In this final episode of season 2, Samantha Yap and Ambre Soubiran continue their discussion focusing on the relationship of data to money and the foundations of digital money.
It’s easily forgotten that financial markets are underpinned by several giant data companies which feed all market participants with up to the millisecond price information. Although still in its infancy, DeFi’s principles of on-chain data transparency, immutability, and anonymity mean that the TradFi model cannot be simply ported across.
The Gap between TradFi, DeFi, and CeFi
TradFi is the existing financial system. This is finance that has been evolving and improving over hundreds of years. Therefore, it is valuable and should not be hastily discarded. But, it is run by what we call centralized institutions that are regulated. The regulations make sure that there are some specific liquidity ratios that are responsive to peak rules so that you cannot do anything with customer funds, etc. On the other side of the spectrum, you have DeFi. DeFi is an entirely public protocol-based and blockchain-based financial application, such as decentralized exchanges, lending and borrowing protocols, and tokenization platforms. Numerous applications leverage blockchain technology and build protocols that mimic financial contracts in order to enable participants to interact with each other, exchange value, and program this exchange of value. This is unregulated but it is also an entirely public, transparent, open-source system where you can read the code and see where funds go.
Between TradFi and DeFi we have CeFi serving as a bridge between the two. To be able to interact with DeFi you need to own crypto assets. Many people, therefore, rely on an application that allows them to convert fiat currency into cryptocurrency. This is the role CeFi fills. They give easy access from TradFi to DeFi and make the user experience more seamless. This is important because interacting with DeFi protocols is still difficult at this stage. Centralized exchanges and centralized finance is making crypto easier by creating an on-ramp. However, as we’ve seen with recent events, CeFi institutions have been misused. They are not supposed to be new unregulated banks that can be used to store value. Being unregulated makes it difficult to distinguish between the good and the bad unregulated centralized exchanges, and there are both good and bad CeFi exchanges out there.
Can we trust the data?
Since the crash of FTX there has been a greater push towards centralized exchanges publishing proof of reserves. Soubiran believes proof of reserves creates the right direction toward self-regulation. Once the data is published, everyone has access to it and can see the number of tokens held by each exchange. Regulations to publish proof of reserves may create operational difficulties for exchanges as everything will be under scrutiny, however, it will be a good move for the ecosystem. Yap raises a poignant question on how users can be assured that they can trust the data being put out by exchanges. Soubiran discloses that there are two sides to consider. The data released showing proof of reserve on the blockchain is completely accurate and can be trusted, however, this does not expose how much fiat currency the exchange might hold with traditional banks.
What does the digital finance economy look like?
All DeFi requires is an internet connection. It is plausible that the existing financial system will be replicated in some form or shape on-chain. The effect of this is that all of the basic functions of the traditional financial system are going to be enabled in a much more transparent, decentralized way than they are currently. Additionally, the amount of fees that banks are taking in every single possible direction today is crazy and that is something that can be changed with DeFi. Solid, transparent, reliable technology should be the focus of digital finance. This requires building systems and networks that are at the level of the existing financial market data feeds.
Kaiko hopes to be the foundation of the digital finance economy. Sabourin states, “we are regulated ourselves under a data regulatory framework around what you can and cannot do with the data as you’re going to be able to serve as a source of truth for an industry”.
She believes that blockchain will be the underlying tech to many industrial applications in the future. And for that to happen there has to be reliable code that is auditable and transparent as well as reliable trusted third-party data providers that can feed data to that code. That is Kaiko’s mission, to solve the quality data components of enabling a blockchain economy.
Where is crypto going to be in five years?
We need to get back to basics. Soubarin believes that there will be a push to return to the original ethos of blockchain and less emphasis on synthetic centralized financial products. She believes the next step to start seeing proper blockchain application is asset tokenization, this is key to enabling proper real-life applications of blockchain tech.
Blockchain is a revolutionary technology, but it is just a technology. It’s a different way of executing contracts. The contracts are not going to change, what will change is how we execute them. So the question is, how do we create trust? How do we execute them? TradFi provides important guides for DeFi, its exorbitant fees and slow innovation make it ripe for disruption; but that disruption is not assured, as recent events have shown us. While the collapse of FTX has reminded us that centralised finance is not the way forward, it is also a lesson in building tools that reflect the core advantages of blockchain, to build real use cases. We’re seeing money evolve – the trust system of money. Blockchain technology is just the foundation of it.
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Follow Kaiko on Twitter here