Hybrid Finance is the Future: Is the Traditional Finance to DeFi Bridge Near Completion

These new developments aim to replace the traditional finance system that is currently used around the world. The traditional financial system uses methods such as taking loans, cashing cheques and making withdrawals. This system has been used as the main global financial system for decades. 

However, while globally practiced, this system has some very evident shortcomings that the DeFi system aims to fill. The Hybrid system (HyFi) is a financial system made up of the combination of the two mentioned above: The combination of the traditional system and the new DeFi system. 

Below is a description of the various systems. What's more, this description will also assess whether the hybrid system’s formulation is nearly complete.

How The Systems Work

The Traditional Finance System

The global finance economy has applied the use of the traditional financial system for decades. This system is mainly centered around banks. In this system, banks play the role of the go-between for investors and users. Through this system, taking loans, cashing cheques, and other financial transactions can be completed.  

This system is also characterized by heavy government involvement. The governments act as the central oversight for all activities carried out by banks in the financial system. In this case, governments, their policies, and regulations are the influencers of what takes place in the whole system. 

This government involvement limits the ability of investors to enter into the economy and the extent of their actions. 

The DeFi Network

This system is referred to as the Decentralized Finance (DeFi) system. This term implies that the system is free of government influence that is problematic for the traditional system. The DeFi system is based on blockchain technology. 

This is a type of technology that utilizes shared digital ledgers in a peer-to-peer network as the basis of record-keeping. The ledger stores data in blocks and is entirely tamper-proof and efficient in ensuring financial records are secure.

Thus, in this system, financial products and systems are developed on a decentralized platform in a bid to promote the openness of the financial sector.

This system has recorded tremendous growth with many different projects being launched around the world. 

The launch of different cryptocurrencies such as Bitcoin, Ethereum, and other projects is proof of the rapid adoption of the system in the current society. 

The Hybrid Finance System

The DeFi system holds some apparent advantages over the traditional financial system. Similarly, the traditional system also holds some advantages over the DeFi system due to its applicability. Thus, when combined, the two financial systems create a hybrid that compensates for the differences left by each system. 

The hybrid system adopts components from both financial systems and combines them to create a blend that suits both the investors and users. These components include:

The Application of Blockchain 

In the hybrid system, the implementation of blockchain technology into the financial system has worked to drastically improve the existing infrastructure. The use of blockchain technology improves the efficiency of the system by reducing the time taken to make transactions. 

The use of blockchain also improves transparency and security through the availability of the shared ledgers that serve as the backbone of the DeFi system. Through the use of the solution, information relating to the assets of investors can be easily obtained. 

The record-keeping aspect of blockchains also improves transparency as every transaction is visible to the entire network.

Centralization

Due to the nature of the decentralized system, the services and products based on the DeFi platforms showcase low stability. Similarly, the lack of oversight may encourage criminal activity that may affect the assets of investors or the system in general. 

Through the incorporation of the centralization structure used in the traditional system, the stability problem can be controlled. 

Oversight through government regulation and policies can also be facilitated in order to make the system more stable and less likely to be affected by criminal activities.

Author’s Word

The traditional financial system is full of gaps that the DeFi system fills. This new DeFi system is more secure, efficient and transparent when compared to the older one. Ths system also allows for more growth heading into the future. 

Nonetheless, it possesses some shortcomings which can be associated with the DeFi system being in its early stages of development. The traditional system also has some advantages with regard to the centralization and oversight aspects. Therefore, there is a need for the present issues to be ironed out from both systems. 

The HyFi system works to borrow the benefits of both sides. This system then combines the DeFi and traditional systems to create a cross-breed system that takes the advantage of each system while covering any issues that may emerge. 

The hybrid system applies these borrowed concepts and makes them into a system that is the best solution going forward. HyFi is therefore testament to the fact that the transition from the old financial system is nearly complete.