Finding the sweet spot: Traditional financial institutions ready for DeFi

Cryptocurrencies have been vying for the attention of large institutional investors for years and they’re finally getting the attention they wanted. Blockchain networks and their consensus mechanisms never made sense to the traditional investor, but decentralized finance, or DeFi? That’s something everyone’s looking to get behind.

Traditional investors are more used to concepts like stocks and real estate, focusing on aspects like revenue, monthly active users and cash flows, making DeFi a far better entry point into blockchain for them. Over the last year, DeFi projects have been popping up across the globe, drawing billions of dollars into the niche industry.

Fidelity Digital Assets recently reported that 80% of surveyed institutions are interested in digital assets, with 36% of them claiming to have already invested in the asset class. Further, according to Evertas, a cryptocurrency insurance firm, 90% of institutional investors in the U.S. and U.K. plan on increasing their crypto holdings soon.

Nick Ovchinnik, chief business development officer of 1inch Network, told Cointelegraph, “Inflow of institutional funds will have a long-lasting positive impact on the market.” He said that the presence of reputable entities should boost the market’s stability for retail investors and the much-awaited adoption of this new asset class, stating:

“Those investors are pretty much risk-averse and have a long-term investment horizon. Therefore, the most efficient assets on the market are the ones that will benefit the most due to their dominant position.”

Just recently, the Aave DeFi protocol announced a new platform exclusively for institutional investors. There may be billions locked in DeFi, but it’s a modest sum compared to the trillions of dollars spent each day across the traditional financial system. As the technology available to investors scales to the size of the industry’s growth potential, all eyes are on DeFi and how institutions will mold it.

Institutional impact

Over the past few months, Ethereum’s total value locked (TVL) into DeFi platforms has been tracking close to $60 billion, pushing it into the limelight and forcing the financial services space to address its advantages. Using 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 incentivizes decentralized participants through yield farming, and while there are enough reasons to remain skeptical, especially considering how much unaudited code runs throughout the DeFi ecosystem, participants are well compensated for that level of risk. As the digital assets’ market value has grown, so has the price of these associated yield tokens, driving double-digit returns to stakeholders.

The more tech-savvy among them have improved their capabilities to review contracts more rapidly and measure for market anomalies through automation. Across the board, new money is entering the DeFi space globally, with institutional funds, trading firms and centralized finance platforms contributing significantly to the space’s liquidity.

However, though DeFi and distributed ledger technology (DLT) may be advancing more than ever before, the regulatory side of things is still far behind where it needs to be. There’s a lot of risk in DeFi, and a platform copying code from other vetted platforms with minor tweaks doesn’t guarantee safety from software risk. In the coming years, regulators have a huge task ahead of them, ensuring the dangers that blockchain poses don’t outshine its advantages.

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 policies allowing them to invest in non-regulated products, so they will be primarily looking for regulated DeFi products.” The team is also…