What do we need for institutions to adopt DeFi?
The remarkable rise of Decentralised Finance has primarily been because it gives more people access to the financial market. Traditional financial instruments have been mainly the domain of banks, brokers and other large financial institutions, which are out of reach for most people.
The difference with DeFi is that provided an internet connection is available, more or less anyone can engage. The increase in popularity has led to an 18-fold rise in market size since 2020. This impressive growth means large institutions can no longer afford to ignore DeFi and will need to think about ways to adopt the technology or be in danger of losing a significant chunk of their market.
There is already evidence that some major institutions are already using DeFi. Pat LaVecchia, Co-Chairman and Chief Executive of Oasis Pro Market, a regulated marketplace and alternative trading system for digital securities, said in a webinar in February:
“INSTITUTIONS ARE USING DEFI EXTENSIVELY BECAUSE THE RETURNS ARE PHENOMENAL. SOME HEDGE FUNDS INVESTING IN DEFI HAVE ALREADY ACHIEVED 100% RETURNS.”
The difficulty is that DeFi is still high-risk. We have discussed the specifics of associated risks in previous posts, and how although the technology is hugely promising, it is still vulnerable. One of the most well-known cases saw crypto enthusiast and billionaire Mark Cuban lose out as the value of Titan Coin flashed to just above zero in several hours. The fact is, without a security layer, DeFi and crypto are just too dangerous for large institutions like JP Morgan and Goldman Sachs. Why would they invest if there was a chance that they could lose billions in a ‘rug pull’ or another similar scam?
Along with improved regulation surrounding DeFi and crypto assets, Astra Protocol from The Proof of Trust will provide that decentralised legal assurance layer that reduces the associated risk with many new decentralised financial protocols. For example, any smart contract governing DeFi lending and borrowing could be embedded with Astra to ensure that both parties are safe whilst maintaining privacy, anonymity and all the other benefits of a decentralised system. One particular problem in DeFi lending and borrowing is price oracle manipulation, where an attacker artificially alters the exchange rates of tokens. Such attacks have resulted in a loss of around $100 million. If it is suspected that someone is attempting to manipulate rates, a panel of carefully selected expert human adjudicators will review the problem and all available evidence independently. Their decision would feedback into the smart contract, which would determine how the transaction proceeds. Either the price oracle was fine, and all is well, or the exchange rates were found to be wrong, and the information is updated, and then the transaction can proceed legitimately.
Here we see the value of Astra. We provide a safety net for all transactions so that large well-renowned institutions can participate and further increase the size and reputation of DeFi. Astra creates an environment in which people and businesses are safe to engage in without compromising the benefits of a decentralised system.
Astra creates an environment in which people and businesses are safe to engage.