The evolution and iteration of the global financial system

Written by: Andy, epochChain

The Evolution and Change of the Global Financial System

Background Introduction

The Age of Discovery: The Birth of Financial Origins (15th - 17th Century)

The Age of Exploration laid the foundation for the development of the financial system. The Dutch East India Company pioneered the issuance of stocks to meet the enormous funding demands of overseas trade, pricing and splitting "trade revenue rights" for trading, achieving "asset tradability," allowing ordinary people to participate in overseas trade investments and share in the profits. Meanwhile, marine insurance emerged, enabling shipowners to transfer transportation risks by paying premiums, with the premiums of numerous shipowners pooling together to form a risk diversification fund, becoming an early model of "risk diversification and pricing." In international trade, gold and silver, due to their scarcity and recognized value, became core settlement tools, solving the trust issues of currency exchange between different monetary systems. At this point, the financial system initially possessed three core functions: revenue generation (stock investment), risk hedging (marine insurance), and value settlement (precious metals), which supported each other and served the needs of trade expansion, laying the groundwork for the embryonic form of the financial system.

The Silver Monetary System and Hegemonic Transition (19th Century)

In the 19th century, the Qing Dynasty, with the strong competitiveness of goods such as tea and silk, occupied an important position in global trade. A large amount of Chinese goods exported attracted a flow of silver into the world, forming a "Chinese goods - global silver" cyclical system, where silver became the core settlement currency in global trade, essentially anchoring the settlement medium with the strength of Chinese goods. As the scale of multinational trade expanded, stock trading spread from Europe to the world, and insurance business extended from maritime transport to bulk commodity transportation, but its core logic always revolved around "pricing assets and covering risks." However, the Opium War broke this pattern, as Britain plundered Chinese silver through war, weakening China's monetary base and promoting "gold standard" based on its own gold reserves, redefining global settlement rules and highlighting the decisive role of national strength in the status of settlement mediums.

Bretton Woods System and the Dollar Era (20th Century)

In 1944, the Bretton Woods system was established, "the US dollar is linked to gold, and the currencies of various countries are linked to the US dollar," marking a shift in the global settlement system from being centered around precious metals to being centered around "national credit." The US dollar became the "central nervous system" of global finance. During this period, the globalization of stock markets strengthened, with stock exchanges in New York, London, and other cities becoming important centers for global stock trading. The insurance industry applied complex actuarial models, and derivatives were used for hedging commodity prices, as the financial market developed around "more accurate asset pricing and more efficient risk hedging." At this time, the financial system was dominated by the US dollar for settlement, the stock market facilitated asset trading, and insurance and derivatives were responsible for risk hedging. The synergy among these three functions was enhanced, promoting the operation of the global financial system and serving the post-war economic recovery and development.

Later, the Bretton Woods system collapsed, and the United States quickly reached agreements with oil powers such as Saudi Arabia, anchoring the dollar to oil and ushering in the era of petrodollars, which continued the dollar's hegemony. However, by 2024, Saudi Arabia announced that oil would no longer be settled solely in dollars, marking the end of the petrodollar era and facing a reshaping of the global monetary landscape.

The Complexity of Modern Finance and the Return to Essence (21st Century)

Entering the 21st century, financial innovation has reached new heights, with financial instruments such as derivatives, commodity futures, and structured products continuously emerging, making the trading structure and product design of financial markets increasingly complex. These innovations have enhanced the efficiency of financial markets and met diverse needs, but regardless of how financial forms change, the core always revolves around "returns, risks, and settlements." Complex financial instruments are extensions and expansions of the core functions of traditional finance in a new environment, representing an iteration of "tech," while the three core functions of "returns, risks, and settlements" are a steadfast adherence to "dao," reflecting the essential purpose of financial services to the real economy and optimizing resource allocation.

The Rise of Emerging Financial Forms: The Birth of DeFi and CeFi

DeFi: Blockchain-driven Decentralized Financial System

The breakthrough of Ethereum smart contract technology in 2015 provided the technical support for the rise of DeFi. Smart contracts enable financial rules to be executed automatically in code form, without the need for traditional intermediaries, changing the mode of financial transactions. In the DeFi ecosystem, the "DeFi triangle" plays a key role. Essentially, DeFi replicates the core functions of traditional finance, achieving "no intermediaries, fully open, automated" through blockchain technology, bringing new vitality to the financial system.

