Making Sense of Embedded DeFi’s Role in Web3’s Future

The Web3 space has its sights set on transforming payments and commerce via blockchain technologies.

And with the news Wednesday (May 15) that Safe has announced the integration of native swaps directly within its Web3 SafeWallet platform, bringing the benefits of embedded decentralized finance (DeFi) — such as transparency, lower costs and accessibility — into mainstream finance and everyday transactions is top of mind for forward looking organizations.

A native swap in the context of cryptocurrency refers to the exchange or trading of digital assets directly within a blockchain network without the need for intermediaries or third-party services. This is typically accomplished through decentralized exchanges (DEXs) or liquidity protocols that operate on the blockchain itself.

By offering users access to DeFi services without the need to navigate complex blockchain interfaces or manage multiple wallet integrations, proponents of the Web3 space believe they will be able to scale adoption across what has traditionally been a tech-focused, and not user-experience-driven, crypto landscape.

Per the company’s release, over the last three years, a total of $23 billion in swap volume has been facilitated through Safe Smart Accounts — only previously, users seeking to swap tokens were required to navigate to external websites.

“Prioritizing seamless experiences and MEV (maximum extractable value)-protection through an intent-based architecture” is a “game changer,” said Safe Co-founder Lukas Schor.

Tapping Web3 for Integration of Financial Services

This move by SafeWallet is indicative of a broader trend in the FinTech industry toward embedded finance. The integration of DeFi protocols and services directly into traditional and non-traditional financial applications, platforms and services can streamline processes such as lending, borrowing and trading, making them more efficient and cost-effective.

That’s because DeFi can offer new models for credit and lending, such as collateralized loans, credit delegation and decentralized credit scoring. These models can be integrated into eCommerce platforms, providing consumers with more flexible financing options.

By removing intermediaries, DeFi can significantly lower transaction fees associated with payments and transfers. This is particularly beneficial for cross-border transactions, which are typically expensive and slow using traditional banking systems.

And DeFi protocols can facilitate near-instant settlement of transactions. This can enhance the efficiency of payment systems and reduce the counterparty risk associated with delayed settlements.

Sheraz Shere, head of payments at Solana Foundation, told PYMNTS on Monday, “It’s important to know that crypto is not just bitcoin and Doge and NFTs … Blockchains are really alternative rails for payments and financial assets.”

What’s more, DeFi protocols are often interoperable and composable, meaning they can be combined in various ways to create new financial products and services. This flexibility allows for innovative applications tailored to specific industry needs.

The Regulatory Elephant in the Web3 Room

But while embedded DeFi offers numerous possibilities, it also presents challenges such as regulatory uncertainty, security risks, and the need for user education. Addressing these challenges is crucial for the widespread adoption and success of embedded DeFi solutions.

As PYMNTS has covered, DeFi services have come under scrutiny from lawmakers as being ripe for abuse by bad actors due to the capabilities for anonymity and the ability for end users to skirt know your customer (KYC) and know your business (KYB) controls while transacting.

By connecting buyers and sellers directly without any middlemen, DeFi platforms are meant to remove the risk of fund misappropriation or platform mismanagement (a la FTX) by relying on algorithmic automation to anonymously match interested parties.

Of course, this wholly technical approach also helps obscure the various parties and is rife for money laundering and abuse by bad actors.

Per a U.S. Treasury Department report from last April, “illicit actors, including criminals, scammers and North Korean cyber actors, are using DeFi services in the process of laundering illicit funds.”

And as noted in the “2024 National Strategy for Combating Terrorist and Other Illicit Financing,” a Thursday (May 16) report from the Treasury, the executive department “continues to work with Congress on potential legislation related to the AML/CFT and sanctions frameworks for virtual assets and to evaluate potential regulatory clarifications to prevent illicit actors from abusing the virtual asset ecosystem.”

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