TradFi & DeFi deep dive 1(b): Hybrid & Shared Infrastructure
Remember when The Next Block discussed how there is a hybrid hypothesis for the future, of TradFi (Traditional Finance) and DeFi (Decentralized Finance), suggesting that each are on a path of convergence as they tackle similar challenges to modernize the financial services experience?
As a refresher, we made the following hypotheses that suggest a hybrid TradFi and DeFi future of finance:
Hypothesis #1: The future of finance is hybrid & distributed across TradFi and DeFi.
Hypothesis #2: The future of DeFi is multi-chain & distributed.
Hypothesis #3: The future of underlying infrastructure is multi-cloud and distributed.
Hypothesis #4: The future of finance governance is hybrid & distributed.
Here’s a refresher on the landscape that we see playing out, and where we will focus today on Hybrid and Shared Infrastructure (1b):
Figure 1: the future of finance shows Hybrid and Shared Infrastructure components that serve both TradFi incumbents as well as DeFi projects
… and the following image shows a view of the respective vendors and projects building out the Hybrid and Shared Infrastructure of the future:
Figure 2: Hybrid and Shared Infrastructure components include both TradFi incumbents as well as new, crypto-native DeFi market entrants
Bottom Line Up Front. The future of finance shows an evolution of Hybrid and Shared Infrastructure components that serve both TradFi incumbents as well as DeFi projects, bridging the gap between each.
Modern financial and payment rails: The future of finance for TradFi incumbents in payments, money movement and other forms of value transfer is changing with underlying infrastructure, and a number of vendors are establishing infrastructure to act as the glue to DeFi. Additionally, new market entrants are also starting to build more of the DeFi-native infrastructure that is still hybrid and expansive to TradFi concepts.
Cloud Service Providers (CSP): The market has shifted to a hybrid and multi-cloud future, as well as a heavy emphasis on computing and data process at the edge, further distributing enterprise IT infrastructure. This applies to Web3 and Crypto projects that are heavily hosted on CSP infrastructure. Cloud-based infrastructure is the easiest way to provision compute, data and networking resources in an extremely easy way that doesn’t require you to buy, host and maintain hardware.
History and Context.
Modern financial and payment rails: for more on the history of financial technology and payment rails, check out the post here detailing how The Future of FinTech is Internet, digital, and cloud-native, including a detailed history of financial technology and a hypothesis on its future trajectory. Finance technology (FinTech) has evolved significantly over the last five decades, and the latest wave of developments suggests that more change than ever before is coming for the remainder of 2021 and beyond. The last 50+ years has evolved a variety of financial and technological disciplines that are enabling what is being created today, across computer science, cryptography, telecommunications, cybersecurity, and even the philosophy of how financial products and institutions should behave and be governed. This leads us to believe that a very complementary, symbiotic relationship is developing and converging between traditional financial products, services and institutions with modern financial technology innovations, rather than a competitive environment where one model or set of institutions win out in the end… resulting in the Hybrid Hypothesis for the Future and this post on how infrastructure may also be hybrid.
Cloud Service Providers (CSP): With a recent announcement from Amazon Web Services (AWS), each of the Big 3 Cloud Service Providers (CSP) are now strategically geared towards multi-cloud, which includes AWS, Microsoft Azure, and Google Cloud Platform (GCP). Originally built as public cloud only service offerings, each of the Big 3 observed that the vast majority of their customer organizations and business partners were not able to fully exit the data center, as many workloads are not public cloud suitable. This trend drove many organizations to adopt a hybrid cloud strategy and invest in on-premise private cloud stacks while also moving to public cloud. As a result, each CSP evolved to offer hybrid cloud tools and services primarily meant to achieve technology stack consistency in the data center (e.g. AWS Outposts), as well as cloud peering solutions (e.g. VMware on AWS). The reason this matters for blockchain and the future of TradFi and DeFi is a significant portion of blockchain nodes are hosted on the public cloud, and many of the CSPs have some form of support and product offerings for blockchain environments and developers. For example, according to blockchain management platform Chainstack, over 60 percent of all Ethereum nodes rely on cloud-based services, with 25 percent running on just one provider: Amazon Web Services (AWS).
Hybrid & Shared Infrastructure component 1: Modern financial and payment rails.
TradFi-anchored hybrid infrastructure. First, let’s address the incumbents in TradFi. The future of finance for payments, money movement and other forms of value transfer is changing with underlying infrastructure, and a number of vendors are establishing infrastructure to act as the glue to DeFi.
