The future of blockchain is hybrid
There is a third way: HyFi = (CeFi + DeFi)∞
But first, tokenization
Tokenization is essentially the digital representation of a real-world asset using blockchain technology.
This process is becoming more common as more assets, such as real estate and art, are represented on the blockchain.
One of the major benefits of tokenization is the ability to divide assets into smaller units, making it easier for people to invest in high-value items that may have been too expensive before.
Tokenization can also automate and optimize processes such as asset management and contracts, saving time and money, but above all, expanding markets where these assets can be traded or exchanged, ushering in a new era of global commerce.
While tokenization has the potential to change the way we trade and manage assets, we still have many regulatory challenges ahead in Europe, which we hope to address with MiCA, such as:
Defining whether a token should be considered a security or a virtual currency, and consequently, be subject to different regulations
Providing clarity on how these markets should be regulated, which can make it difficult to create a safe and transparent market for investors
Establishing adequate measures to protect investors and ensure transparency and integrity in the token market
Having a regulation that is consistent and does not hinder the development and adoption of tokenization at the European level
Joining together both worlds
Now, what role does tokenization play in this new landscape?
Firstly, it is important to clarify a series of concepts.
Centralized Finance (CeFi) refers to traditional financial systems that are controlled by a central authority, such as banks and other financial institutions.
On the other hand, Decentralized Finance (DeFi) is a relatively new concept that refers to financial systems built on blockchain technology and operate in a decentralized manner, without the need for a central authority.
The traditional centralized financial system (CeFi) suffers from many problems, including access, efficiency, time, cost, but above all, lack of transparency, where citizens are at the mercy of entities and the supposed control of usually governmental central entities that have shown inefficiency in control.
On the other hand, decentralized finance (DeFi) was supposed to solve the problems of CeFi but has created a new set of problems, including:
High and unpredictable transaction fees
Slow transaction speed
Lack of support for KYC (Know Your Customer), AML (Anti-Money Laundering), and CFT (Combating the Financing of Terrorism)
Lack of mechanisms for dispute resolution
Lack of consumer protection mechanisms
A third way: HyFi = (CeFi + DeFi)∞
We believe that combining elements from both models, offering the security and transparency of decentralized finance along with the convenience and accessibility of centralized finance, can be the future to bring blockchain closer to the mainstream.
Furthermore, this idea can help solve some of the challenges faced by both decentralized and centralized finance, such as scalability and mass adoption.
It is important to remember that hybrid finance products can provide a more balanced and user-friendly experience, facilitating access to the benefits of DeFi.
Additionally, the combination of both worlds can open the door to the emergence of a new type of products that we believe can be truly disruptive.
The key element of this equation, as we explained at the beginning, is tokenization, which precisely allows us to combine the best of both worlds.
Some ideas of hybrid products (HyFi):
Hybrid and tokenized investment portfolios with on-chain and off-chain underlying assets
Decentralized exchange with a centralized order book
Stablecoin backed by a combination of fiat currency and decentralized collateral
Hybrid lending platform that combines centralized risk management with blockchain collateralization
Hybrid payment platform that combines payment methods with stablecoins and a centralized network such as Visa or Mastercard
Decentralization: Utopia or Power
We run the risk of killing decentralization if we become completely fanatical about it.
We believe that utopias inherently contain an element of being unrealizable, but they also propel movement towards action, meaning they are an engine for change.
Those who are maximalists of decentralization must acknowledge that the world does not function in a decentralized manner. Practically every aspect of our lives has some level of centralization, from refueling our vehicles (we don't store gasoline containers in our homes) to storing our photos on our phones (we rely on cloud storage provided by someone else).
Therefore, if we want blockchain technology and all its derivatives, including decentralized finance, to achieve massive global adoption, we must make some concessions. In other words, we need to sacrifice some decentralization in exchange for greater convenience, a better user experience, and to prevent the crypto movement from remaining isolated and restricted to a group of "hard users."
The combination of CeFi and DeFi has the potential to create innovative financial products that offer the best of both worlds.
These hybrid products could ultimately lead to a more efficient, secure, and global financial system.
This is our approach at Common Sense.
