As many subsectors in the crypto market continue to take heavy hits from recent volatility, some market players see decentralized finance (DeFi) as resilient and gaining interest despite the negative macroeconomic environment.
Centralized financial institutions are similar to traditional firms, with people running their operations and managing their funds. In contrast, DeFi protocols use technology — not people — to execute services through things like smart contracts.
“We see significant institutional interest in the sector,” Robert Alcorn, CEO and co-founder of decentralized capital markets ecosystem Clearpool, said to TechCrunch. “This was apparent before the recent bout of volatility and continues despite it.”
The general consensus among both crypto-native and traditional institutions is that DeFi has the potential to solve the problems that led to the current market turmoil, Alcorn said.
In the past few months, a handful of major centralized finance crypto firms collapsed after ripple effects shocked the ecosystem following the meltdown of Terraform Labs’ cryptocurrency LUNA and defunct algorithmic stablecoin UST. Earlier this month, crypto hedge fund Three Arrows Capital filed for bankruptcy, as did crypto lender Celsius Network and crypto broker Voyager Digital.
Of course, crypto-focused institutions are more adept with DeFi concepts, making them more comfortable with trusting the smart contracts, Alcorn noted. (Smart contracts are digital contracts on the blockchain that automatically execute when preset conditions are met.)
Alcorn said Clearpool has attracted demand from crypto firms on both the borrowing and lending sides, but interest has spread beyond the industry.
“We also see continued growth in the interest from more traditional financial institutions, such as Jane Street, which recently became a borrower on Clearpool. Several other similar-profile institutions are on the verge of making similar moves,” Alcorn added.
Jane Street is a quantitative trading firm and liquidity provider that trades on over 200 different venues in 45 countries. Earlier this year, the firm stepped into the DeFi space by taking out a $25 million USDC stablecoin loan through Clearpool.
“There is shared optimism from both types of institutions that DeFi concepts possess the ingredients necessary to build a more transparent and efficient financial market infrastructure,” Alcorn said. “The main obstacle for the traditional institutions remains regulatory clarity and compliance.”
DeFi do or don’t?
The interest in DeFi has grown beyond institutional players and struck a chord with some venture capitalists who were previously skeptical of the space.
“I have observed for the past two and a half months that while CeFi [crypto] companies are going belly up, bankrupt and withholding withdrawals, DeFi has held up,” David Nage, venture capital portfolio manager at Arca, said to TechCrunch. “Smart contracts, the technology and innovation happening within DeFi, is actually holding up and doing what it’s supposed to do.”
In the past, Nage had “hated the entire DeFi world” but has since warmed up to the idea of what a future of DeFi could be, beyond just collateralizing assets. “DeFi was out of favor for a long period of time, but it’s starting to catch interest again because it seems to be holding well after the last two and a half months.”
Nage still has a number of questions for the DeFi space, though: Can DeFi actually be there to provide sustainable finance for those that are outside of the financial system? Can it provide lending and borrowing to those who don’t have access to financial institutions? Can it help with the ability to reestablish decentralized identities?
“I think these are all things that are part of what DeFi can do in the future,” Nage said.
There is no doubt that recent events in the crypto industry may slow the plans for the adoption of DeFi for some institutions, Alcorn said. “But it seems widely understood that these issues were caused by mismanagement in the more opaque CeFi segment, and, therefore, we expect, as the dust settles, that DeFi will emerge stronger and with continued growth.”