Institutions And DeFi
With cryptocurrencies reaching new heights and companies actively adopting crypto payments, DeFi has become one of the most rapidly developing subsectors in the web3 space.
Words like Decentralized exchanges, Automated market makers, Yield farming, staking, swapping, and over-collateralized loans, have become pleasant to the ears of a modern investor.
To put it in a better perspective, at the time of writing this blog, there’s over US$100 billion of total value locked in Defi protocols and institutional investors cannot afford to miss the opportunity of capitalizing on this ever-growing innovation.
With a little touch of KYC, AML, insurance, and regulations, Institutional DeFi is emerging as the perfect replacement for the traditional financial space.
Even JPMorgan, initially hostile to cryptocurrency, is now looking at the yields available as an incentive to park their wallets in the staking industry. According to Forbes, this is currently generating over US$9 billion in annual revenue.
Furthermore, according to a report by Fidelity Digital Assets, 80% of the institutions surveyed, including financial advisors and foundations, have a growing interest in investing in digital assets. Institutional investors are increasingly depending on cryptocurrencies to hedge against inflation, as well as for cheaper transportation, transaction, and storage costs, in comparison to traditional investment options such as real estate and hedge funds.
That raises an essential element that must be addressed!
What exactly are the advantages of DeFi for institutions and businesses?
Early Adoption
Traditional investors are always on the lookout for that elusive piece of information that would give them an advantage over their competition. While blockchain technology brings an incredible opportunity for businesses to reduce unnecessary human errors, intermediaries, and costs, DeFi provides an excellent option for businesses to experience the benefits of blockchain technology firsthand.
Attractive Yields
Despite the fact that DeFi is still considered the new kid in the block, it has managed to outperform standard market yields, which vary from 0% to 2%. It’s not simply the low-interest rates that make it difficult for institutions and businesses to generate a significant return in the fixed income market; it’s also the central banks’ quantitative easing and other stimulus measures.
While some institutions have already started experimenting by investing in Bitcoin, DeFi is a far bigger concept with significantly greater potential returns. Indeed, the DeFi stablecoins market, which is based on the demand for stable digital assets, provides consistent yields of up to 10% and can easily be integrated into corporate treasury operations.
Easy Access
Small businesses, particularly in developing economies, frequently struggle to obtain bank loans due to a lack of effective banking infrastructure to meet their financial demands. DeFi protocols, on the other hand, make use of smart contracts to allow enterprises to secure loans from anywhere in the globe by locking up their digital currencies.
In addition, the most intriguing feature for DeFi participants is how easily they can use their idle funds to access lending protocols, earning considerable interest.
While there are still risks associated with engaging with DeFi protocols such as the recent Luna fiasco, businesses can use DeFi platforms to lend stablecoins like USD to not only hedge against rising inflation but also strengthen their balance sheet.
In fact, some platforms, it appears, are already working to make the world of DeFi safer and more intelligent for institutional investors.
According to a report by S&P Global Market, The concentration of Certificates of Deposits (CDs) and borrowings on bank balance sheets has decreased dramatically over the last three quarters.
What does DeFi have to do with it?
Well, this decline has resulted in unimaginative loan growth, with net interest margins reaching new lows, casting doubt on the profitability of the CD interest rate market.
Final Words
There was a lot of suspicion about investing in digital assets after the 2017 ICO bubble burst. Institutional participation in the DeFi space, on the other hand, lays the groundwork for the cryptocurrency market’s success, as these investors aid in the development of trust, which is critical for mainstream adoption.
As DeFi grows in popularity, its usability and scalability will improve dramatically, allowing more platforms to put their theory into practice and address long-standing issues posed by traditional finance.