CeFi: A Centralized Bridge Connecting Traditional and Decentralized Finance

Although DeFi has innovative advantages, it faces issues such as high technical barriers and vague regulations. CeFi has emerged as a bridge connecting traditional finance and DeFi, playing the role of a "converter."

Its main function is very simple: it helps users convert fiat currencies (such as Renminbi, US dollars) and cryptocurrencies (such as Bitcoin, Ethereum) into each other, making it more convenient for money to flow between traditional finance and DeFi; at the same time, it simplifies the operations in DeFi, providing an interface that is easy for everyone to understand, reducing the difficulty for ordinary people to participate, and is responsible for safeguarding user assets to ensure security; additionally, under the premise of compliance, it will also undertake the business needs of traditional financial institutions (such as banks, securities companies) on the blockchain, helping these institutions explore on-chain business and promoting a better integration of traditional finance and DeFi.

Integration of Tradition and Innovation

Role Positioning and Dilemmas of the Three Major Systems

TradFi

TradFi refers to the traditional finance that we usually encounter, such as depositing money in a bank, transferring funds, buying stocks or funds at a securities company, or purchasing gold and bonds.

For example: If you want to transfer 10,000 US dollars to a friend abroad but cannot operate it directly, you must find a bank that has cross-border business to help: The bank will first convert the Renminbi into the currency of the other country, charge fees and exchange rate differences as stipulated, and then circulate through the SWIFT system. However, you have to fill out a bunch of forms and go through several reviews, often waiting several days for the funds to arrive. The fees alone might deduct several hundred dollars, and the bank is fully responsible for the flow of this money, solving any problems that arise.

This is the model of TradFi - whether it is cross-border transfers, buying stocks, or loans, it all has to go through banks and brokerage firms. They set the processes, charge fees, and take responsibility, and you cannot bypass them directly. This model has also led to issues of low efficiency and high costs in cross-border settlements. Moreover, many countries rely on US dollar settlements for business, and once there are fluctuations in the dollar exchange rate, they can easily suffer losses.

CeFi

CeFi is a centralized crypto finance platform, serving as a "bridge" between the traditional financial world and the cryptocurrency world. It can provide exchange channels; it can also simplify steps to allow non-technical individuals to easily participate; furthermore, it can help traditional institutions like banks and brokerages to comply with regulations when engaging in crypto asset-related businesses, promoting the integration of both sides. However, it also has drawbacks: regulatory oversight has not yet fully caught up, and platforms can make their own decisions. Sometimes, platforms may secretly misappropriate user assets for their own profit.

For example: If you want to exchange your salary for Ethereum for crypto wealth management, it's too troublesome to operate directly. You can use the CeFi platform of a well-known cryptocurrency exchange, recharge RMB through a bank card, convert it to Ethereum with one click, and then use the platform's simplified wealth management function to earn returns. The whole process doesn't require you to study complex technologies; the platform takes care of everything for you, but you have to trust that the platform won't run away with your money.

DeFi

DeFi refers to "decentralized finance" built on blockchain technology, which eliminates intermediaries such as banks and brokerages, relying instead on smart contracts to operate automatically, with transparent transactions that anyone can see. It allows for faster and cheaper transfers and loans, and regardless of whether you have money or not, as long as you understand blockchain operations, you can use its services anywhere. However, it also has its challenges: ordinary people need to understand wallets, private keys, and other technologies to use it effectively, which can be a bit of a barrier; moreover, if there are vulnerabilities in the code, it may attract hackers looking to steal funds.

For example: If you have Bitcoin and want to exchange it for Ethereum, you can do it directly on a DeFi platform without looking for an exchange. You can connect your wallet to the platform, select the exchange rate, and the smart contract will automatically convert your Bitcoin into Ethereum. The money goes directly to your wallet, with no intermediaries involved. The fees are lower than those at exchanges, and the transaction is quick. However, you must take good care of your wallet keys, or else if you lose them, you won't be able to retrieve your funds.

The Cornerstone of the Trifi Ecosystem

Here, we propose a brand new concept - Trifi (the fusion of "TradFi + CeFi + DeFi"). The on-chain migration process of traditional finance is essentially the process of integrating traditional finance (TradFi), centralized finance (CeFi), and decentralized finance (DeFi): through gradual penetration and synergy, it ultimately gives birth to the new financial form "Trifi". This path profoundly reflects the underlying evolutionary logic of the financial industry from fragmentation to interconnection, from competition to symbiosis, and "Trifi" is the ultimate form and core product of this evolutionary process.

