By Tom Fairbairn
Decentralized Finance (DeFi) is on the rise, with industry veterans predicting the market will reach $800 billion within the next year as the applications and benefits become clear (bit.ly/3Ja2Wo9). But how can financial services firms make a smooth switch from traditional transactions through intermediaries to this modern, technology-focused alternative?
The benefits of a decentralized approach for the financial services industry is clear, with firms on either side of a transaction bypassing intermediaries to deal directly with each other in a secure, rapid manner.
Trust, transparency and security are at the heart of the DeFi model—and when bundled with additional benefits such as operational efficiency savings and no intermediary fees, it makes for a very attractive proposition for firms. But what lies under the hood to make DeFi a reality as opposed to another too-good-to-be-true concept based on novel technology?
DeFi marks a departure from the status quo of using trusted intermediaries such as settlement agencies in financial transactions. It opts instead for direct dealings between financial institutions based on distributed ledger technology—in other words, transactional data held and accessible by multiple parties, providing a tamper-proof source of financial truth.
Finance is especially ripe for disruption by this technology, with trust, transparency and safeguarding against threats such as fraud and theft always under the spotlight and all critical to continued smooth operations—all while saving on transaction costs.
Yet with settlement flows, such as Fx, fund transfers and other financial exchanges taking place at extremely high volumes 24/7/365, and with the desire for greater risk position visibility and reduced working capital requirements, the underlying technology must be flawless to ensure the distributed nature of this new technology does not introduce security, accuracy or reliability risks, or unavailability or delayed settlement times.
This distributed ledger technology (DLT) is very much the foundation of DeFi, enabling the decentralization of critical functions and operations. Financial services firms must be able to consistently tap into this, bridging the gap between the distributed ledger and their own in-house systems.
The key is to develop a solution based on an event-driven architecture that carefully balances the event-driven nature of financial services operations with the opportunities and benefits brought by the slower, more distributed nature of DLT. Only this way can financial services companies unlock the full capabilities of a DeFi approach.
DLT as a technology is designed to be first and foremost flow cautious, both due to its distributed nature and to ensure security through cryptography—often at the expense of speed. This is in stark contrast to most event-driven architecture, where ensuring speed regardless of the volume of events taking place is critical.
This is a disparity that must be bridged to ensure financial institutions (FIs) can tap into the full range of benefits on offer from a DeFi approach to transactions.
Certain tasks must also be completed off ledger, such as financial due diligence and data and currency formatting, within the remit of event-driven architecture, before suitable information can be moved onto the distributed ledger.
What is the glue that brings these two pieces together? Enter the event mesh—and event broking.
Event-driven architecture, a timely solution for FIs
To make DeFi a reality, FIs must interface their core systems with a distributed ledger. This is where event brokers—and in turn the event mesh—come into play.
Event brokers can provide the necessary interface between on- and off-ledger processes, but the usefulness of this is greatly enhanced by introducing additional technology to accelerate this interfacing and exchange through abstraction and orchestration.
An event broking platform, for example, can act as the backbone of the FI’s operations, effectively sharing trades between the necessary processes and applications, while an abstraction platform can enhance the on-ledger side of the process to deliver a truly effective interface between core systems and a distribution ledger.
The demand for event-driven solutions to emerging financial services challenges is clear. A recent major study of C-Suite and IT architecture professionals (bit.ly/3idtTvc) found 85 percent of organizations are currently looking to incorporate real-time data and event-driven architecture (EDA) into their operations. This is especially true in the financial services space, with these firms leading the way: 57 percent of those surveyed cited prioritization of their EDA adoption to address timely detection and reaction of threats and opportunities.
DeFi opportunities—and challenges—are a case in point. The primary headache for firms looking to embrace decentralized models is the balancing act required between legacy in-house systems and complex, distributed workflows, without compromising on speed or scale.
Use an event mesh to eliminate the friction between these two positions, and DeFi success is within reach.
DeFi will be an invaluable tool in the ever-constant drive for improved operational efficiency among financial services institutions, saving money and enhancing resolution and transaction times. Combine this with the customer benefits of enhanced trust, transparency and convenience, and DeFi is a powerful proposition for the future of financial services.
Yet the technology alone is no silver bullet—without a fit-for-purpose, event-driven framework, harnessing an event mesh and event broking, institutions will struggle to realize its full potential. Careful evaluation of feasible DLT use cases is equally vital, identifying how an event mesh can best tie core financial systems together with distributed ledger technology.
Tom Fairbairn, distinguished engineer at Solace, https://bit.ly/3tZwa2K, which helps enterprises adopt, manage and leverage event-driven architecture with a complete event streaming and management platform. Contact him via LinkedIn at https://www.linkedin.com/in/tomfairbairn/.
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