Below is a guest post from Clearpool co-founder and CEO Robert Alcorn.
Entering the 2023 midpoint, the DeFi lending market continues to grow, with Total Value Locked (TVL) up 20.5%. This reflects a common consensus among traditional and crypto-native institutions that DeFi could solve the problems that caused system failures across the CeFi market in 2022.
Regulation brings hurdles, but it’s driving the evolution of DeFi even further. With the advent of sophisticated protocols, the nascent cryptocurrency credit market is shifting to his mature DeFi ecosystem. Increased regulatory scrutiny highlights the need for KYC- and AML-compliant protocols to enable his DeFi adoption within organizations.
A resilient DeFi protocol that has stood the test of 2022 has emerged as a key part of the market infrastructure. For the DeFi industry to continue to grow, it needs to focus on attracting more institutional investors and creating more sophisticated products.
Institutions assess the DeFi landscape
Not surprisingly, crypto-native institutions are more familiar with the concept when evaluating DeFi. However, both traditional and crypto-native institutions share optimism about DeFi’s potential in building a more transparent and efficient financial market infrastructure.
Despite last year’s CeFi demise, DeFi is slowly picking up growth, albeit slower than in 2022.
Nonetheless, DeFi, and the broader digital asset market in general, continues to attract institutional attention. Notable examples are:
- BlackRock’s June 2023 filing Spot Bitcoin (BTC) ETF.
- franklin templetonwill launch a crypto product in April 2023, tokenizing US government securities, cash, and Gensaki contracts with Polygon.
- JP Morgan Chasecontinues to tokenize traditional financial assets through its Onyx digital asset platform, processing nearly $700 billion in short-term lending transactions.
- First attempt on Jane Street Financing agreement with BlockTower Capital For $25 million in May 2022.
Dual approach of regulatory clarity and innovation gains institutional traction
A major obstacle for traditional institutions still remains. Regulatory clarity and compliance. A recent report from JP Morgan (JPM) underscores this, stating that
“A comprehensive framework on how to regulate the cryptocurrency industry and the relative responsibilities of the SEC and the Commodity Futures Trading Commission (CFTC).”
Notably, significant progress has been made in various areas. Asia and Middle East. Hong Kong’s Securities and Futures Commission (SFC) is actively adapting policies to improve retail access for cryptocurrencies. Dubai established his VARA, the first independent regulator of crypto assets, establishing itself as a pioneer in cryptocurrency regulation.
Additionally, the central banks of both Hong Kong and the UAE have announced plans for joint efforts in crypto regulation, demonstrating their commitment to promoting a crypto-friendly environment. These advances suggest that Asia and the Middle East will emerge as major crypto lending hubs as investor confidence grows.
In parallel with regulatory progress, DeFi protocols will need to develop innovative and sophisticated products to attract a more diverse user base. This includes facilitating a safe and compliant environment for institutions to lend and borrow digital assets at scale, thereby ensuring liquidity and efficient pricing for market participants.
Arguably, 2022 setbacks, largely due to mismanagement within the more opaque CeFi segment, have temporarily delayed DeFi adoption by institutions. But his recent move into DeFi by a major financial institution is a promising sign that the industry is gaining momentum.
DeFi surpasses CeFi
Since the DeFi boom of 2021, decentralized exchange (DEX) trading volumes have increased consistently, marking a clear shift away from centralized exchanges with opaque practices and questionable risk management.
DeFi platforms have the unique advantage of eliminating a central point of failure. In DeFi, lenders have autonomy to choose borrowers. Funds transfers occur directly between lenders and borrowers through immutably coded smart contracts. There is no central middleman.
Rather than causing disruption, market volatility activates specific mechanisms embedded within these smart contracts. These encourage specific actions from borrowers and lenders to maintain a balanced market.
Ushering in a New Era of Decentralized Finance
DeFi’s resilience comes from its architectural design and community of builders and stakeholders who rise to the challenges posed. Our commitment to innovation and sustainable growth allows DeFi platforms to weather storms of market volatility.
Unique mechanisms such as direct trading via immutable smart contracts and autonomous market reactions to market cataclysms enhance this resilience. These advantages set DeFi apart from his CeFi and ensure better performance on stress tests.
The digital asset industry will become an integral part of the global economy. The traditional financial services industry will continue to do so, but it will be strengthened by the decentralized financial ecosystem we are building today.
DeFi isn’t just surviving, it’s going to grow.
Robert Alcorn is a seasoned entrepreneur with over 20 years of professional experience in the global financial markets. Rob was an early adopter of Bitcoin and he first entered cryptocurrency in 2015.
Prior to founding Clearpool, Rob was Asia Pacific Head of Repo Trading at First Abu Dhabi Bank, where he built a sales and trading desk from the ground up and built a multi-billion dollar franchise. In parallel with this role, Rob initiated and led a project to build an automated asset management platform using blockchain technology.
During his career, Rob has held positions in Asset Liability Management, Fixed Income/Money Market Sales, and worked as a Senior Broker in the Fixed Income Markets. In 2021, Rob co-founded Clearpool to solve one of the most significant problems facing DeFi borrowers: overcollateralisation. Rob is a CFA charter holder and holds the Massachusetts Institute of Technology’s Fintech Credential in Future Commerce.