The following is a guest post from Robert Alcorn, co-founder and CEO of Clearpool.
As we enter the mid-point of 2023, the DeFi lending market continues to grow, observing a 20.5% increase in Total Value Locked (TVL). This reflects a shared consensus among traditional and crypto-native institutions that DeFi has the potential to solve the problems that led to systemic failures across the CeFi market in 2022.
Regulation, though presenting hurdles, is further propelling the evolution of DeFi. The emergence of sophisticated protocols is moving the nascent crypto credit market to a mature DeFi ecosystem. Growing regulatory scrutiny emphasizes the need for KYC and AML-compliant protocols to enable institutional DeFi adoption.
Resilient DeFi protocols, having withstood the tests of 2022, have emerged as critical pieces of market infrastructure. For the DeFi industry to continue growing, we must focus on attracting more institutional players and creating more sophisticated products.
Institutions assess the DeFi landscape
In assessing DeFi, crypto-native institutions are, of course, more familiar with the concepts. However, both traditional and crypto-native institutions share optimism for DeFi’s potential in building a more transparent and efficient financial market infrastructure.
Even with last year’s CeFi collapses, DeFi is seeing a gradual return to growth, albeit slower than in 2022.
Nevertheless, DeFi, and the broader digital asset market in general, continue to draw institutional attention. Notable examples include:
BlackRock’s June 2023 paperwork filing for a spot bitcoin (BTC) ETF.Franklin Templeton’s launch of a crypto product that tokenizes U.S. government securities, cash, and repurchase agreements on Polygon in April 2023.JPMorgan Chase’s continued commitment to tokenizing traditional financial assets through its Onyx digital assets platform, processing nearly $700 billion in short-term loan transactions.Jane Street’s first-of-its-kind loan agreement with BlockTower Capital for $25M in May 2022.
Regulatory clarity and innovation dual approach gain institutional traction
The main obstacle for traditional institutions remains; regulatory clarity and compliance. A recent report from JPMorgan (JPM) underscored this, suggesting the need for
“a comprehensive framework on how to regulate the crypto industries and the relative responsibilities of SEC vs the Commodity Futures Trading Commission (CFTC).”
Notably, significant progress has been made across Asia and the Middle East. Hong Kong’s Securities and Futures Commission (SFC) is actively adapting its policy for better cryptocurrency retail access. With establishing VARA, the inaugural standalone regulator for virtual assets, Dubai has positioned itself as a pioneer in crypto regulation.
In addition, central banks in both Hong Kong and the UAE have unveiled plans for joint efforts in crypto asset regulation, signaling their commitment to fostering a crypto-friendly environment. These advancements suggest that Asia and the Middle East will emerge as the leading crypto lending hubs as investor confidence builds.
Alongside regulatory advancements, DeFi protocols must develop innovative, sophisticated products to attract a more diverse user base. This includes fostering a secure and compliant environment for wholesale borrowing and lending of digital assets by institutions, thereby ensuring liquidity and efficient pricing to market participants.
Undoubtedly, the setbacks in 2022, primarily due to mismanagement issues within the more opaque CeFi segment, temporarily slowed institutional adoption of DeFi. However, the recent moves by large financial institutions towards DeFi is a promising sign that the industry is gaining momentum.
DeFi outperformed CeFi
Since the 2021 DeFi boom, decentralized exchanges (DEXs) trading volume has grown consistently, showing a clear shift from centralized exchanges with their opaque practices and questionable risk management.
DeFi platforms offer a unique advantage – they eliminate central points of failure. With DeFi, lenders have the autonomy to select their borrowers. Fund transfers occur directly between lender and borrower through a smart contract coded in a way that can’t be changed – there’s no central intermediary.
Rather than causing chaos, market volatility activates certain in-built mechanisms within these smart contracts. They incentivize certain behaviors from borrowers and lenders to help maintain a balanced marketplace.
Ushering in a new era of decentralized finance
DeFi’s resilience stems from its architectural design and its community of builders and stakeholders who rise to the challenges thrown at them. Their commitment to innovation and sustainable growth enables DeFi platforms to weather the storms of market volatility.
Unique mechanisms like direct transactions via unchangeable smart contracts and autonomous market responses to market upheavals reinforce this resilience. These advantages set DeFi apart from CeFi and ensure its better performance in stress tests.
The digital assets industry will become an integral part of the global economy. The traditional financial services industry will always have its place, but it will be augmented by the decentralized financial ecosystem we are building today.
DeFi is not just surviving – it’s set to thrive.
Robert Alcorn is an experienced entrepreneur with over 20 years of professional experience across global financial markets. Rob was an early adopter of Bitcoin, first venturing into crypto in 2015.
Before establishing Clearpool, Rob was the APAC Head of Repo Trading at First Abu Dhabi Bank, where he built the sales and trading desk from the ground up, into a multi-billion-dollar franchise. Alongside this role, Rob initiated and led a project to build an Automated Wealth Management Platform using blockchain technology.
During his career, Rob has held positions in Asset and Liability Management, Fixed Income / Money Market Sales, and working as a Senior Broker in Fixed Income Markets. In 2021, Rob co-founded Clearpool to solve one of the most significant problems facing DeFi borrowers – over-collateralization. Rob is a CFA Charterholder and holder of the Massachusetts Institute of Technology’s Fintech Certificate in Future Commerce.
