This past year, DeFi and fintech met in new and interesting ways.
Institutions introduced client staking. Others accepted cryptocurrency as payment. We saw financial services begin to engage with DeFi.
A few months ago, we caught a glimpse into the perspectives of those closest to this topic, during a Mainnet 2021 panel discussion. The panelists are experts in both legacy financial institutions and cutting edge crypto technology. The result is a discussion around the current DeFi and fintech landscape.
Today, the DeFi industry today consists primarily of crypto-to-crypto transactions. Would a blending of DeFi and fintech see DeFi become truly fiat-to-crypto? Would it blur the lines of how we view finance? In this talk, we saw panelists touch on key themes which shaped much of 2021.
- Sarah Olsen, Head of Corporate Development Onyx, by J.P. Morgan
- Oli Harris, Head of North America Digital Assets at Goldman Sachs
- Aya Kantorovich, Head of Institutional Coverage at FalconX
- Konstantin Richter, CEO and Co-Founder at Blockdaemon
- Jesus Rodriguez, CEO at IntoTheBlock
- Jack O’Holleran, Co-Founder and CEO at SKALE Labs
What are the opportunities for institutions in DeFi?
For Aya Kantorovich, the main opportunity is clear. “Institutions are thinking about DeFi because of yield.”
“If you look at a money market account today it’s yielding maybe 0.5%. Institutions are trying to give their clients at least 2% returns.”
“Some DeFi pools yield 900%.”
“While that may not be sustainable year-over-year, it’s definitely a number that is very difficult to look away from, especially in a market today where bonds aren’t yielding as significant as they were historically.”
Jesus Rodriguez agrees that such returns, while attractive, are not sustainable. “I think that’s a phenomenon of the current market conditions and is probably not sustainable.”
High yield and high volatility are already available in other areas…
A high yield is not exclusive to DeFi. Neither is the volatility that crypto brings. Other regulated assets also provide competitive yields.
It’s clear that today, institutions already have access to high-risk / high-performing asset-classes. “There have been times when you’ve had incredible yields like in both sovereign debt or emerging market debt”, says Sarah Olsen of Onyx by JP Morgan. “There are markets, particularly in emerging economies, where you can get a super high yield and they are well known,” agreed Jesus.
At the end of the day, there are a lot of risky assets that many regulated entities can access today, that are relatable to the volatility you see in some crypto assets, whether it’s DeFi or not.
That being said, the opportunities for institutions in DeFi protocols are huge. If institutions see DeFi through the lens of yield, what’s stopping some of them from getting started?
What’s stopping DeFi institutional adoption in DeFi?
When thinking about institutional adoption, we often think of businesses on-boarding Bitcoin onto their balance sheet.
The reality is slightly more nuanced.
At the moment, U.S. investment banks do not have default permission to hold cryptocurrency. This includes DeFi tokens. To-date, family-offices, macro-focused hedge funds and alternative investment funds have been the vanguard of crypto asset adoption. In some cases, such as with BNY Mellon, permission has been granted to custody assets.
It is institutional investment, however, that has helped to grow proof-of-stake to what it is today. According to Jack O’Holleran of SKALE Labs, proof-of-stake was relatively small when he started out in 2017.
“people thought staking would be a small market”, he said, “the reality is that $150bn staked on proof-of-stake networks … that would not be possible without institutions.”
What difficulties, therefore, do institutions have with getting involved?
For Oli Harris of Goldman Sachs, there are three clear issues:
Due to the pseudo-anonymity of crypto, the origin of many tokens is unclear. “If you don’t know who you’re facing on the other side on AAVE, Compound or others, that’s obviously a showstopper”, says Oli. A way of overcoming this, according to Oli, would be embedding identity into a token. Having token provenance and history will be key for institutions.
2. The Risk Management of Protocol Itself
For Oli, this means ensuring a protocol meets capital market standards. Algorithms must stand up to scrutiny. They must be fit for purpose for institutions.
3. Systemic Risk
For Oli, these are three problems that have already been solved in traditional capital markets. While there are some great ideas working on these in DeFi, the solutions are not ubiquitous yet.
What does the future look like for DeFi and financial institutions?
“I think the opportunity for a bank like JP Morgan in the DeFi space is massive”, says Sarah.
For Sarah, the main opportunities lie at the crossroads of public and private blockchain.
“Where I think it’s going to be really important is the right intersection between private and public infrastructure”.
“I’m a big believer personally that public infrastructure is really gonna win out”, she said.
“If you take an open network where you allow anyone to participate in it, that’s where the best ideas are going to come from.”
This is a testament to the power of open-source networks at scale.
How does the future look for DeFi adoption? According to Aya, the outlook is strong.
“It looks really good … we’ve seen over 100% growth year-over-year.”
Jesus believes that DeFi will win in the long run. This is because it is the smartest tech play. This stands up, even in the face of uncertainty in areas such as regulation.
For Sarah, this success will come from the generational shift in how younger consumers view value and identity.
At Blockdaemon, our road is clear. We provide the institutional backbone for the most cutting edge blockchain protocols.
Blockdaemon handles the operational overhead for institutional clients. We offer bespoke validators that can cater to fully KYC’d coins hosted on exchanges. To view our marketplace of supported blockchains or get in touch with us, visit Blockdaemon today.