According to Blockdata Institutional Defi to become a $1 trillion industry

According to blockchain research firm Blockdata, a trillion dollars could flow into decentralized finance (Defi) if the world’s 100 largest banks invested, even experimentally, in Defi.

Over the last year, Defi — financial services that can be conducted on the blockchain without the use of intermediaries such as banks or brokers — has grown at an exponential rate. According to Chainalysis, a blockchain data analytics firm, institutional investors have largely driven Defi adoption — institutional transactions exceeding US$10 million accounted for more than 60% of Defi transactions in Q2 2021, compared to less than 50% of all cryptocurrency transactions.

According to Defi Llama, over US$178 billion is currently locked into Defi protocols, and institutional investors are increasingly realizing that they cannot afford to ignore the potential returns Defi can offer.

Banks are also paying close attention to Defi. JPMorgan Chase & Co., the largest investment bank in the United States, is bullish on the staking business, which generates US$9 billion in annual revenue and could reach US$20 billion by the time Ethereum 2.0 launches in 2022 and US$40 billion by 2025.

With 55 of the world’s top 100 banks investing in cryptocurrency and amassing US$94 trillion in assets, it’s not inconceivable that many of these banks and other institutions are now considering investing in Defi, according to an article published this week by Blockdata’s co-founder and general manager Jonathan Knegtel.

“If one or two major banks discover a way to benefit from Defi even with a small 1% injection, they will illuminate a path that many, many more will want to follow in order to avoid being left behind,” Knegtel explained, noting that 1% of US$94 trillion equates to US$0.94 trillion in new liquidity into the Defi ecosystem — roughly half the market value of cryptocurrencies and a drop in the bucket in terms of scale.

“Whatever traditional finance has, Defi has a parallel version — credit lending, trading, derivatives, asset management, and insurance, to name a few,” Mukaya Panich, chief venture and investment officer at SCB 10X, the venture arm of Thailand’s oldest bank, Siam Commercial Bank, recently told Forkast.News. “In the future, this could completely disintermediate banks and financial institutions. Thus, we sought to prepare the bank by investing in and learning about Defi, as well as attempting to partner with and integrate Defi with traditional finance.”

What is the future of institutional Defi?

“Defi is the logical next step for investors into crypto, Bitcoin taught them that they could hold a crypto asset, Defi is teaching them that they can use crypto assets in a wider range of financial activities.”

“However, it is still early days — there are only tens of thousands of entities involved in Defi, a factor of two or three fewer than simply trading and investing in core assets. According to what I’ve heard, the most common institutional exposure to Defi is through gaining yield on stable coins. This appears to be a low-risk investment compared to a money market fund but with higher returns,” Gradwell explained.

While Defi is still in its infancy, Knegtel predicts explosive growth in institutional Defi due to the industry’s fast pace. “Regulations are rapidly catching up and establishing requirements, Defi services are maturing and becoming more attractive to institutions, and for institutions, 1% of their AUM is a pittance.”

“When it comes to Defi, institutions are still in the early stages of discovery, but they are now waiting patiently in the wings as institutional service providers enter the market to avert regulatory scrutiny,” Knegtel added. “When, not if, these services pass muster and institutions are given the opportunity to test the waters, 1% of assets under management at the world’s top 100 banks entering Defi may be an underestimate.”

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