The core logic of complementary advantages: the value symbiosis of the "Trifi" ecosystem

The reason why TradFi, CeFi, and DeFi can integrate to form the Trifi ecosystem lies in the complementary nature of their core advantages, which, through synergies, addresses the pain points of traditional finance and single-chain finance, building a more resilient financial system.

For example: Suppose a traditional real estate company (TradFi institution) holds commercial real estate worth 10 million USD. To enhance the liquidity of the asset, it splits and tokenizes the property into "A token" (each token corresponds to a share of the property) through a compliance process and completes regulatory filing. As the asset provider, it converts the offline asset into a tradable digital asset on-chain; then, the real estate company chooses a cryptocurrency exchange (CeFi platform) as the intermediary. Users can transfer USD from their bank accounts to exchange for stablecoins through the platform's compliance channel, while the real estate company deposits A tokens into the platform's custody account. After the platform's review, the trading pair goes live, allowing investors to purchase A tokens with stablecoins on the platform, which they can hold within the platform or withdraw to their personal blockchain wallets. The platform can connect with traditional fiat currency while providing compliant trading scenarios for A tokens, paving the way for users to enter DeFi and building a bridge across systems. Users holding A tokens can transfer tokens from the platform to DeFi lending protocols. The lending protocol automatically reads the on-chain data of A tokens through smart contracts to assess their value and allows users to borrow stablecoins by using A tokens as collateral. The entire lending process does not require manual review; collateralization and liquidation are executed entirely by code. DeFi provides decentralized financial tools, enabling real estate assets that were traditionally traded in the market to achieve new functionalities of on-chain collateralized lending, greatly enhancing the capital efficiency of the assets. The three parties collaboratively complete the entire process of migrating traditional assets from offline to on-chain.

In general, TradFi provides capital, CeFi serves as a conduit, and DeFi offers technical support. The combination of the three enables the "Trifi" ecosystem to not only accommodate massive traditional capital but also to unleash the innovative potential of on-chain finance.

Construction and Development Trends of Future Financial Systems

The Core of the Circulation System: The Evolution of Payment and Settlement

Transformations in Cross-Border Trade Scenarios

In the field of international trade, blockchain technology is profoundly restructuring the cross-border settlement system.

Taking the Lightning Network as an example, the Lightning Network is like a "fast lane" on the Bitcoin platform. In the past, transferring small amounts of money internationally was not only slow but also had high fees. Now, with it, the money can be received in just a few seconds, and the transaction fees have been greatly reduced. As a result, small businesses or individuals are more willing to engage in small-scale international trade, as their money flows quickly and costs are lower.

Let’s talk about commodity trading, like oil trading. There is a technology called Layer2. This technology can make transactions smoother and reduce costs. It can also turn commodities into "digital tokens", just like transforming oil into a string of digital codes. Buyers and sellers no longer need to go through the cumbersome processes of the past, such as opening letters of credit and exchanging shipping documents back and forth. They can directly trade these digital tokens through smart contracts, and payments can be settled immediately, significantly increasing transaction efficiency.

Innovation in Social and Inclusive Scenarios

Embedding payment functions in decentralized social platforms is becoming a trend.

Now there are some new ways to make financial services closer to our daily lives, such as "sending red envelopes on the blockchain" and "peer-to-peer direct transfers of small amounts of money." In the past, when we wanted to transfer some money, we either had to pay a lot in fees or were limited to a few payment platforms, making the process cumbersome. Now, on some decentralized social platforms, using cryptocurrency to transfer small amounts of money has become much more convenient, without the fear of high fees and without going through complicated processes. This is especially useful for people in remote areas without bank accounts or with low income. Previously, they might have found it difficult to access formal financial services, but now, with these new methods, they can participate more easily, lowering the barriers to financial services.

The Role of the State in Payment and Settlement Transformation

For a long time, those large-scale and complex cross-border trade settlements had to be led by the state. The state ensures that settlements are stable and secure by formulating monetary policies, regulating financial institutions, and participating in international financial cooperation. For example, when it comes to trade involving strategic resources such as oil and minerals, the state will strictly manage which currency is used for settlement and how the settlement is conducted, in order to safeguard the country's economic security and interests.

However, as blockchain technology becomes more mature and user-friendly, those small and medium-sized cross-border settlement businesses will gradually shift to blockchain. At this time, the government can introduce relevant policies and regulations to standardize and guide the use of blockchain in small and medium-sized cross-border settlements, ensuring that financial technology can innovate and develop while maintaining proper regulation, thus enhancing the country's competitiveness in the global financial market.

