (SBK), the hardest fiat-backed stablecoin on the planet. You'll swap it back to dollars when you need it, to withdraw to your CeFi account for rent and bills, but for now you deposit it in a couple of pools to generate a return.
One of your bids got hit overnight, and you're now the proud owner of a Netazon Prime Gold NFT. The weather forecast suggests light rain in the pH 1-2 range later this morning, but it's still early and you've got plenty of time to finish your 10,000 steps to lock in today's food subscription, so for now you settle down to watch Sly duke it out with the French in Rambo 8.
What a time to be alive!