DeFi or decentralized finance is the hottest crypto buzzword nowadays. TVL or total value locked in DeFi has grown exponentially in the last one year. Such tremendous growth can’t come only from the retail investors or crypto hobbyists. Institutional participation in DeFi is already happening behind the curtain and it signifies that the market is evolving dramatically. DeFi activity was happening on Ethereum blockchain previously but many new blockchains have started to capture decent market share recently and expanded the market. The idea of lending-borrowing without the intervention of a third party or intermediary has found enough takers and the smart-contracts are acting as financial robots to automate execution. The disintermediation has obviously reduced the cost of acquisition or maintenance in DeFi and adoption can happen at a broad scale. DeFi isn’t limited to lending-borrowing activity only. The possibility is really enormous and naturally the institutional investors will want to capture the opportunity.
‘Yield Farming’ in DeFi is really attractive but the smart contract bugs are also often found. Getting rugged isn’t an uncommon incident in DeFi but it’s also a reality that many top DeFi projects are operating for a decent time frame without any issues. The high yield of nascent DeFi platforms also provides an incentive to opt for the risk. More return comes with more risk only. The wallets participating in DeFi activity are growing at a lightning speed. Many centralized exchanges or CEXs are offering mild DeFi exposure to their users and the institutional wallets of Alameda, Celsius are actively participating in many DeFi pools. Many custodian service providers are reportedly using DeFi to mobilize the fund deposited by the users so that they can offer higher returns. The high gas fee of Ethereum can be irritating for the retail investors but the institutional investors move large funds so they’re quite comfortable with this.
Metamask announced ‘Metamask Institutional (MMI)’ last December. It was an expansion of MetaMask services to include better security and operational features. The wallet has been launched very recently and the official blog post says that it enables “cryptocurrency funds, family offices, and financial institutions to gain access and exposure to the diverse decentralized finance opportunities that compose Web3.” MMI has the same interface of Metamask wallet and it offers enterprise-grade security with multi-sig and built-in compliance mechanisms to the institutional investors so that they can participate in DeFi easily. MMI team wants to collaborate with partners, custodians, and professional trading firms to decide their future roadmap and they’re offering extensive beta testing to the corporate.
“Our vision is that Compound Treasury becomes the bridge for non-crypto financial institutions to deliver the core benefits of DeFi to the next billion users, and we are extremely excited to work with our customers to navigate this enormous opportunity.” – Compound Treasury announcement
Compound Protocol is a successful DeFi protocol with great reputation. Compound Labs, the company behind the protocol, has announced Compound Treasury very recently. It has been designed for non-crypto native businesses and financial institutions to access the Compound Protocol. The institutional investors can deposit US Dollars to their Compound Treasury Account via wire deposit and start earning a guaranteed, fixed interest rate of 4% per year. How will they pay such assured return when the current stablecoin deposits earn less than 2% APY on Compound? Don’t forget COMP, the governance token of Compound protocol, which has given very good returns in the last few years and maintained its value. It’s a cool proposition for the corporations as the return is higher than the average US savings bank account. Within 24 hours, the investors will be able to withdraw the funds and low minimums, no maximums, and no fixed terms or duration make it very attractive.
Fidelity Digital Assets conducted surveys in late 2019 and early 2020 to understand DeFi participation of institutional investors across the US and Europe. The last survey results showed that almost one third of the respondents said they were invested in digital assets. The jump was 64% from the previous year survey. Exposure to DeFi can’t happen overnight but as these investors are well acquainted with the digital asset class and they’ve observed a recent bull market, it’s highly possible that many of them have already jumped into it. Money is really a magnet and high flow of money is bound to attract the institutional whales. The need of the hour is fiat on-ramp to the DeFi protocols and compliance for corporate entry. DeFi is destined to be plugged into Fintech with its fast paced innovation and we’re witnessing the beginning.
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Increasing corporate participation in Defi means that more institutional investors will be involved in the future. Defi is really growing and the number of institutional investors is increasing day by day.
Will defi replace banks?