DeFi is the the Future in Finance
DeFi’s growing popularity has been heralded as the death knell for traditional finance, or TradFi. While we’re not quite there yet, there’s a reason DeFi has caught the public’s attention: the total value locked in the vast network of DeFi integrated protocols and financial instruments now exceeds $200 billion.
Let’s have a look at how DeFi makes financing more affordable.
From customer onboarding to trade execution to post-transaction services like clearing and settlement, financial incumbents in the TradFi industry have a high cost of servicing clients. According to a Bank of England estimate, trade processing costs TradFi institutions over $20 billion every year. By utilizing distributed-ledger technology (DLT), TradFi can save up to 80% on post-trade settlement costs.
TradFi’s financial innovation capabilities is constrained because to the high cost of servicing clients and old infrastructure. Tokenization projects are being piloted by a number of banks and central securities depositories in order to strengthen existing asset classes.
These initiatives, despite demonstrating technological viability, do not go live. When considering the expense of migrating to a new system, the business case for these initiatives is difficult to create. To make matters worse, existing procedures, as well as stakeholder and user behavior, must be adjusted to accommodate any new technology. When sales and trading desks switched from speech to digital, we saw similar behavior.
The digital business grew thanks to new business divisions with varied skill sets, whereas the voice business saw a loss in personnel and systems.
DeFi is ideally positioned to disrupt TradFi with new and innovative financing possibilities because it does not create its alternative financing structures using any of the TradFi frameworks. DeFi’s lack of market infrastructure solutions provides fertile ground for rethinking the user experience throughout the capital markets lifecycle. This contributes to the development of new financial primitives, alternative financing structures, and potential for yield generation. DeFi now includes over 17,000 protocols for loan, borrowing, staking, hedging, exchanging, yield farming, and much more, including Aave, Compound, and Uniswap.
DeFi has also reduced the cost of manufacturing and disseminating various assets, much like the internet did for publishing and advertising. DeFi’s peer-to-peer lending method, which eliminates third-party intermediaries, is one reason for the cheaper prices. This means that a company seeking credit does not have to pay a charge to a bank or another financial institution to gain access to credit.
Increased Institutional Interest
In 2021, institutional interest in Defi and Web3 was at an all-time high. Institutional investors, who had previously been suspicious of DeFi’s investment potential, realized that the expansion of Web3 and its related financial instruments driven by DeFi was unavoidable. They may not have fully comprehended the motivations behind DeFi or Web3, but they have realized that the asset class cannot be overlooked. As a result, according to statistics from Chainalysis, a blockchain data platform, institutions dominated DeFi transactions in the second quarter of 2021. Large institutional transactions, defined as those worth more than $10 million, accounted for more than 60% of all DeFi transactions during this time period. When compared to returns from TradFi instruments, part of the appeal of DeFi for organizations is the large yields offered across the sector. Increased inflation reduces the benefits from TradFi instruments, making these higher yields even than appealing. 2021 was a year of many firsts in institutional DeFi, whether it was the Office of the Comptroller of the Currency permitting US banks to settle payments using stablecoins or payments processor Visa settling the first crypto transaction.
Firms that make investments
DeFi has had a push-and-pull relationship with investment banks and asset managers. While the large rates are appealing, the regulatory and technological uncertainty associated has kept these institutions out of the ecosystem. That changed in 2021. Many investment banks, including as Blackrock, BNYMellon, and Goldman Sachs, have either resurrected or entered the crypto industry.
Blackrock filed with the Securities and Exchange Commission to add bitcoin exposure to two of its investment vehicles at the start of the year. According to regulatory documents, the world’s largest asset management also spent $384 million in bitcoin mining companies last year. BNY Mellon, the oldest bank in the United States, has established a new digital assets unit to provide services related to bitcoin and other digital currencies in an effort to increase crypto’s acceptance as an investment.
Morgan Stanley and Goldman Sachs have both opted to provide bitcoin exposure to their wealth management clients. Meanwhile, the European Investment Bank, the EU’s investment arm, issued its first ever digital bond on public blockchain, valued 100 million euros. The third-biggest bank in France, Societe Generale, also suggested borrowing $20 million in Dai from MakerDAO, one of the major DeFI protocols.
Retail Banks
Retail banks’ relationship with digital currencies has gone full circle, from calling them a fraud to providing custodial services for their clients’ digital assets. Many retail banks began selling bitcoin exposure in 2021 or were contemplating it for clients.
JPMorgan Chase announced in January that certain of its clients may be able to invest in bitcoin ETFs. Citibank, meanwhile, formed a digital assets section to provide crypto investing services in response to growing client demand.
JPMorgan didn’t stop there with bitcoin funds. It teamed with Wells Fargo and NYDIG later in the year to provide bitcoin exposure to their respective clients. In addition, for its private banking clients, JPMorgan developed an in-house bitcoin fund.
US Bank announced bitcoin custody services, while Bank of America formed a research section to look into digital assets.
These are just a few examples of DeFi’s growing acceptance and popularity among businesses. This is a subject that will come up again and again.
