Published Mar 14, 2022
By Qredo Team

The Impact of Institutions on DeFi and Web3

The DeFi industry and the development of Web3 infrastructure has moved into a whole other gear over the past few years.

Growing adoption of cryptocurrencies, enhanced utility among networks such as Ethereum, the rise of NFTs and surging prices have all combined to propel the markets from the fringes to the center of the global financial system.

Discussions about the sector’s place within our economic systems remain ongoing, but much of the early skepticism from traditional markets has dissipated as crypto has proved its value and potential.

The crypto world has come in for heavy criticism from some corners of the mainstream financial markets, scorned as a tool of speculation or criminal activity.

However, those banks, funds, and other institutions which were previously wary of the market are now playing a key role in its development, with the increasing adoption among TradFi companies a clear sign that crypto has entered a new stage of its evolution.

Here comes change

The industry is maturing. And fast.

With increasing institutional involvement in crypto through platforms such as the Qredo and MetaMask Institutional integration, the market is set to undergo substantial changes in the coming years.

Institutions in this sense are very different from the early adopters of crypto, such as developers, individual investors, or venture capital firms.

These companies take a more cautious, long-term horizon on their capital, but their involvement signals that crypto has truly arrived as a mainstay of finance.

But how will these institutions leave their mark on the DeFi industry?

How institutional investment will change DeFi

Institutional involvement in the crypto industry is set to take the market to the next level, introducing a swathe of new demands and investments which will help Web3 cement its place as the future of the financial sector.

Here are 4 ways that institutions will transform the DeFi industry:

1. Capital

The DeFi industry offers financial institutions a host of opportunities for trading, lending, and arbitrage as well as direct investments in companies and projects in the space.

The introduction of more institutional capital to the DeFi industry will help supercharge the growth and adoption of companies active in the space, offering up more resources and connections to other parts of the economy.

Alongside those larger investments, there will be bigger valuations for successful firms within Web3.

Institutions also offer the DeFi universe another advantage: long-term horizons.

While much of the mainstream discussion around crypto and Web3 centers on daily price swings, institutions often take a much more long-term approach to their investment strategies.

That long-term point of view will help shift the focus away from the day-to-day price changes and offer projects more stability to build for the future, helping to establish DeFi as a mainstay of the economy and highlight its utility and potential over its short-term booms.

The influx of new capital and improved liquidity for the sector as a whole will also boost the efficiency of existing DeFi platforms, which will benefit from the enhanced network effect of more users and activity. 

2. Integration

Increased involvement with DeFi from institutions means more integration between mainstream financial services such as banks, investment funds and exchanges and the crypto world.

Currently, boundaries between the two sectors on a technical level — as well as lingering reluctance in some corners of the institutional markets to get more involved in DeFi — mean that the various parts of the modern financial world operate in parallel but often separate universes.

However, those boundaries are quickly eroding, with more and more banks and funds beginning to offer their clients on ramps to the crypto markets in response to demand for more exposure to the growth that DeFi offers.

That integration will also help increase trust in crypto among a wider audience, both within the institutions themselves and among their client base of professional and retail users.

That integration won’t happen overnight and will require sophisticated platforms such as Layer 2 blockchain solutions to help smooth the path between TradFi and DeFi. But, over time, the market will become more enmeshed with the mainstream financial system.

For crypto and Web3, that means more access to the bulk of consumers, and — with more access — comes more adoption and understanding of how DeFi can help the wider world evolve.

3. Standards

With the involvement of Institutions, the DeFi industry will have to significantly raise its standards in order to accommodate the benchmarks required of such firms.

We’re already seeing institutions becoming interested in new approaches to crypto asset security and custody, such as that offered by Qredo’s Decentralized Multi-Party Computation.
As has been demonstrated by Qredo’s partnership with MMI, governance (ie the process by which team controls are applied for DeFi trades) and transaction transparency is increasingly important to regulated firms with complex compliance requirements.

The need for a system which can be controlled securely through multiple signatories rather than relying on single keys and a governance layer which can be integrated with other systems marks a seismic evolution in how the DeFi market can appeal to Institutions.

With more of these types of companies entering the market, the standards across the industry are likely to improve to meet the rising demand.  

4. Regulation

One of the major changes looming for the entire DeFi industry in the coming years is the development of regulations and frameworks on both a national and international level.

The crypto sector is already preparing for the introduction of compliance standards such as the Travel Rule,and the growing involvement of institutions in the market will only add more impetus to the plans of regulators.

As regulated entities such as banks, pension funds or payment processors increasingly integrate with the crypto world, DeFi is likely to fall under either existing or soon-to-be-realized regulatory frameworks.

The market has thus far evolved outside of the existing regulatory system, with the decentralized nature of digital assets meaning that agencies have struggled to fit it under any of the umbrellas designed for traditional financial markets.

Headlines around the scale of criminal activity in the market (despite it representing a tiny fraction of the market), and demands from governments to bring crypto within the scope of taxation were already prompting action from regulators. Institutional involvement will hasten those efforts even further.

However, regulation isn’t necessarily a negative thing for the DeFi sector.

A recent conference sponsored by crypto crime specialists ComplyAdvantage showed that the institutional market is working hard to find ways to work with the crypto sector, and more regulation helps give institutions the framework they need to dive further into the industry

Full Steam Ahead

Institutional interest in DeFi has surged over the past two years, and with more investment pouring into the sector, that involvement is only set to grow even further in the years to come.

If you’re part of an institution wanting to get involved in DeFi and Web 3, check out how Qredo with MMI can help your business with the financial system of the future.

Get in touch!

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