Payments providers like Visa and MasterCard, as well as core banking software vendors, such as FIS, are offering these hybrid services like card-to-crypto services to better bridge TradFi and DeFi. The digital asset and tokenization mechanism by which transfers value across these mediums could include TradFi digital assets (e.g. CBDCs, tokenized deposits), and DeFi digital assets (e.g. open stablecoins).
The possible scenarios for the future of payments in a digital and blockchain driven future, built on hybrid & shared infrastructure, could include one to multiple of the following innovation vectors, some being TradFi-centric and others DeFi-centric:
Cryptocurrencies (DeFi-centric): using open, permissionless cryptocurrencies in a TradFi environment. Currently, the only acceptance of this appears to be card-to-crypto transactions, including FIS bridging the gap between TradFi and DeFi.
Stablecoins (DeFi-centric): leveraging asset backed stablecoins that are decentralized in nature, including USDC from Circle which allows you to move digital money leveraging traditional payment rails and do business in a more global, scalable and efficient way through blockchain infrastructure. This allows a hybrid of DeFi assets traversing TradFi payments infrastructure. Check out this video as well where Circle discusses the potential for new cross-border payment infrastructures, that include public blockchains, multi-currency and multi-chain interoperability standards and crypto-assets, such as regulated stablecoin arrangements.
CBDCs (TradFi-centric): given recent positive policy statements supportive of centralized TradFi digital assets, namely from the Biden Administration’s Executive Order (EO) on Digital Assets, there appears to be significant support for research and development of potentially design and deployment options of CBDCs, as sovereign money is at the core of a well-functioning financial system, macro policies, and overall economic growth.
Tokenized deposits (TradFi-centric): TradFi’s could consider to create its own, private blockchain environment where participating Banks are the only member nodes in a proprietary blockchain environment for payments, money movement and value transfer. The digital asset would come in the form of Bank-Minted, tokenized deposits referencing fiat currency on a blockchain. A great example of this is the USDF consortium where a number of banks have participated as stakeholders. Additionally, the Provenance Blockchain Ecosystem is serving as a viable foundation for a hybrid and shared technology platform to realize faster, more cost effective ways to complete financial transactions for TradFi’s and DeFi.
Proprietary stablecoins (TradFi-centric): TradFi’s could potentially develop their own dedicated digital assets in the form of stablecoins to take advantage of the tech, but maintain control over the digital assets, its reserves and backing, and the overall payments infrastructure and ecosystem. A good example includes JPM Coin from JP Morgan.
DeFi-anchored hybrid infrastructure. New market entrants are also starting to build more of the DeFi-native infrastructure that is still hybrid and expansive to TradFi concepts. A good example includes Swipe, which provides card payment infrastructure for digital assets and partners with major TradFi payment networks like Visa, MasterCard, Google Pay and Apple Pay. Coinbase Card and Gemini Credit Card are also doing the same by issuing traditional card payment methods that hook in with mobile and TradFi and DeFi assets and rewards.
Hybrid & Shared Infrastructure component 2: Cloud Service Providers (CSP):
CSP trends.
Market shift to hybrid and multi-cloud. The market has shifted to a hybrid and multi-cloud future, as well as a heavy emphasis on computing and data process at the edge, further distributing enterprise IT infrastructure. Whether by implementation of strategic technology imperatives or by accident, multi-cloud is here to stay in the technology portfolios of the world’s largest IT organizations. The demands of platform agnostic digital products, workload portability, encapsulation of data via API-led connectivity, modularity, and a decoupled technology stack have all driven many IT organizations towards a multi-cloud posture.
CSP vendor specific shifts towards decentralization and multi-cloud. As a result of these market trends and customer demands, all of the “Big 3” Cloud Service Providers are officially strategically multi-cloud.
Blockchain-specific trends for CSPs.
Web3 and Crypto projects hosted on CSP infrastructure: Cloud-based infrastructure is the easiest way to provision compute, data and networking resources in an extremely easy way that doesn’t require you to buy, host and maintain hardware. This makes it extremely attractive to developers, maintainers of blockchain nodes, and other stakeholders. For example, according to blockchain management platform Chainstack, over 60 percent of all Ethereum nodes rely on cloud-based services, with 25 percent running on just one provider: Amazon Web Services (AWS).
CSP managed blockchain service offerings: every major CSP vendor maintains some presence in the blockchain space. Amazon Web Services now provides a Managed Blockchain Service. Google Cloud just established a Web3 team to support its customers in the Web3, blockchain and crypto space. Microsoft Azure is investing heavily into the concept of decentralized, digital identity on the blockchain, which we touch on more in our recent post here. Azure also maintains its own blockchain solution offering.
