Is DeFi Ready For Institutional Adoption?

The Emergence of DeFi

Ethereum was regarded as the de facto home of DeFi, but things are changing rapidly. The success of the Binance Smart Chain (BSC) has expanded the scope of DeFi. Developers can copy successful Ethereum DeFi protocols and replicate them on BSC. This, coupled with the low transaction fees and faster confirmation times on BSC, has led to more projects in DeFi.

Retail investors initially spurred the DeFi craze. However, it appears that institutions are beginning to take notice. The idea behind DeFi initially puzzled many institutional investors. However, the concept of letting smart contracts execute market others with a third party is the opposite of the norm.

Financial institutions are known for their preference for regulated financial products. The regulation is typically provided by a third party (Central Banks) and ensures that things go smoothly.

Less Centralization

Blockchain technology has removed the third-party factor and replaced it with smart contracts to ensure decentralization. This has drastically reduced the cost of maintenance since developers use open-source blockchains like Ethereum and BSC to build DeFi protocols. Consequently, DeFi has been able to achieve adoption on a broader scale than traditional banking systems.

An exciting concept within DeFi that has caught the attention in DeFi is ‘’Yield Farming’’. This is the idea of adding capital or liquidity to staking pools for new tokens or impressive return on investments (ROI).

Although Yield Farming is seen as a risky form of investment, with many losing money to rug pulls, several top DeFi platforms have emerged that hold the light and are seen as top projects. The risk-reward ratio has also ensured that many remain attracted to yield farming opportunities in DeFi.

Centralized exchanges have also strengthened the potential for a sustainable ecosystem. For example, popular CEXs like Binance are providing mild DeFi exposure to clients and institutional users. In addition, custodial services have reportedly turned to DeFi to invest funds deposited by clients to offer higher returns.

Institutional Interest

Institutional investors have the advantage of huge funds that can offset the high gas fees of Ethereum-based DeFi protocols. This ensures that they can reap better ROI than retail investors on reputable DeFi platforms.

The DeFi sector has also responded in different ways to encourage institutional investors. Compound Protocol is regarded as the DeFi project that kickstarted the craze in DeFi. The protocol recently announced the development of the Compound Treasury. The Treasury is a platform designed to target financial organizations and non-crypto-based businesses.

Financial organizations can deposit US dollars via wire deposits to their Compound Treasury Account for guaranteed interest rates of 4% yearly. This is substantially higher than what is provided by the US savings bank account and fixed deposit accounts. Furthermore, institutional investors can withdraw their funds within 24 hours of deposits, making it attractive for financial corporations.

Metamask Leading the Way

Popular crypto wallet platform Metamask also revealed the launch of an institutional-based service called ‘’Metamask Institutional (MMI) in December. The institutional service was designed to build security and operational features that would appeal to financial organizations.

Metamask recently launched the institutional wallet. The MMI has a similar interface to the popular Metamask wallet and has a compliance mechanism that appeals to institutional investors. According to information on their website, the wallet provides institutions an easy way to participate in DeFi.

Sygnum, a Swiss-based crypto bank, has also been at the forefront of crypto and defi adoption. The bank recently revealed that it had started to offer institutional exposure to DeFi tokens. This included popular tokens like Aave (AAVE), Aragon (ANT), Curve (CRV), Uniswap (UNI), and other tokens. It also noted that it would offer more personalized yield farming products and services for institutional clients. Popular DeFi lending protocol Aave has already started offering a private pool for institutions.

The growing interest is further indicated in a recent survey conducted by Fidelity Digital Assets from 2019 to 2020. Institutional investors globally were asked about their interest in cryptocurrencies across different periods. It was noted that the percentage of institutional investors jumped by 64% from 2019 to 2020.

It will be interesting to see how this trend continues in the coming months as DeFi becomes mainstream.

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