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Cryptocurrencies have been competing for the attention of large institutional investors for years and they are finally getting the attention they wanted. Blockchain networks and their consensus mechanisms have never made sense to the traditional investor, but decentralized finance, or DeFi? It is something that everyone is looking to support.
Traditional investors are more accustomed to concepts like stocks and real estate, focusing on aspects like income, monthly active users and cash flow, making DeFi a much better entry point into. blockchain for them. Over the past year, DeFi projects have popped up around the world, attracting billions of dollars in the niche industry.
Fidelity Digital Assets recently reported that 80% of institutions surveyed are interested in digital assets, with 36% saying they have already invested in the asset class. Additionally, according to Evertas, a cryptocurrency insurance company, 90% of institutional investors in the US and UK plan to increase their crypto holdings soon.
Nick Ovchinnik, Director of Business Development for 1inch Network, told Cointelegraph: “The influx of institutional funds will have a lasting positive impact on the market. He said the presence of reputable entities is expected to boost market stability for retail investors and the much-anticipated adoption of this new asset class, saying:
“These investors are quite risk-averse and have a long-term investment horizon. Therefore, the most efficient assets in the market are the ones that will benefit the most due to their dominance. “
Just recently, the Aave DeFi protocol announced a new platform exclusively for institutional investors. There may be billions stuck in DeFi, but that’s a modest sum compared to the trillions of dollars spent every day in the traditional financial system. As the technology available to investors adapts to the size of the industry’s growth potential, all eyes are on DeFi and how institutions will shape it.
Institutional impact
Over the past few months, Ethereum’s Total Locked-In Value (TVL) in DeFi platforms has followed nearly $ 60 billion, putting it in the limelight and forcing the financial services space to mine its benefits. By using programmable smart contracts, DeFi can perform the same functions as traditional centralized systems while reducing economic drag, minimizing overhead, and making the system more efficient.
It incentivizes decentralized participants through yield farming, and while there is enough reason to remain skeptical, especially given the amount of unaudited code running in the DeFi ecosystem, participants are paid well for this level of risk. As the market value of digital assets has increased, the price of these associated performance tokens has also increased, generating double-digit returns for stakeholders.
The more tech-savvy among them have improved their abilities to review contracts faster and measure market anomalies through automation. Overall, new money is entering the DeFi space on a global scale, with institutional funds, trading companies and centralized funding platforms contributing significantly to the liquidity of the space.
However, while DeFi and Distributed Ledger (DLT) technology are advancing more than ever, the regulatory side of things is still far from where it needs to be. There is a lot of risk in DeFi, and a platform copying code from other approved platforms with minor tweaks does not guarantee security against software risks. In the years to come, regulators have a huge task ahead of them, ensuring that the dangers posed by blockchain do not outweigh 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 policies allowing them to invest in unregulated products, they will therefore mainly look for regulated DeFi products. The team also works with partners in the traditional financial services industry, including governments. Santos added:
“We are the pioneers of 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 portfolios dominate their capital pools, including Celsius, 0XB1, Three Arrows and Alameda. Institutions are certainly coming for DeFi, but as a space that thrives on decentralization, not everyone is sure exactly how their arrival will affect the industry.
That said, blockchain has never succumbed to bureaucracy because it was designed to oppose it. Its permissionless and trustless philosophy of inclusiveness makes it easy for anyone to participate in its credit and insurance markets, provide liquidity and even farm returns. According to Michael Bazzi, CEO of the DeFi Onomy platform, synthetic assets like stablecoins could even accelerate the shift from forex and stock markets to on-chain trading frameworks.
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“DeFi does not discriminate,” Bazzi told Cointelegraph, stating, “While a powerful infrastructure to integrate CeFi into DeFi is a reality being assembled right now, the technology will be ready by the time institutions will be ripe to fully embrace the DeFi paradigm. “
Others seem to share the feeling that institutions will not have a significant impact on the decentralization of projects, including the head of growth at Balancer Labs, Jeremy Musighi. “I think the DeFi community generally recognizes the value of institutional capital. I would say the overall position of the DeFi space is welcoming, ”he told Cointelegraph, adding:
“I think the biggest bottleneck, besides compliance issues, is the learning curve that accompanies a technological breakthrough. I have done a lot of consulting for financial institutions and many of them are still understanding the basics of DeFi.
However, he also said that hosting the space didn’t matter, as DeFi platforms run on unauthorized protocols that inherently invite participation from anyone without bias. With tighter risk controls, improved diversification, and better smart contract code review processes, institutions are preparing to invest.
Company concerns
DeFi has exceeded most people’s expectations, but much of its underlying infrastructure relies on the Ethereum network. With the high gas costs and network congestion plaguing the system, DeFi platforms and users are both seemingly looking to get off the ship. However, these issues are little more than drawbacks for institutional traders.
Ethereum can charge up to $ 200 in transaction fees, but when you’re trading on a scale of hundreds of thousands of dollars, those fees are much less invasive. Additionally, the fees are not proportional to the transaction amount, which means that a multi-million dollar transaction can incur the same fees as a $ 100 transaction.
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While efforts are being made to move the DeFi space away from Ethereum, institutions will likely focus on this platform. However, competing networks like Polkadot, Cardano, and Solana have all seen significant investments from institutional players, but whether they bet against Ethereum or just hedge their existing holdings has yet to be revealed.
The returns from decentralized finance can be extremely lucrative, but are also completely unpredictable. The payoffs vary widely across space, and while the latest platforms often generate the highest returns, they also come with the greatest risk of total loss. Institutions approach investment size and price risk in very different ways than retail traders. Nonetheless, as confidence in the space increases, risks should decrease and institutional positions in digital assets should start to grow.
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