A balance must be struck between empowerment and security.
Article author: Curve Finance founder Michael Egorov
Article Source: Cointelegraph
Article compilation: Ada, MetaEra
Decentralized finance (DeFi) is rapidly becoming one of the most important trends affecting the financial world. With the continuous growth of DeFi activities, the total locked value exceeds 100 billion US dollars, making this field increasingly popular among institutional investors.
However, as institutional interest in DeFi grows, inevitably it has raised questions about the future of the industry. Can DeFi maintain its decentralized and democratic principles while ensuring the safety of all participants? Or will it change the essence of 'decentralized' finance to meet the needs of large participants, thus compromising it?
The institutionalization of DeFi
We can see that institutional investors' interest in DeFi is growing day by day, such as BlackRock's BUIDL fund, which manages assets exceeding 550 million USD. This in turn marks a transformation in this field, where tokenized securities, once considered a niche concept, are now seen as a bridge between traditional finance (TradFi) and the blockchain ecosystem.
Even companies like Securitize are striving to ensure that these tokenized assets comply with relevant regulatory requirements. Various intermediaries will also play an important role in driving more funds into DeFi.
But the road ahead is not smooth sailing - integrating institutional investors into DeFi still faces many challenges. Regulatory and legal uncertainties, as well as compliance issues with customer identification (KYC) and anti-money laundering (AML) standards, are all influencing factors. In addition, there are also issues with trading liquidity and transparency, technical security, and economic risks. All of these obstacles make it difficult for institutional investors to navigate in this environment, thus slowing down the adoption of DeFi.
Despite the promising prospects of DeFi, large investors remain cautious about fund security. The key issue is how to strike a balance between the core principles of decentralization and meeting the security requirements of institutional investors.
Market reports from institutions such as Blockworks and JPMorgan support institutional investors' foray into the DeFi space, pointing out the need to provide support for these investors and adopt necessary infrastructure for scalable development. However, the reality is far more complex.
The involvement of institutions can enhance people's trust in the decentralized financial ecosystem, pushing its development to new heights. However, this also brings a higher degree of centralized risk, causing the system to deviate from its original design intent, as well as from the initial intention of attracting many people.
RWA Tokenization Risks
A major development in the DeFi space is the tokenization of real-world assets (RWA)), including tokenized commodities and tokenized stocks. According to McKinsey, by 2030, the market size of these assets could reach $20 trillion.
While RWA marks a significant step forward for DeFi, they also come with security risks that need to be addressed. One of the most pressing challenges is the 'custodial' risk - when assets are tokenized and transferred to DeFi. In this case, the security of these assets relies on legal agreements rather than automated smart contracts.
For example, the two most widely used stablecoins - USDC and USDT, are supported by traditional banking institutions rather than decentralized protocols. Because they rely on centralized entities, they are easily manipulated and prone to errors.
Assets that need to comply with AML and KYC rules are more tricky. For example, short-term Treasury bond tokens (STBT) can work in a permissionless DeFi environment as long as they are accepted. Accepting these assets seems restricted because users are unwilling to accept the accompanying KYC requirements. These compliance issues have become obstacles to promotion.
If traditional financial giants can use their infrastructure to protect RWAs, it may help solve security issues related to tokenization. If done professionally, theoretically, stablecoins with appropriate support from large traditional financial institutions may become very popular, gaining greater trust and adoption. Tokenized stocks and commodities may also receive attention, providing new investment opportunities that integrate traditional financial structures with blockchain.
The future of DeFi
The future of DeFi is likely to be a hybrid model that combines decentralized principles with regulated centralized elements. This approach can help enhance security while retaining the essence and advantages of DeFi: reducing intermediaries and increasing transparency.
Many times, the future is not about the victory of old or new paradigms, but finding a compromise. Even without large institutional participants, true DeFi can still stand firm. However, certain areas in DeFi may need to accommodate centralized elements to ensure better security and regulatory compliance.
Anyway, in the end, it will be a financial ecosystem with fewer intermediaries involved than the current traditional financial system. This hybrid model is likely to become the foundation of how the future world financial system operates.
The content is for reference only, not a solicitation or offer. No investment, tax, or legal advice provided. See Disclaimer for more risks disclosure.
