Institutional Adoption of DeFi – Only a Matter of Time

For years, most analysts considered decentralized finance (DeFi) a fringe element in the world of finance. This designation hasn’t been unwarranted in the past, as DeFi is still a relatively new concept. It is also characterized by blockchain technology, a novel technology itself, and is associated with the cryptocurrency market.

But there is now evidence that mainstream financial institutions are adopting DeFi at unprecedented levels, or they are at least considering it. Even NGOs and some government entities are either adopting or investigating the prospects of DeFi. The World Economic Forum recently released its “Decentralized Finance (DeFi) Policy-Maker Toolkit” to provide regulators with guidance for DeFi adoption.

Here, we explore why DeFi is suddenly taking a turn toward the mainstream and what that could mean for the financial movement.

DeFi Is Now Big Business

There’s some disagreement over the exact size of the DeFi market. One conservative estimate puts the total value of digital assets locked in DeFi smart contracts at $13 billion. That’s up from just $670 million in 2020—an 18-fold increase—according to the same source. 

By one estimation, the DeFi sector is expected to grow substantially in 2021 as more and more individuals and organizations adopt it as a true option for investment and personal finance. According to Nasdaq, the total value locked in DeFi is tracking towards $50 billion in value, and about $40 billion of that total value has been added in just the months since November 2020.

This is just further evidence that DeFi has matured as a financial sector. It is no longer the purview of hobbyists, early adopters, and fringe investors. There is real money to be made in DeFi, and both consumers and organizations are beginning to take note.

Major Financial Institutions Are Already Interested in DeFi

The meteoric rise of DeFi also makes it an attractive prospect for traditional financial institutions, in part because it is a competitive element. As DeFi stands today, it is a distinct contrast to the traditional financial transactions that are facilitated by banks and other major institutions. 

Instead of relying on an institution, DeFi leverages smart contracts to facilitate transactions. It automatically executes codes using blockchain technology and eliminates the necessity of an intermediary. 

It’s also difficult for major institutions to ignore the major financial gains investors have made through cryptocurrencies and DeFi financial transactions. Although there has been instability in the past years, this is to be expected with a new financial sector, and there are also undeniable opportunities. 

Metrics for stability and reliability are improving in the DeFi sector. This is attracting traditional funds, trading organizations, and investment firms, who are poised to provide a significant amount of liquidity to the marketplace.

Adoption Will Only Increase Once Regulations Are Ironed Out

One of the main attractions of DeFi for some is the sector’s absence of regulation. Without intermediaries to facilitate transactions, investors, borrowers, and digital asset holders have more freedom to purchase the financial products they choose. Deregulation can also lower barriers to entry, allowing investors and others to conduct transactions without having to pay fees or meet arbitrary requirements.

But the absence of regulation also causes ambiguity, and it makes some consumers nervous. Many investors still see a significant amount of risk in the DeFi market because there are so few regulations governing it. At present, even some who are participating in DeFi are only investing what they can afford to lose.

Once regulations are solidified, that ambiguity will disappear. This will make the sector much more welcoming to people who are holding out on DeFi due to perceived risks. It will also make it easier for established institutions to adopt DeFi, as they’ll have clear guidance on how to adhere to regulations.

Consumers Are Increasingly Adopting DeFi, Spurring Action by Institutions

Finally, there is evidence that individual investors, borrowers, and asset holders—consumers—are adopting DeFi as an alternative to traditional finance. DeFi holds immense promise to almost every financial consumer. However, it is perhaps most promising to underbanked regions and among populations who can’t access traditional financial products.

Transactions like micro-loans, which have long been elusive in the traditional financial market, could be made feasible in the DeFi sector. This is mainly because of its low threshold to entry and because of the absence of intermediaries. 

Even with regulations, DeFi will likely be much less prohibitive than traditional finance. With the right tools to access DeFi markets, consumers around the world could get a much better hold of their financial futures.

Harness the Power of DeFi with EQIFI

Whether you’re an early adopter of decentralized finance or considering getting involved in the space, you can take the guesswork out of your DeFi experience with EQIFI. EQIFI is a decentralized protocol for pooled lending, borrowing, and investing in the DeFi sector, and it’s the only DeFi platform that’s backed by a registered bank.

Find out how EQIFI will democratize financial products and improve access for all.