How to Bridge the Gap between Web3 and TradFi

2023-03-08, 08:12

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## TL; DR
The integration of decentralized finance and traditional finance should lead to the greater adoption of Web3

The major Web3 problem is the lack of interoperability between DeFi and TradFi.

Suitable self-custodial wallets, Application Programming Interfaces (APIs), and efficient crosschain bridges can increase interoperability between DeFi and TradFi.

One-stop-shops for DeFi and TradFi products will result in greater adoption of Web3.

## Introduction 
Traditional finance has existed for centuries  while Web3 has been in existence for a period of less than two decades.  This is the reason why there is no comprehensive integration between these two financial systems. Currently, they seem to compete with each other. Today, we discuss how the integration of TradFi and DeFi will lead to the greater adoption of the blockchain sector.

## TradFi vs. Web3 
Before we delve deeper into the aspect of integration let’s understand what Web3 and TradFi mean. TradFi, standing for traditional finance, comprises legacy financial institutions such as  banks and other fin tech companies that operate in the sector. These are regulated financial institutions with strict Know Your Customer (KYC).

![](https://gimg2.gateimg.com/image/article/167826230110781678262258_.pic_hd.jpg)
Banks (TradFi) - Immigrantivest

Web3, on the other hand, refers to a new type of internet service powered by the distributed ledger or blockchain. [Decentralized finance (DeFi)](https://www.gate.io/blog_detail/196/decentralized-finance-defi-a-technology-that-challenges-centralization "Decentralized finance (DeFi)") is an important aspect of Web3. DeFi is the peer to peer financial service based on the distributed ledger technology. This is a financial system which does not have intermediaries or any centralized authority.

## Web3 and TradFi integration 
Many experts believe that DeFi will not reach its fullest potential if it does not integrate with traditional finance (TradFi). There are several reasons for this. For example, TradFi has a wide support from many investors and consumers around the world while DeFi still has less trust. Therefore, the best way to expand DeFi is to partner with TradFi in order to gain the support and trust of many consumers around the world.

Read also: [Key Points of Encryption Hearing](https://www.gate.io/blog_detail/388/key-points-of-encryption-hearing-the-industry-called-for-no-excessive-regulation-and-members-of-congress-proposed-to-ensure-web-3.0-revolution-took-place-in-the-united-states "Key Points of Encryption Hearing")

DeFi and TradFi should cooperate in order to meet the needs of the consumers. As such, the crypto leaders should take the initiative to work with TradFi companies as they can use their different strengths and capabilities to develop products which the tech savvy users prefer. For instance, they can find ways to offer insurance, mortgage and credit solutions which consumers want.

Both DeFi and TradFi can also cooperate to ensure that the consumers can access their services on a daily basis. As an example, the consumers need to use cryptocurrencies to pay for their bills. Having an interface that enables consumers to use both cryptocurrency and fiat currency to pay for everyday products will likely increase the adoption of Web3.

Read also: [How do Web3 firewalls and smart contract security services mitigate crypto security flaws?](https://www.gate.io/blog_detail/1738/how-do-web3-firewalls-and-smart-contract-security-services-mitigate-crypto-security-flaws "How do Web3 firewalls and smart contract security services mitigate crypto security flaws?")

It is also important to view TradFi companies as DeFi’s potential clients. What this means is that Web3 tech firms should develop tools which TradFi companies need in order to use or integrate [DeFi products](https://www.gate.io/price/view/decentralized-finance-defi "DeFi products").

## Partnerships and collaboration
It is important for firms that operate in decentralized finance and traditional finance to forge partnerships. This helps TradFi companies to understand how the blockchain works and to integrate some of the Web3 tools and applications. With this, they are able to create interoperability between the two systems thereby increasing the use cases of digital assets.

## Compliance to regulations
One reason why the mainstream users are not quick to adopt Web3 solutions is lack of regulations in the sector. Therefore, Web3 firms should work with TradFi to influence the development of crypto friendly regulations that apply to the sector. If the DeFi sector complies with jurisdictional regulations more consumers will adopt its products.

## Tokenizing real-world assets
Tokenization of real world assets will enhance further adoption of Web3 products. In simple terms, tokenization means creating a digital file that exists on the blockchain which represents a real world asset such as a bond or a stock. Tokenizing legacy financial assets like bonds creates a close connection between TradFi and DeFi.

Tokenization of financial instruments or works of art has several benefits. For example, that increases the asset’s liquidity, reduces management costs, results in fair prices as well as enhancing efficiency, democratization of investment and transparency.

## Web3 problems  
There are different problems which Web3 is facing that require urgent solutions. The sector is facing regulatory uncertainty following initiatives by many countries to introduce relevant legislation.

In some cases, the transaction cost is very high which inhibits consumers from utilizing the blockchain technology. For instance, transactions on the <a href="/pt-br/price/ethereum-eth" target="_blank" class="blog_inner_link">Ethereum</a> blockchain are very high.

The technology is not yet ready for mainstream adoption. For instance, there is still limited privacy in the sector. Although wallets are anonymous it is possible to use the transaction history to identify the wallet holder.

Another major problem is the absence of Web3 and TradFi interoperability. The blockchains cannot interact with each other. On top of that, there is no interoperability [between DeFi protocols](https://www.gate.io/blog_detail/1672/10-best-defi-protocols-to-invest-during-bear-markets "between DeFi protocols") and the traditional financial infrastructure.

![](https://gimg2.gateimg.com/image/article/167826248610791678262273_.pic.jpg)
Multi-chain interoperability- Edgeapp

## Traditional finance meets blockchain
For Web3 to reach its fullest potential DeFi and TradFi should work together. The blockchain sector should come up with Web3 applications for traditional finance and vice versa to enhance interoperability. Greater use of Application Programming Interfaces (APIs), efficient crosschain bridges, settlement networks and custody solutions should create synergy between DeFi and TradFi.

Integration between decentralized finance and traditional finance should help to bring both DeFi and TradFi products to one central location, accessed through a single interface. In other words, there is a need for one-stop-shops for both DeFi and TradFi products and services.

The blockchain sector also needs many multi-chain wallets which are connected to different blockchains. In fact, we expect self-custodial digital wallets such as DeFi Wallet, <a href="/pt-br/price/trust-wallet-twt" target="_blank" class="blog_inner_link">Trust Wallet</a>, MetaMask and Crypto.com to provide the users with one-stop-centres for digital assets from various blockchains.

## Conclusion 
In short, Web3 can develop to its fullest potential if TradFi adopts DeFi products and tools as well as introduces in-demand services such as lending and mortgage.  The other blockchain solutions for traditional finance include interoperability and collaborations. Already, APIs help in the integration of TradFi and DeFi.

<div class="blog-details-info">
<div>Author:** Mashell C.**, Gate.io Researcher
<div class="info-tips">\*This article represents only the views of the researcher and does not constitute any investment suggestions.
<div>\*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.
</div>

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