Financial markets have been evolving since time immemorial - the earliest known form of market interaction was mainly barter trade (exchange of goods for other goods). Since then, this ecosystem has seen the rise of money and financial instruments that are traded across most markets today. In fact, both money and financial products are a fundamental part of global economics.
Money in itself has undergone many transitions, from the gold standard to paper money and now the widely used credit and debit cards. As if not enough, cryptocurrencies made a debut more than a decade ago to further evolve the concept of money and financial markets. Bitcoin which is the premier digital asset is an open-source 'innovative network and a new kind of money' - this peer-to-peer technology is built to eliminate third parties such as central authorities and financial institutions.
While Bitcoin was the pioneer digital currency innovation, this nascent industry has grown a great deal to feature other crypto assets as well. Most importantly, the new innovations are built with a goal of improving the products offered in traditional finance by making them accessible to everyone. Today, one can access some financial services such as credit, derivatives trading and exchanges without going through an intermediary - thanks to Decentralized Finance (DeFi).
This emerging crypto niche went mainstream in the summer of 2020 and is now touted as the 'future of finance' by the crypto community. Ideally, DeFi is a permissionless financial market that offers anyone the opportunity to interact with available products within a trustless ecosystem. Looking at its fundamentals, the infrastructure borrows heavily from traditional finance - only these time the market operations are done on-chain. This simply means that they are facilitated on a blockchain network like Ethereum.
Though still in the early stages, crypto is gradually proving itself as a force to reckon with in today's financial landscape - the total market cap is well over $1.8 trillion as of press time. What remains uncertain is whether this industry will completely overhaul traditional finance or the two will eventually integrate. Both scenarios seem possible, although most action is currently on the integration of both markets. Let's take a look into the possible future of finance through cryptocurrency evolution.
As we mentioned earlier, financial markets are ever-evolving in order to feature more flexible and customer-centric products. We are at a point where web 3.0 products such as decentralized crypto assets are finding their way into today's financial ecosystem. Arguably, this upcoming sector might as well shape the future of finance.
Crypto is changing some of the most fundamental foundations of the financial market which include money and underlying products. There are also ongoing innovations whose focus is integrating the crypto ecosystem with real world assets, in what has been termed as 'tokenization'. While most of these developments are still in the infancy stages, there has been a lot of action in recent years.
Money is recognized as a medium of exchange, unit of measure for value or an instrument that can be used to store value. Normally, each jurisdiction has its own fiat currency such as the U.S dollar, Euro or Chinese yuan - these denominations are issued by monetary authorities while financial institutions facilitate the transactions within an economy.
The evolution of money dates back to barter trade when commodities such as salt, ivory or weapons were considered a medium of exchange. With time, this became cumbersome and led to the invention of coins and paper currencies. Today, the world has further evolved to adopt plastic money in the form of credit and debit cards.
That being the history, it seems that we might have a clue about the next form money is likely to assume - crypto. Bitcoin made its case when the world was still recovering from the U.S subprime mortgage crisis in 2008. At the time, it was apparent to Bitcoin's inventor Satoshi Nakamoto that the world needed a new form of money that is decentralized (Cannot be manipulated by governments or institutions).
A decade down the line and Bitcoin is gradually gaining its place as one of the world's currencies - in fact, it is a borderless one. With BTC now in the picture, merchants across the world are embracing this digital asset to make payments. It has gained the support of payment card service providers such as Mastercard and Visa to mention a few.
The financial market has been the go-to place for most people seeking to access products that are tied to finance. Some of these are offered by financial institutions ranging from banks, investment firms, brokerages and stock exchanges. It is particularly common to go for credit services from a bank and leverage stock exchanges to get an exposure in the equity market.
However, traditional finance is faced by a myriad of challenges when it comes to on-ramping. Most of the world's population is still unbanked which means that they have little or no access to financial products such as loans or investment opportunities. Well, cryptocurrencies are gradually changing this narrative by offering a decentralized and permissionless market through DeFi.
Some of the products that are featured in the DeFi ecosystem are an exact replica of those offered in traditional finance. As it stands, you can access a loan or save money via a DeFi protocol such as Aave, Compound or Maker. Other products/services include decentralized exchanges (Dexes) like Uniswap and Sushiswap. This ecosystem also features sophisticated financial instruments including derivatives and non-fungible tokens (NFTs).
Notably, the financial products within the crypto ecosystem are largely experimental - most of the work is still in beta phase. Most of the efforts are now being directed into building an ecosystem that can be adopted mainstream and challenge traditional finance through the fundamental aspect of decentralization. It may take a while but the progress seems pretty solid and promising.
Tokenization has facilitated the integration of traditional finance and the crypto ecosystem - this process simply involves the representation of securities or real world assets as tokens to be traded on-chain. With tokenization, publicly traded stocks like Tesla (TSLA) and Apple (AAPL) can be accounted for and transferred into a blockchain ecosystem where market participants can trade the representative tokens. Some of the perks of this integration include 24/7 markets, fractional ownership, rapid settlements and deep market liquidity.
There are various factors that distinguish the crypto market from traditional finance - some of which are beneficial while others pose as a risk. Here's a look at the main ones:
This is the main distinguishing factor between crypto and existing financial markets - the former is built on decentralized architecture such as the Bitcoin blockchain while the latter revolves around centralized entities like central banks and financial institutions.
With cryptocurrencies, the blockchain ecosystem is maintained across several networks which makes them decentralized and trustless. This is not the case for traditional finance products where central banks control money circulation amongst other factors that may affect their value.
Though traditional finance has been around for long, market products in this niche are often not accessible to everyone. This is because of limiting factors such as KYC requirements, minimum capital and a knowledge gap in financial awareness.
On the other hand, cryptocurrencies are built on a permissionless network - anyone can access them seamlessly. All it takes is to open a crypto wallet through existing services providers and start interacting with DeFi applications, NFTs and other crypto opportunities that have been built on public blockchains.
Unlike cryptocurrencies, traditional finance products offer little to no anonymity for their users. Bank loans or investment products will often be attached to the KYC information provided by a client. In crypto, this is not the case - funds are moved through anonymous crypto addresses which means that a user's privacy and anonymity is maintained. However, centralized exchanges like Binance now collect user's KYC in line with the Financial Action Task Force (FATF) 'Travel Rule' that was introduced to oversee digital asset operations.
Cryptocurrencies offer a shorter transactional window compared to traditional finance products. One Bitcoin transaction could take as little as 15 minutes to be confirmed - this is a drop in the ocean compared to traditional payment channels that can take up to 3 days. It is also noteworthy that cryptocurrencies provide a cheaper transaction avenue by eliminating third parties.
Cryptocurrencies are here to stay, although it may take while before these digital assets are adopted mainstream. This being the case, an integration with traditional finance is inevitable given that most people still rely on fiat or card money - both markets are likely to form the future of finance!