Institutions shape the future of Decentralized Finance
A balance must be struck between empowerment and security.
Article author: Curve Finance founder Michael Egorov
Article Source: Cointelegraph
Article compilation: Ada, MetaEra
Decentralized finance (DeFi) is rapidly becoming one of the most important trends affecting the financial world. With the continuous growth of DeFi activities, the total locked value exceeds 100 billion US dollars, making this field increasingly popular among institutional investors.
However, as institutional interest in DeFi grows, inevitably it has raised questions about the future of the industry. Can DeFi maintain its decentralized and democratic principles while ensuring the safety of all participants? Or will it change the essence of 'decentralized' finance to meet the needs of large participants, thus compromising it?
The institutionalization of DeFi
We can see that institutional investors' interest in DeFi is growing day by day, such as BlackRock's BUIDL fund, which manages assets exceeding 550 million USD. This in turn marks a transformation in this field, where tokenized securities, once considered a niche concept, are now seen as a bridge between traditional finance (TradFi) and the blockchain ecosystem.
Even companies like Securitize are striving to ensure that these tokenized assets comply with relevant regulatory requirements. Various intermediaries will also play an important role in driving more funds into DeFi.
But the road ahead is not smooth sailing - integrating institutional investors into DeFi still faces many challenges. Regulatory and legal uncertainties, as well as compliance issues with customer identification (KYC) and anti-money laundering (AML) standards, are all influencing factors. In addition, there are also issues with trading liquidity and transparency, technical security, and economic risks. All of these obstacles make it difficult for institutional investors to navigate in this environment, thus slowing down the adoption of DeFi.
Despite the promising prospects of DeFi, large investors remain cautious about fund security. The key issue is how to strike a balance between the core principles of decentralization and meeting the security requirements of institutional investors.
Market reports from institutions such as Blockworks and JPMorgan support institutional investors' foray into the DeFi space, pointing out the need to provide support for these investors and adopt necessary infrastructure for scalable development. However, the reality is far more complex.
The involvement of institutions can enhance people's trust in the decentralized financial ecosystem, pushing its development to new heights. However, this also brings a higher degree of centralized risk, causing the system to deviate from its original design intent, as well as from the initial intention of attracting many people.
RWA Tokenization Risks
A major development in the DeFi space is the tokenization of real-world assets (RWA)), including tokenized commodities and tokenized stocks. According to McKinsey, by 2030, the market size of these assets could reach $20 trillion.
While RWA marks a significant step forward for DeFi, they also come with security risks that need to be addressed. One of the most pressing challenges is the 'custodial' risk - when assets are tokenized and transferred to DeFi. In this case, the security of these assets relies on legal agreements rather than automated smart contracts.
For example, the two most widely used stablecoins - USDC and USDT, are supported by traditional banking institutions rather than decentralized protocols. Because they rely on centralized entities, they are easily manipulated and prone to errors.
Assets that need to comply with AML and KYC rules are more tricky. For example, short-term Treasury bond tokens (STBT) can work in a permissionless DeFi environment as long as they are accepted. Accepting these assets seems restricted because users are unwilling to accept the accompanying KYC requirements. These compliance issues have become obstacles to promotion.
If traditional financial giants can use their infrastructure to protect RWAs, it may help solve security issues related to tokenization. If done professionally, theoretically, stablecoins with appropriate support from large traditional financial institutions may become very popular, gaining greater trust and adoption. Tokenized stocks and commodities may also receive attention, providing new investment opportunities that integrate traditional financial structures with blockchain.
The future of DeFi
The future of DeFi is likely to be a hybrid model that combines decentralized principles with regulated centralized elements. This approach can help enhance security while retaining the essence and advantages of DeFi: reducing intermediaries and increasing transparency.
Many times, the future is not about the victory of old or new paradigms, but finding a compromise. Even without large institutional participants, true DeFi can still stand firm. However, certain areas in DeFi may need to accommodate centralized elements to ensure better security and regulatory compliance.
Anyway, in the end, it will be a financial ecosystem with fewer intermediaries involved than the current traditional financial system. This hybrid model is likely to become the foundation of how the future world financial system operates.