The Underlying Logic and Structural Bottlenecks of the Traditional Financial System

Core Infrastructure Components of TradFi

Traditional finance is not a single system but a complex network composed of multiple layers of infrastructure. Banks, clearinghouses, payment networks, exchanges, and regulatory systems work together through specialized roles to maintain stable financial order. This architecture emphasizes the separation of responsibilities and uses institutionalized processes to reduce systemic risk.

Functionally, the core infrastructure of TradFi mainly includes:

• Commercial banks and central banking systems, responsible for fund storage and currency clearing
• Payment and settlement networks, such as interbank transfer systems and international clearing frameworks
• Securities exchanges, custodians, and clearinghouses supporting capital market operations
• Regulatory and compliance agencies ensuring financial activities follow established rules

This system excels in security and controllability but also lays the groundwork for subsequent efficiency challenges.

Multi-Layer Intermediation and Trust Costs

The core of traditional financial operations is not technological trust but institutional trust. Users do not establish direct trust relationships with counterparties; instead, transactions and asset management are completed through multiple intermediaries such as banks, clearinghouses, and custodians. While this design reduces individual risk, it significantly increases system complexity.

Each additional intermediary introduces more reconciliation procedures, compliance reviews, and time delays. In scenarios like cross-border payments or securities settlement, transaction chains often pass through several or even dozens of institutions before final settlement. Trust is highly institutionalized, but the costs accumulate accordingly and are ultimately borne by users.

Limitations in Efficiency, Transparency, and Globalization

In the digital age, the limitations of the traditional financial system are increasingly evident in terms of efficiency and transparency. Transaction settlements are typically calculated in business days; cross-border transfers may take several days to complete. The fee structures are opaque, making it difficult for users to track funds in real time.

Additionally, TradFi inherently has clear geographic boundaries:

• Financial services rely on local banking systems with high entry barriers
• Regulatory rules differ significantly across countries, increasing cross-border collaboration costs
• Global users cannot achieve instant, frictionless transactions within a single system

These limitations are not accidental but rational choices made by traditional finance under historical conditions. These structural bottlenecks have provided fertile ground for the development of decentralized finance and blockchain technology.