The Path Forward for Institutional Adoption of Web3
This article was co-authored with Injective Labs, a portfolio project of Binance Labs.
The decentralized finance (DeFi) market is currently in a state of optimistic flux.
While there are still some challenges to be addressed, such as scalability, security, and user experience, there is ongoing innovation and utility in DeFi. New protocols and applications are being launched daily, Web3 communities and DAOs are thriving, and we are now witnessing a slow uptick in DeFi total value locked (TVL) as overall sentiment and market conditions gradually improve.
The Great Divide Between DeFi and TradFi
If the current crypto market continues in this upward trend, more new users, new builders, and new capital will come. And most importantly this new wave will demonstrate to the traditional finance (TradFi) markets something that the decentralized communities have known all along: there is undeniable value in the DeFi space and it is here to stay. Already we’ve seen some applications of blockchain tech in building out more efficient supply chains or creating more privacy and control in identity management services.
And we’ve seen how individuals around the globe can use crypto to provide financial aid directly to those in need, all of which effectively cuts out any dubious middlemen or opaque financial networks in between.
Yet this is only tapping into a small piece of DeFi’s full potential.
If DeFi desires to grow and evolve into a permanent global movement, it needs to soften its original anti-establishment ethos and find ways to onboard the old guard. And on the other side, if the powers of traditional finance do not wish to be left behind, they need to look to embrace change and find ways to tap into the numerous strengths of DeFi.
In other words, this financial cold war must come to an end, and common ground for both sides must be found. We need to merge the great divide.
What is the path forward for the institutional adoption of DeFi?
1. Creating DeFi platforms that appeal more to institutions
Institutional investors and traders need on-chain platforms that better fit their basic needs for security, regulatory compliance, and trust. Helix Institutional on Injective is one clear example of a space where these larger traders can operate comfortably without the common concerns of current DeFi trading, eg. frontrunning, unclear legality, or low liquidity.
2. Providing institutional investors with that traditional finance feel
The switch from traditional to decentralized finance should be a seamless one. Institutional investors and traders are more likely to use DeFi platforms that provide them with all of the comforts they enjoy off-chain. This means offering them near-instant finality on their trades, customizable API plug-ins, and dedicated customer service.
3. Offering digital trading assets that bridge the gap between the real-world and blockchains
DeFi platforms need to meet traditional finance in the middle by providing access to both worlds. One way is through on-chain exchanges that offer trading on established cryptocurrencies like BTC, ETH, and BNB, but that also provide traditional firms the ability to work with new types of markets such as real-world assets (RWAs) and exotic products. A wide range of trading assets gives institutional traders freedom and selection without needing to switch between platforms.
4. Encouraging institutions to embrace the decentralized future
We have seen how crypto can impact the real world already in places like Ukraine, and now with BlackRock leading the way on BTC ETFs, we can see that DeFi truly can become the future of finance. This means the sooner that traditional firms begin to explore the opportunities and advantages of decentralization, the better – all of which starts by providing these institutions with a space they can feel comfortable in before branching out into different (and exciting) blockchain opportunities.
5. Unlocking new business models for institutions
The use of blockchain as a system of records allows for minimization of post-trade reconciliations between participants, thereby reducing operational overhead. Further potential benefits include enhanced transaction transparency, lower settlement risk, as well as increased efficiency and trading speed due to atomic settlement. The use of DeFi could lead to change in existing TradFi business operations, allowing institutional players to refine business and operational models to capture the incremental business value.
Final Thoughts
The financial landscape is changing, first slowly, then all at once with the next influx of 'power users' ready to be those already accustomed to TradFi tools.
While DeFi seems poised for another bull market run, it needs to make its strengths available to its TradFi counterparts in order to fully maximize its potential moving forward. On the other side of the coin, TradFi firms and institutions may have the firm foundation of users and funds, but they will need to find ways to embrace and explore this new wave of decentralized financial technology, or risk being left behind.
The future of institutional DeFi lies in enhancing TradFi by streamlining the exchange of assets between the two systems. Institutional DeFi represents a feasible and transformative potential, utilizing DeFi protocols in financial markets with appropriate guardrails. Combining the power of DeFi protocols with safeguards ensures financial integrity, regulatory compliance, and customer protection, unlocking value for issuers, investors, and financial firms.
Despite its challenges, the combination of capital, close collaborations, product development, and regulatory alignment will establish DeFi as an integral component within the institutional financial ecosystem. Ultimately, it is important for both sides to realize that eventually there will be no “decentralized” or “traditional” finance – it will all be finance.
About Injective
Injective is an open, interoperable, layer 1 blockchain built for finance applications. It provides a powerful smart contracts platform tailored for DeFi developers to quickly build and launch DApps for widespread use. Injective uniquely provides traditional finance infrastructures, such as an order book module, on-chain and is highly interoperable with prominent layer 1s, including Ethereum and Cosmos.
Injective is built with the Cosmos SDK and utilizes a Tendermint proof-of-stake consensus for secure transactions with instant finality.
For more information, follow Injective Labs on X.
About Binance Labs
As the venture capital arm and accelerator of Binance, Binance Labs has now grown to be worth over $9 billion. Its portfolio covers 200 projects from over 25 countries across 6 continents and has an over 10X rate of return on investments. Fifty of Binance Labs’ portfolio companies have been projects that had gone through our incubation programs.
For more information, follow Binance Labs on X.
Disclaimer: The content on this article has been prepared solely for informative purposes and should not be the basis for making investment decisions or be construed as a recommendation to engage in investment transactions or be taken to suggest an investment strategy in respect of any financial instruments or the issuers thereof.