.jpg)
Decentralized finance has transformed the financial landscape by leveraging blockchain technology and smart controls, creating democratic access to a transparent and diverse financial ecosystem. In doing so, DeFi has also created significant opportunities for institutional investors looking to get involved in blockchain and crypto. Unlike traditional financial (TradFi) institutions that rely on intermediaries, DeFi uses smart contracts and decentralized networks to offer transparent, speedy, and safe transactions - an attractive proposition for investors.
Earlier this year, a London-based digital asset management firm announced the results from a survey of institutional investors and wealth managers across several regions and discovered that 37% of these firms expected widespread adoption as an investment within five years, and 41% within seven years, an increase on previous years’ sentiment numbers. While the crypto market remains volatile, there are increasing numbers of institutional investors who want to diversify and inflation hedge with cryptocurrencies.
In this blog, we explore how decentralized finance has transformed the way institutional investors engage with the crypto market in two major ways: democratization and safety.
Democratization
DeFi allows institutions to take a more democratic, inclusive approach to financial decisions. Institutions wanting to get involved in the crypto industry can benefit greatly from the democratization that DeFi offers.
For example: intermediaries. Traditional finance relies on a whole host of intermediaries. This leads to raised costs and delays, forming barriers to access, especially in a fast-moving market such as cryptocurrency. DeFi operates on the blockchain, which means smart contracts automate transactions directly between parties, lowering the need for intermediaries.
Transparency is also key to democratizing institutional investment in crypto. DeFi is built on public, open-access blockchains. Transaction data is publicly accessible and readable, enabling everyone - including institutional investors - to make informed decisions based on available data. Decentralized autonomous organizations also level a great deal of transparency for the system. DAOs are managed - fully or partially - by smart contracts and blockchain technology. A community of members hold governance tokens, which grant them voting rights on propositions that affect the organization. Smart contracts are encoded with the rules and operations of DAOs, and any activity or voting within one is recorded on a blockchain, making them more transparent and safer from risk.
Decentralized finance is also global, allowing anyone (with an internet connection) to access opportunities and creating a more even playing field. This removes many geographical barriers and limitations that TradFi has and allows institutional investors from different regions worldwide to access the same financial opportunities as others. Cryptocurrency innovation and opportunities come from all corners of the globe. Not only can democratization allow cryptocurrency innovation from around the world (not just the markets where traditional finance flourishes) to be boosted through investment, but it also means that investors don’t miss out on fantastic opportunities because they are unable to know about or access them.
Better democratization equals better access to innovation. DeFi offers a host of new and innovative ways to facilitate lending, borrowing, and investing in crypto. This means that institutional investors have been discovering new ways to generate returns and manage risk, and will continue to do so.
Safety
Blockchain means that DeFi can offer several advantages for risk management over traditional financial systems. DeFi operates on public blockchains, where transaction data is recorded. This allows for full transparency, as all financial activities are visible to participants and regulators. Institutional investors can use this to verify transactions and reduce the risk of fraud or error.
Smart contracts can be written to enforce predefined rules to counteract risk. Anyone can access and understand the code on the blockchain on which the smart contract is written, which means that agreement terms can be closely scrutinized by any party. This technology executes contracts automatically, which eliminates the need for third parties. Intermediaries do not just block transparent access, but increase safety risks and the potential for human error or tampering. In an environment with such highs and lows as crypto, this is proving to be an attractive proposition for investment institutions that want to ensure transparency and responsibility.
As mentioned previously, DAOs allow for a more even playing field for operations on the blockchain. Decisions are made collectively through a safe voting process. This decentralized governance mitigates the risk of having a single central authority, which is open to abuse or error. With a more open decision-making process, institutional investments are overall more secure and transparent. This is particularly attractive for those moving into cryptocurrencies, where issues of safety and lack of user education are cited as reasons for anxiety.
Institutional investment requires a high level of regulation and protection. DeFi technology is creating specialized solutions for these institutions, including handling the long and complicated process of regulatory compliance. Platforms are being created that organize and expedite compliance protocols such as AML (anti-money laundering) and KYC (know your customer). The DeFi ecosystem is also developing solutions to protect against the specific risks that can come with using blockchain and smart contract technology, such as failures or hacks, which provides an extra layer of protection for institutional investors.
In addition to all of this, DeFi platforms reduce systemic risk. In traditional finance, the failure of a single institution can have a domino effect on the entire ecosystem. With a decentralized system, risk is distributed across many participants. With risk distributed, institutional investors have safer opportunities to engage with crypto.
The future of institutional investment in crypto
Decentralized has had an indelible impact on the financial system, and has begun to reshape the landscape of institutional investment as we know it. Slowly but sure, institutions are looking at cryptocurrency not as a radical, risk-taking exercise, but as a smart diversification tool with a potential high growth rate. This will only continue to grow if the crypto industry can prove its value on two key issues: democratization and safety.
By leveraging the blockchain, DeFi creates a more democratic and secure financial ecosystem for institutions to tap into. Democratic systems lead to faster, more exciting innovation, and a market in which many more players are able to enter the field. Safety means that institutional investors are able to get involved in a market where many risks are more stringently avoided.
Opportunities are there to be unlocked if institutional investors are willing to make the changes. By embracing the advantages of democratization and safety, institutional investors will be able to put their money into a more resilient and exciting financial future. Recognizing these advantages means that the transformative power of decentralized finance has not only created the cryptocurrency system we have today, but will also help to fund it into the future.
.png)
