Web3’s potential in finance has been a hot topic in recent years. Does this relatively new technology have what it takes to overthrow processes that have sustained the global banking system for decades? Or will its hype die out as its relevance fades in the face of legacy systems and institutions that dominate financial markets?
To find out, one must pit the two against each other, weighing their strengths and weaknesses. And what better way to do that than to lean on the opinions of executives who have spent the better part of their careers in traditional finance (TradFi) and are now spearheading the next generation of decentralized finance (DeFi) solutions?
Traditional Banks Work, But…
“They’re very cumbersome, inefficient, and costly. Let’s say you trade bonds…You have to wait three days for a bond to settle. And then you think, ‘Why is that the case?’ It is extremely inefficient. There is no justification for that,” says Alex Gherzi, founder and CFO of STIMA.
TradFi’s inefficiencies stem from its reliance on intermediaries. It’s a system built by middlemen who not only slow down the settlement process; they also drive up the cost of participating in the mainstream financial system.
“TradFi is very centralized with a lot of intermediaries. The whole system is set up to make money off of you (the user),” says Brian Norman, CFO at Mantra.
Take international payments, for instance. The World Bank estimates that sending remittances costs an average of 6.20% of the amount sent. At the same time, the average overseas transaction takes a couple of days to complete, which is a tad too long.
Conversely, DeFi, which uses blockchain technology to cut out the middleman, has proven to be very efficient.
“If you take crypto and blockchain, what I think it ultimately resolves, it’s the fact that you disintermediate,” says Alex. “You cut the middleman so that the middleman effectively becomes way less relevant.”
This gives DeFi an edge over conventional banks as far as efficiency is concerned. For example, a remittance conducted on web3 rails only has to move between wallet addresses. This takes seconds to execute while costing less than 1% of the amount.
“From an international payment perspective, the time for settlement and the cost in DeFi is much less expensive than what you get from doing it on banks,” says Brian.
Take OneSafe for instance. It is a digital banking platform. And like any good bank, it offers various payment options like wire and ACH. But even better, OneSafe was designed with native web3 integration. This allows for even faster payment settlement times at a fraction of the price.
And there’s more.
The Opportunities of DeFi-Based Banking
Web3 banking has the potential to democratize access to the banking sector. This is thanks to its decentralized and permissionless nature that allows anyone from anywhere in the world to access and use a blockchain-powered platform.
Of course, regulatory bodies will want to have a say in that. But generally, a bank built on web3 principles is more accessible at a global scale than a traditional bank.
For example, OneSafe’s blockchain integration allows users to, among other things, open and manage accounts across borders. Anyone in a country that is not OFAC-sanctioned can access and use the banking platform.
DeFi also opens up new avenues for investment through tokenization. Tokenizing assets, which involves bringing them on-chain, empowers people to invest in instruments that would otherwise be inaccessible via traditional means.
For example, the platform STIMA leverages tokenization to create asset-backed tokens. Users can have independent valuations of their real-world assets recognized in STIMA tokens. These tokens allow users to hold and manage their assets on the blockchain, and for those who want to, trade their assets with other investors worldwide.
There is also fractionalized asset ownership, which allows people to own a fraction of an asset. This makes it easier to invest in alternative asset classes, like luxury watches, expensive art, and jewelry, even without being able to afford the full value of the assets.
Compare this to TradFi. The average investment bank will demand a substantial amount to enter these markets. Furthermore, depending on their jurisdiction, certain assets are either out of reach or incur significantly higher costs due to all the intermediaries.
But before picking web3-based finance as the clear winner, it’s important to point out its weaknesses.
The Inadequacies of DeFi
Web3 technology is still pretty young, and compared to traditional finance, its infrastructure is underdeveloped. Certain issues do arise from that.
“We haven’t quite got there yet with some of the blockchain technologies as far as processing speed (at scale),” says Brian. “And with the ease of getting on and off, particularly for self-custody, we’re completely not there.”
DeFi is still rather convoluted and complicated. There are just too many complexities with cold and hot wallets, private keys, addresses, and seed phrases. So in its current state, DeFi is a step too far for the average retail consumer. It’s not very user-friendly; at least not yet.
At the same time, the vast majority of people are wary of web3 technologies. Inadequate regulation and repeated failures in the NFT and crypto markets have worn at the willingness of many to embrace blockchain-powered innovations.
“You’re also running into problems with just the overall feeling of the crypto market. There’s a trust issue. And with that, people probably won’t start coming around until it is properly regulated with institutions that they know,” says Brian.
In comparison, traditional banks enjoy high trust levels among the public. They’re also the very definition of user-friendly. Their user interfaces (UIs) are a result of decades of refinement. The result is that it doesn’t take much to begin using a bank account, banking application, debit card, or credit card.
So despite DeFi’s obvious benefits, most people have an easier time in TradFi. This is why they continue to use traditional banking platforms.
So, What Will Power the Future?
The future of banking may not really be a choice between DeFi and TradFi. This is because neither has it all. TradFi struggles with costs and efficiency, whereas DeFi suffers from a lack of public trust and the user experience.
But generally, each seems to have what the other lacks. And this, according to experts, means that the future of banking, and finance in general, will leverage the best of both worlds. It will be a hybrid.
How the Future of Banking is Currently Unfolding
One way this future is unfolding is traditional banks embracing web3 technology to improve their processes.
“I think banks full well understand that there are certain things they either will integrate, or they will just start really suffering from a business model perspective,” says Alex.
These ‘things’ include leveraging blockchain to cut out the middleman and optimize efficiency for international transactions. Brian echoes these sentiments.
“So, is there a point where banks can start relying on web3 to make their processes more efficient? I think there’s a lot of applications that can come from that to make everything more efficient.”
But despite their best efforts to adopt blockchain technology, banks are generally slow to embrace change. So, what we’re now seeing are new digital banking platforms built from the ground up with native web3 integration.
These platforms have the same functionality as traditional banks. And being digital, they can easily incorporate blockchain technology in their systems and processes. This is changing the game.
For example, OneSafe is a platform leveraging innovations, including web3 and cryptocurrencies, to upgrade banking with the goal of making it cheaper and easier.
At the same time, it’s also designed to smoothen the process of interacting with web3. It uses account abstraction to make web3 banking comparable to traditional fiat banking. This turns it an all-in-one banking platform combining a traditional bank, crypto exchange, and Multisig wallet in one interface.
This is the future of the financial sector. Whether it’s new companies coming up or legacy entities adopting blockchain technology, banking in the coming years will be defined by the merger of traditional banking services with innovative crypto solutions, reshaping the industry landscape and redefining the customer experience.