The total value locked (TVL) in DeFi reached a high of $250 billion (£210 billion) in 2021. But its dip has been just as rapid as its growth. In the past month alone, the TVL in decentralised finance has dropped by 35%.
The recent DeFi letdown exposes the hollow promises of crypto evangelists, who have always envisioned DeFi as the “end of traditional finance”. Distress in the crypto economy was already visible with Celsius’ bankruptcy rumours (now confirmed), further aggravated by Terra’s historic crash. But amidst all the chaos and lost money, DeFi seems to have found a temporary survival home in the form of centralised financial institutions. Let’s see how.
The DeFi Revolution: What Drove Growth in the First Place?
DeFi was conceptualised back in 2015 after the advent of MakerDAO. By 2018, Uniswap’s meteoric rise had already put DeFi into the spotlight.
DeFi has a simple purpose: to break the inevitable barriers of traditional finance and create an open, borderless and equitable alternative to modern fintech services, right from creating an FD to investing in SIPs, mutual funds, loans, insurance and more.
Unlike CeFi, a decentralised financial mechanism isn’t KYC dependent, vulnerable to cyberattacks or a custodian to user’s private keys. Having said that, DeFi smart contracts have not been a disappointment yet, despite the fluctuations and extremely stressed market conditions.
To boot, legacy financial institutions are finally coming to terms with the fact that DeFi isn’t going anywhere. Most conventional banks are in talks of a peaceful existence rather than an aggressive confrontation with dApps.
Maker, a global DAO, has already partnered with Huntingdon Valley Bank to use blockchain for the bank’s lending activities. The first-of-its-kind integration has legitmised the role of DeFi in conventional financial space. Moreover, the UK government is pursuing backchannel talks to formally introduce stablecoins under the Bank of England’s payment ambit.
While the DeFi TVL has been highly volatile, London’s Nexus Mutual has managed to keep its price steady. Nexus combines the centuries-old principle of distributed risk to insure against smart contract failure. It’s no surprise that smart contracts have fallen prey to rising crypto attacks, with most investors losing funds.
Nexus’s smart contract cover offers an added security layer with a payout, as when a crypto catastrophe is triggered. What has kept the firm’s token WNXM afloat is an improvised strategy and a reach out to hybrid platforms. In 2021, Nexus Mutual’s TVL rose as high as $780 million (£648 million), thanks to its entry into the traditional mutual fund space, an extension of cover to SAFE contracts, pooled staking and shield mining, and integration with protocols like Bancor.
True to its name, London-based Merge is also creating an API-driven solution to blend, trade and convert fiat currencies with crypto assets while taking care of compliance in parallel. Moreover, the startup focuses on lowering the transaction costs and conversion complexities so consumers won’t have to endure the pain of maintaining numerous licences or accounts across exchanges. Merge’s USP is the convertible subaccounts where holders can put assets, reflect real-time balance and ensure fraud detection.
RegFi: The Best of Both Worlds
DeFi has a clear challenge: establish compatibility with traditional finance while satisfying compliances. The constant finance battle of who is superior over whom has to end now, and regulatory finance seems to be one of many needles in this extremely large haystack.
RegFi is still a greenfield concept, but numerous enterprises have emerged to ensure a harmonious integration of the two financial systems through a regulatory approach, or more precisely, a gating function.
Alkemi Network is one such platform making traditional banking space DeFi ready by creating a custody-free support system for crypto assets where users can earn yield by swapping through CeFi environments. The enterprise is a boon for institutional investors and asset managers to tap counterparty exchanges. Alkemi has managed to gain user trust through creating pools where all members have been scrutinised before their application is accepted.
DeFi institutions can also think about farming Automated Market Maker (AMM) autonomous protocols enabling flexible trading across DEXs. AMM is a big change for traditional institutions lacking navigational skills to access profits stemmed out of blockchain. With a single click, users can earn yield through a trading fee, aka liquidity provider fees, whenever two assets are pooled at the same time. The other way is through generating token rewards for LPs.
There is so much left to be built. DeFi, despite gaining all the traction in the world, hasn’t stepped into the mainstream to solve real-life finance problems but still pacifies the already self-conscious class of miners or crypto holders.
Even now, more than two billion people don’t have access to any type of digital services; with DeFi, traditional institutions can attain redemption by making a difference to these billions of lives and ‘actually’ contributing back to the real global economy.
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