Prime Brokerage: DeFi vs. TradFi

Editor's note, October 2026: This post was published in August 2023, when Arkis described itself as a DeFi prime broker that held no client assets. Arkis is now an institutional prime broker that margins CeFi, DeFi and TradFi positions as one portfolio. Client collateral for centralized venues stays in Copper's custody, off the exchange. Arkis has deployed more than $400 million in credit. For how traditional and DeFi prime brokers handle counterparty risk today, see Traditional vs DeFi Prime Brokerage.

In the world of finance, prime brokerage is a multifaceted service offered by investment banks to hedge funds and other professional investors. However, with the rise of decentralized finance (DeFi), the landscape of prime brokerage is undergoing significant changes.

This article delves into the differences between prime brokerage in traditional finance (TradFi) and DeFi, with a special focus on Arkis, a DeFi prime broker.

Traditional Finance: The Dual System of Custodian and Exchange

In the traditional financial system, two primary components dominate the scene: the Custodian and the Exchange.

Custodian in TradFi: A custodian is a specialized financial institution responsible for safeguarding a firm’s or individual’s financial assets to minimize the risk of theft or loss. Some of the most renowned custodians include Bank of New York Mellon, J.P. Morgan, and State Street. One of the essential functions of prime brokers in TradFi is to provide custody services, ensuring that clients’ assets are safe and accessible.

Exchange in TradFi: Exchanges are venues where stock buyers and sellers transact. The New York Stock Exchange (NYSE) and the NASDAQ are among the largest and most well-known exchanges globally. They provide a platform for companies to raise capital and investors to buy and sell securities.

The Problem with Centralized Exchanges

In the crypto world, many centralized exchanges (CEXs) act as both custodians and exchanges. This dual role can lead to potential conflicts of interest and increased risks. A notable example is FTX, which used client funds in ways that would have been impossible if they weren’t also acting as a custodian.

However, there’s a shift in the crypto industry. New crypto exchanges, backed by giants like Citadel and Sequoia, are emerging where the roles of custody and exchange are distinct. This separation is beneficial for the industry as it reduces the risk of misuse of funds and provides clearer accountability.

Differences in Infrastructure and Accessibility

In TradFi, the infrastructure is predominantly centralized. Prime brokers are typically large financial institutions with vast resources. To access their services, clients often need to meet stringent criteria, including minimum assets under management (AUM) and a proven track record. This makes prime brokerage services in TradFi exclusive to a select group of institutional investors.

Conversely, DeFi democratizes access to prime brokerage services. With platforms like Arkis, any individual or entity can access leverage and other prime brokerage functions without the need for intermediaries or meeting high entry thresholds. This inclusivity fosters a more diverse and dynamic financial ecosystem.

Operational Transparency and Control

TradFi prime brokers operate in a somewhat opaque environment. While they are regulated and audited, the inner workings of their operations, especially their risk models and internal processes, are proprietary and not publicly disclosed.

DeFi prime brokers, on the other hand, operate on public blockchains. Every transaction, margin call, and contract interaction is visible to anyone who wishes to see it. Platforms like Arkis use smart contracts, which are open-source and can be audited by the community. This transparency gives users confidence in the system and its fairness.

Collateral Management

In TradFi, collateral management is a complex process involving multiple parties, including clearing houses, custodians, and the prime broker itself. The process can be time-consuming and often requires manual intervention.

In contrast, DeFi prime brokers automate collateral management using smart contracts. These contracts can automatically adjust leverage, liquidate positions if necessary, and manage collateral in a decentralized manner, all in real-time.

Arkis: Revolutionizing Prime Brokerage in DeFi

Arkis stands out in the DeFi space by enabling borrowers to obtain under-collateralized leverage. At the same time, lenders can earn passive yields by supplying liquidity for this leverage. What’s remarkable about Arkis is that it performs the leverage-provisioning prime broker function without holding onto any funds from either lenders or borrowers. Everything operates on transparent and secure smart contracts.

How Does Arkis Help?

Arkis bridges the gap between lenders and borrowers in the DeFi space. By leveraging smart contracts, it ensures:

• Transparency: Every transaction and interaction is visible on the blockchain, ensuring users can verify the platform’s operations.

• Security: Without holding onto user funds, Arkis reduces the risk associated with central points of failure.

• Efficiency: By connecting borrowers and lenders directly, Arkis ensures optimal rates for both parties, fostering a more efficient financial ecosystem.

The world of prime brokerage is evolving rapidly with the advent of DeFi. While traditional finance has its merits, the transparency, security, and efficiency offered by platforms like Arkis are undeniable. As the financial landscape continues to change, it’s clear that DeFi will play a pivotal role in shaping the future of prime brokerage.

About Arkis

Arkis is an institutional prime broker that margins CeFi, DeFi and TradFi positions as one portfolio. Backed by Spark, Arkis has deployed over $400M in institutional credit with zero bad debt. Author Oleksandr Proskurin is the Co-founder and Chief Product Officer.

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Prospective clients can reach the Arkis team through contact form on arkis.xyz/request-access