Cryptocurrencies have been vying for the attention of large institutional investors for years and are finally getting the attention they want. Blockchain networks and their consensus mechanisms never made sense for the traditional investor, but decentralized finance or DeFi? This is something that everyone is looking for behind them.
Traditional investors are more used to concepts like stocks and real estate, and focus on aspects like revenue, monthly active users, and cash flows, which makes DeFi a far better entry point into the blockchain for them. Over the past year, DeFi projects have surfaced around the world, drawing billions of dollars into the niche industry.
Fidelity Digital Assets recently reported that 80% of the institutions surveyed are interested in digital assets, with 36% of them saying they have already invested in the asset class. Additionally, according to Evertas, a cryptocurrency insurance firm, 90% of institutional investors in the US and UK plan to increase their crypto holdings soon.
Nick Ovchinnik, 1inch Network’s chief business development officer, told Cointelegraph, “The inflow of institutional funding will have a lasting positive impact on the market.” He said the presence of well-known companies has boosted the resilience of the retail market and the eagerly anticipated adoption this new asset class, stating:
“These investors are quite risk averse and have a long-term investment horizon. Therefore, the most efficient assets on the market are those that benefit the most because of their dominant position. “
Just recently, the Aave DeFi Protocol announced a new platform exclusively for institutional investors. There may be billions in DeFi, but it is a modest sum compared to the trillions of dollars spent every day in the traditional financial system. As the technology available to investors scales with the size of the industry’s potential for growth, all eyes are on DeFi and how the institutions will shape it.
In the past few months, Ethereum’s Total Value Locked (TVL) has hit nearly $ 60 billion on DeFi platforms, putting it in the spotlight and forcing the financial services sector to take advantage of its advantages. With programmable smart contracts, DeFi can perform the same functions as traditional centralized systems while reducing economic drag, minimizing overhead costs and making the system more efficient.
It creates incentives for decentralized participants through yield farming, and while there are plenty of reasons to remain skeptical, especially considering how much untested code is running across the DeFi ecosystem, participants are well compensated for that risk. With the market value of the digital assets, the price of these associated yield tokens has also risen, resulting in double-digit returns for stakeholders.
The more tech-savvy among them have improved their skills to review contracts faster and measure market anomalies through automation. New money is pouring into the DeFi space across the world on a broad front, with institutional funds, trading companies, and centralized financial platforms making significant contributions to the space’s liquidity.
Although DeFi and Distributed Ledger (DLT) technology may be advancing more than ever, the regulatory side of things is still way below what it should be. DeFi carries many risks, and a platform that copies code from other tested platforms with minor tweaks does not guarantee security from software risk. In the years to come, regulators face a huge task of ensuring that the dangers that blockchain poses do not outshine its benefits.
Daniel Santos, the founder of DeFi.Finance – a platform that offers DeFi products tailored to large institutions – told Cointelegraph: “Only a fraction of institutional investors have guidelines that allow them to invest in unregulated products. therefore, they are mainly used for regulated DeFi products. ”The team also works with partners in traditional financial services, including governments. Santos added:
“We are pioneers in a whole new world of financial services that will be orders of magnitude larger than today’s DeFi industry.”
Many decentralized financial platforms have reported that institutional wallets dominate their capital pools, including Celsius, 0XB1, Three Arrows, and Alameda. Institutions are definitely coming for DeFi, but as a space that thrives on decentralization, not everyone is sure how their arrival will affect the industry.
However, the blockchain has never succumbed to bureaucracy because it was designed to fight back against it. Its ethos of permissionless and trustless inclusiveness makes it easy for anyone to participate in their credit and insurance markets, providing liquidity and even agricultural income. According to Michael Bazzi, CEO of DeFi platform Onomy, synthetic assets like stablecoins could even accelerate the transition of currency and stock markets to on-chain trading frameworks.
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“DeFi does not discriminate,” Bazzi told Cointelegraph, explaining, “Although high-performance infrastructure for integrating CeFi with DeFi is a reality at this moment, the technology will be ready when institutions are mature to fully embrace the DeFi paradigm . ”
Others seem to agree that institutions will not have a material impact on the decentralization of projects, including Balancer Labs growth leader Jeremy Musighi. “I think the DeFi community generally recognizes the value of institutional capital. I would say the general demeanor of the DeFi room is welcoming, ”he told Cointelegraph, adding:
“I think the biggest bottleneck, aside from compliance concerns, is the learning curve that comes with a technological breakthrough. I have advised a lot for financial institutions and many of them are still studying the fundamentals of DeFi. “
However, he also stated that it doesn’t matter how inviting the room is, as DeFi platforms ran on permissionless protocols that inherently invite anyone to participate without bias. Institutions are preparing for investments with stronger risk controls, improved diversification and better verification processes for smart contract codes.
DeFi has exceeded most people’s expectations, but much of the underlying infrastructure is built on the Ethereum network. With high gas charges and network congestion plaguing the system, it seems that DeFi platforms and users both want to get off the ship. However, these problems are little more than an inconvenience to institutional traders.
Ethereum can charge up to $ 200 in transaction fees, but when you’re trading hundreds of thousands of dollars, those fees are far less invasive. In addition, the fees do not scale with the transaction amount, which means that a multi-million dollar transaction may incur the same fees as a $ 100 trade.
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While efforts are being made to divert DeFi space from Ethereum, institutions are likely to sharpen their focus on this platform. However, competing networks like Polkadot, Cardano and Solana have all seen significant investment from institutional players, but whether they are betting against Ethereum or just hedge their existing holdings is not yet known.
Returns in decentralized finance can be extremely lucrative, but they are also completely unpredictable. Profits vary widely in space, and while the newest platforms often generate the highest returns, they also come with the greatest risk of total loss. Institutions approach asset size and price risk very differently than retailers. However, as confidence in the area increases, risks should decrease and institutional positions in digital assets should begin to grow.