The Struggle for Pricing Power and the Anchoring of Stablecoins

The Dollar's Hegemony Faces Challenges

The hegemonic position of the US dollar in the global financial system is facing challenges in the era of digital currencies. The United States is attempting to strengthen regulation over stablecoins through measures such as the GENIUS Act, in order to maintain the dollar's on-chain pricing power. Currently, most mainstream stablecoins (such as USDT and USDC) are pegged to the dollar, and US regulators oversee the reserve assets and operational models of stablecoin issuers to ensure their close tie to the dollar, reinforcing the dollar's core position. However, the global economic landscape is developing in a multipolar direction, with other countries and regions actively exploring regional settlement to reduce dependence on the dollar.

The Development of Multi-Polar Stablecoin Systems

China is actively promoting the research and development pilot of the digital renminbi, which features controllable anonymity and dual offline payment capabilities. The domestic pilot has covered sectors such as retail, transportation, and government affairs, and is expected to play a greater role in trade settlements along the "Belt and Road" countries in the future, promoting the internationalization of the renminbi. The European Union is also exploring the development of digital currency, aiming to enhance Europe’s voice in the global financial system and reduce the impact of dollar fluctuations. These regional settlement schemes will challenge the dollar's dominance in the stablecoin sector, prompting the global financial system to evolve towards a stablecoin system characterized by "dollar dominance and multi-currency coexistence," thus promoting the diversification of the financial system.

New Opportunities: Migration of Traditional Finance to Blockchain and DeFi 2.0

The Development Trend of RWA Tokenization

RWA (Real World Asset) tokenization is an important direction for the future development of finance. Traditional financial assets such as US stocks, private equity, and real estate enter the DeFi ecosystem through on-chain token issuance, becoming new collateral and trading targets. Taking US stocks as an example, after tokenization, investors can trade and lend stock tokens on DeFi platforms, broadening investment channels and providing new financing avenues for listed companies. Private equity tokenization improves asset liquidity, and real estate asset tokenization reduces investment thresholds, allowing more people to participate in investments and share profits, closely integrating traditional finance with DeFi and injecting vitality into the financial market.

The Core Goals and Development of DeFi 2.0

DeFi 2.0 aims to replicate the complex scenarios of traditional finance and create "On-chain Wall Street." It conducts complex financial operations based on US stock tokens and other RWA, such as US stock token lending and derivatives trading. Through smart contracts and blockchain technology, it achieves the on-chain transformation of complex traditional financial products and trading strategies. Investors can collateralize US stock tokens to borrow funds for investment or purchase derivatives like futures and options based on US stock tokens for risk management and speculative trading, enriching the DeFi ecosystem's financial products and services, and improving the efficiency and transparency of financial markets.

The Promoting Role of Traditional Financial Institutions

With the improvement of regulatory policies, traditional financial institutions are becoming more accepting of crypto assets. Banks, asset management companies, and others are entering the crypto asset field, participating in DeFi ecosystem development through investments and collaborations. They bring significant capital, professional talent, and mature risk management experience, helping to promote crypto assets as a mainstream investment category. Traditional financial institutions leverage their brand and customer resources to promote crypto asset investment products, enhancing market recognition and liquidity. Their compliant operations facilitate the standardization of the crypto asset market, creating a favorable environment for the deep integration of traditional finance and emerging finance.

Summary

In the next round of core trends in the migration of traditional finance to blockchain, RWA (Real World Assets) tokenization will become mainstream. A large number of physical assets, from real estate and US stocks to private equity, will be split into on-chain tokens, becoming "new altcoins backed by real entities," driving the arrival of "altcoin season." The Ethereum ecosystem, relying on mature DeFi infrastructure and compliance, will become the core vehicle for RWA tokenization, enabling cross-chain circulation and lending of assets through smart contracts, with the breakout point being the deep integration of RWA and DeFi.

The key focus areas are on RWA tokenization, DeFi innovations within the Ethereum ecosystem, and compliant on-chain exchanges (such as the Nasdaq on-chain platform). Unlisted companies can tokenize private equity through compliance processes and raise funds on on-chain exchanges without traditional IPOs, thereby lowering the barriers to going public. At the same time, TradFi provides asset and compliance frameworks, while DeFi offers on-chain tools to implement "nested investments" (such as RWA collateral generating stablecoins, which are then used to invest in other tokenized assets). The two work together to drive the market's transition from speculation to the "financialization of on-chain real assets."

Source: epochChain