- Use Cases
While the growth of digital assets has been well documented, the transformational potential of DeFi on the financial system as a whole remains largely under the radar. This is in part because institutional DeFi is not as developed as other parts of the digital asset infrastructure, leaving openings for innovators to capture significant market share.
The overall size of the DeFi space has gone up by orders of magnitude in the last two years. DeFi Total Value Locked (TVL) increased from a mere $601 million at the start of 2020 to $239 billion in 2022. With institutions still in the early stages of participation in the digital asset market, TLV should continue to increase dramatically in the coming years.
Despite it still being early days for institutional DeFi by some metrics, institutions have already started to dominate. According to Chainalysis, large institutional transactions (defined as those above $10 million) became the biggest segment of DeFi transactions by volume beginning in Q4 of 2020 and grew to over 60% of transaction volume by Q2 of 2021.
But what does the growth of DeFi, particularly the increase in adoption of smart contracts, mean for the future of institutional finance beyond potential returns?
Reduced Data Infrastructure Needs
At the moment, financial services companies of all types have to maintain significant infrastructure and personnel to collect, process and maintain that data. DeFi offers the potential to reduce these data infrastructure needs by decentralizing data storage.
For example, a retail bank that maintains ATMs and branches needs to maintain data connections between those endpoints, its corporate offices, and the data center(s) where that data is stored. This bank could leverage a DeFi solution on a private blockchain that reduces data center needs only to what is necessary to maintain blockchain nodes. In addition, operations wouldn't be at risk if connectivity to a data center is lost or if it experiences an outage.
Similar architectures could be adopted by other types of institutions (credit reporting agencies, insurance companies, etc) or even entire industry segments by using private blockchains and hybrid and consortium blockchains, depending on their business model and what external organizations may need access to the data.
While regulations make some of these potential transitions challenging, DeFi offers the promise of a complete revamp of how financial institutions store and manage data.
Increased Efficiency and Productivity
DeFi applications have the potential to dramatically increase efficiency and productivity by leveraging smart contracts. Payment settlement times, particularly for large transactions, could go from days to minutes, if not instantaneous. Insurance claims could be paid out as soon as the claim is approved, automatically transferring funds to the client's wallet. Even complex transactions that have to navigate multiple regulatory environments, like international transfers, could be automated by coding the appropriate logic into the smart contract. The use of smart contracts can also offer protection from litigation because of the built-in transparency and guaranteed execution.
Efficiency improvements would also be seen in internal processes like accounting, compliance auditing, risk modeling, and more. Personnel needs would be significantly disrupted, as would companies' business models that serve more as intermediaries than service providers (would title insurance still be necessary if titles are recorded on-chain and mortgage contracts are executed algorithmically, for example?). Still, institutional margins would be improved along with customer experiences.
Rapid Adoption and Innovation is Critical
Because of the potential operational improvements that DeFi adoption could bring to the financial services sector, the existing $239 billion TLV is the tip of the proverbial iceberg. In 2021, the global financial services market was estimated to be worth more than $23.3 trillion, meaning that at present, DeFi accounts for about 1% of the total. An increase to just 5% would see over a trillion dollars flow into the space.
Innovative institutions that begin building and marketing DeFi products soon, either on their own or by partnering with an existing project, could capture a significant piece of this space as it grows, generating tremendous value and returns for their investors. At the same time, those who don't enter DeFi soon risk being left behind, if not fatally non-competitive.
However, before you can begin innovating or looking for a DeFi acquisition, institutions entering DeFi need to have comprehensive, granular data to power decision making. Given the fast-changing nature of the ecosystem, the deep domain knowledge required, and the inherent challenges of blockchain data, institutions should not waste time and resources building infrastructure to access this data on their own.
Instead, institutions seeking to enter DeFi will best serve their clients by working with a digital asset data provider that already has the necessary expertise to process blockchain data and provide actionable insights about the ecosystem.
The Amberdata platform provides blockchain data from the most active cryptocurrency networks and protocols (as well as market data from the most important crypto exchanges). We’ve built our data sets with institutional use cases in mind, providing the easy to consume formats and reliability you receive with traditional asset classes.
Our ebook, "The Digital Asset Data Guide for Financial Professionals," will help you build the blockchain data knowledge needed, including the challenges you will face in accessing and using this data to be successful. Download your free copy today!
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