Last year, we witnessed crypto companies spend their time trying to manage financial reserves, avoid reputational damage, or steer clear of a full-blown collapse. Meanwhile, traditional institutions delicately tested the waters, mostly via low-profile integrations or direct blockchain investments.
But traditional finance institutions of all sizes clearly have concerns over fully diving into blockchain assets. A recent JPMorgan Chase survey showed 72% of institutional investors have “no plans” to trade crypto or digital coins, with many citing the industry’s volatility as a repellent. On the other hand, Wall Street fixtures seem to be stepping off the sidelines to explore crypto or reaffirming their blockchain investments, indicating that interest still remains.
So how can decentralized finance (DeFi) projects convince institutions that it’s ready to handle their blockchain ambitions without compromising their original tenets?
Do institutions even need DeFi?
Centralized finance (CeFi) platforms and exchanges can’t provide the same access and flexibility to digital assets that DeFi can. Crypto has applications and an inherent malleability that goes beyond what is achievable through TradFi. It’s a factor that draws investors to it in the first place. But many CeFi platforms operate by merely putting existing financial tools on-chain and replicating what traditional institutions already do.
While that might entice institutions wanting to avoid crypto’s learning curve, these centralized offerings usually fall flat because they don’t really bring anything new to the table. Offering more of the same may work in the short term, but if an institution sees there isn’t anything truly beneficial beneath the surface, its support may be rescinded just as quickly as it arrives.
Despite its perceived complexity, DeFi fixtures such as smart contracts, self-custody, and liquidity pools are all fundamentally different tools for institutions to interact with digital assets that completely diverge from traditional and CeFi product offerings.
DeFi undoubtedly creates new revenue streams for institutional-level clientele to explore, but there is no quick spell to get them to trust crypto and DeFi. That being said, DeFi projects are well-positioned to adjust their development and growth strategies to garner meaningful institutional attention once again.
How to close the trust gap
Onboarding traditional institutions start with infrastructure. Point blank. Many traditional institutions that have looked at crypto integrations predominantly avoided DeFi due to most platforms having, at best, a skeletal framework to comfortably accommodate their scale. That’s not to say that institutions are completely allergic to embracing new technology, but most do search for some kind of backup or infrastructure that serves their interests.
DeFi can provide the technical backbone for TradFi so they don’t have to build up and operate infrastructure themselves, but doing so requires a strong track record of security and reliability.
These frameworks must also align with measures to boost transparency and regulatory compliance. International governments are aiming to seriously ramp up crypto regulation across the board this year, and it would be wise for DeFi projects to stay on top of all developments when and where they can.
This is especially true in the U.S., with the Securities and Exchange Commission (SEC) cracking down hard on DeFi in regard to market manipulation and exploitation. While that might sound bleak, Moody’s analysis shows that heightened DeFi scrutiny will create a new regulatory reality for the sector to thrive in during a bullish market.
By self-imposing strict parameters and frameworks now, projects can start building partnerships and collaborations with established institutional players in TradFi to build the necessary credibility. TradFi institutions keep tabs on their competitors like any other industry, so seeing crypto stability work for institutions at their level can help encourage greater DeFi adoption. Creating open standards and protocols can also promote interoperability and collaboration across different DeFi platforms, increasing trust in the ecosystem as a whole.
This year is crypto’s year to rebuild, but DeFi isn’t suffering from the same setbacks or controversies as its centralized counterparts. In a market that’s already turbulent, a quiet period is a luxury, and DeFi projects that have their sights set on institutional adoption should take a moment to craft impressive infrastructure before setting off on forging partnerships.