DeFi - financial services can be performed on blockchain without the need for intermediaries like banks or brokers - has seen exponential growth over the past year. According to Chainalysis, a data analytics company blockchainDeFi adoption is largely driven by larger investors - large institutional transactions over $10 million US accounted for more than 60% DeFi transactions in Q2 2021, compared with less than 50% for all transaction cryptocurrency.
According to DeFi Llama, more than US$178 billion is currently locked in DeFi protocols as of press time, and institutional investors are increasingly realizing that they cannot ignore the potential profits DeFi can make. bring .
Banks are also eyeing DeFi. US investment bank JPMorgan, originally disliked cryptocurrency, is bullish on the betting business , which currently generates US$9 billion in annual revenue and could be worth more than US$20 billion when Ethereum 2.0 launch in 2022 and US$40 billion in 2025.
With 55 of the world's top 100 banks, holding US$94 trillion in assets, having invested in cryptocurrencies, it would be insurmountable to imagine that many of these banks and Other organizations are currently looking to pour money into DeFi, according to Blockdata colleague and CEO Jonathan Knegtel in an article published this week.
“If one or two big banks find a way to benefit from DeFi even with a small 1% injection, they will reveal a path that many, many other banks will want to follow so as not to be left behind, Knegtel added. 1% Out of $94 Trillion U.S. Dollar Generates $0.94 Trillion of New Liquidity into the DeFi Ecosystem - about half the market value of cryptocurrencies and an oceanic drop in financial systems. traditional main.
“No matter what traditional finance, there is a parallel version in DeFi – credit lending, trading, derivatives, wealth management, insurance, etc.” Mukaya Panich, chief investment officer and ventured at SCB 10X, the joint venture branch of Thailand's oldest bank, Siam Commercial Bank, told Forkast.News in a recent interview. “This could completely upset banks and financial institutions in the future. So we wanted to prepare the bank by investing and learning about DeFi and trying to find partners and integrate DeFi with traditional finance. ”
What is Institutional DeFi?
Blockdata defines institutional DeFi as blockchain-based financial products that have been tailored to the requirements of organizations with strict compliance needs.
A lack of regulatory clarity and concerns around compliance and security have been some of the cited obstacles to greater institutional participation in DeFi. Regulators, including the US Securities and Exchange Commission, increasingly include DeFi in their sights.
Singapore's DBS Bank, Southeast Asia's largest lender, in a report on digital assets earlier this year, said: “DeFi, like any new technology application, is experiencing difficulties, including high transaction costs, volatility, and uncertainty. about regulations.
These are the early days for what promises to be the source of a wide variety of financial intermediaries. If DeFi can pass the test of speed, cost, and transparency, financial institutions will see their benefits in participating, issuing tokens, and acting as a bridge between centralized finance and public finance. central and decentralized.
Regulators will also have to develop, need to approve protocols and smart contracts before they are widely used.”
Sam Lin, Asia Managing Director of Swiss-regulated SEBA Bank, recently told Forkast.News that as the DeFi industry matured, users have evolved from crypto developers and early adopters into high net worth individuals, family offices, and crypto hedge funds. An increasing number of funds, trading firms and centralized yield platforms provide most of the liquidity, Lin said.
DeFi Infrastructure for Organizations
DeFi interest in banks and other institutions has unleashed a wave of institutional DeFi service providers attempting to bridge the gap between DeFi and their compliance and regulatory needs. organizations . “The right, regulated, and institutional DeFi tool is coming, as planned, with growing interest,” Knegtel writes.
Eg: Circle, digital payment company issued USDC , the world's second largest stable coin, is rolling out a DeFi API for institutions to access leading DeFi protocols, starting with Complex Finance on the blockchain Ethereum. Aave Arc (formerly known as Aave Pro) allows institutions to access DeFi profits through private liquidity pools, where participants have completed customer requests.
Sidney Powell, CEO and Co-Founder of Maple Finance, a decentralized corporate debt marketplace built on blockchain Ethereum, talk to Forkast.News in an email that he has seen a lot of interest from institutions in for-profit DeFi products.
“They are most attracted to capital preservation and risk reduction because these are fixed income products. They think in terms of adjusted risk, so they are looking for more attractive yields than what is available in traditional finance, but these returns cannot come at the expense of risk management. and security.
Therefore, they care about the quality of the institutional partners on Maple. According to Powell, Maple has had $172 million in deposits since its launch in May and over 80% deposits greater than $1 million, which highlights the level of adoption by institutions.
Knegtel added that institutional staking providers, custody support and KYC/KYT providers, paying attention to institutional usage, are also emerging making the transition from crypto to crypto-to-crypto DeFi just got a whole lot more seamless.
What's next for institutional DeFi?
“DeFi is the logical next step for investors in crypto,” Philip Gradwell, chief economist at Chainalysis, told Blockdata. "Bitcoin has taught them that they can hold crypto assets, DeFi is teaching them that they can use crypto assets in a wide range of financial activities.”
“But it is really still early days – there are only tens of thousands of entities involved in DeFi, to a greater or lesser extent simply trading and investing in core assets. The most common institutional exposure to DeFi I've heard of is profit on stablecoins. This looks low-risk and similar to a money market fund but offers better returns,” said Gradwell.
With growing interest in DeFi, the infrastructure for functions like compliance, transactions, and data analytics – funded by funding rounds, strategic investments, and even acquisitions - under development to build and scale access for crypto-access organizations, software companies Ethereum ConsenSys said in its DeFi ecosystem in the report 2nd quarter of 2021 .
As the institutional-targeted players and products continue to grow, Blockdata expects the number of DeFi users to grow and more DeFi protocols creating permissioned versions of the partners in the list. white book.
More types of collateral can be used than used in DeFi protocols, such as non-fungible tokens (NFT) or other digital assets. Traditional financial assets such as real estate, stocks, and bonds can also participate in DeFi protocols through asset encryption, contributing to asset displacement away from traditional financial services. .
DeFi Institutions Set for Explosive Growth
It may still be early days for DeFi but Knegtel predicts the explosive growth of institutional DeFi based on the fast-paced nature of the industry. “Regulations are rapidly catching up and setting their requirements, DeFi services are evolving, maturing, and becoming more attractive to organizations, and for institutions, 1% AUM of they are a very small amount.”
“Organizations are in the discovery phase of interest when it comes to DeFi, but they are now patiently waiting as institutional service providers enter the market to defuse regulatory scrutiny,” Knegtel said. added. “When, not if, these services pass the pool and institutions have the opportunity to test the waters, 1% of assets under management from the world's top 100 banks into DeFi could be a turning point. underestimate."