Wall Street is missing out on DeFi

INTRODUCTION
Decentralized finance is a game that anyone can play. Hosted on a level playing field, it’s a sport that doesn’t discriminate. Rich or poor, professional or amateur, consumer or institution: It makes no difference.
Given the rich opportunities available within DeFi — attractive yields, liquidity, global accessibility and round-the-clock availability — it’s worth pondering what’s preventing bigger fish from entering. Particularly those with the technical means and the money to extract the most value out of decentralized finance — institutions.

What’s keeping TradFi away?

In the wake of the first bitcoin ETF, institutional interest in crypto is riding high. Major players like BlackRock are eyeing asset tokenization, further legitimizing crypto as an asset class. Real-world assets (RWAs) have become a multi-billion dollar industry and ambitious Wall Street players like JPMorgan are experimenting with blockchain, albeit on private networks.
All of which raises the question: What’s preventing traditional finance from doing DeFi? After all, trading firms have a mandate to make money, and goodness knows there’s enough of it swilling around in decentralized finance to turn wealthy investors into on-chain whales. DeFi activities such as lending, collateralization and staking could potentially all be countenanced by forward-thinking institutions. 
Unfortunately, traditional finance’s hands are tied on account of two major concerns: security and compliance. Identifying these impediments is easy. Solving them will be harder, but is nevertheless achievable. As history has shown, where there’s a will, there’s a way.
Before we can set about fixing these problems, first we must acknowledge the extent to which they’re keeping the great traditional finance crossover on ice. It all starts with security.

How secure is secure enough?

Layer-1 blockchains like Bitcoin and Ethereum are highly secure. The protocols built upon them, not so much. 
When you introduce smart contracts, you introduce attack vectors, and that’s where things start to go wrong. $1.7 billion in crypto was stolen last year, much of it through smart contract vulnerabilities. While lower than 2022’s record of $3.7 billion, the number of incidents in 2023 was actually higher. That’s not progress. Nor is it a ringing endorsement of DeFi.

Read more from our opinion section: DeFi degens and finance bros: Let’s be friends
Of course, no system, be it blockchain or legacy, is 100% secure. If enterprising attackers can swipe $200 million Hong Kong dollars through elaborate deepfakes, it’s churlish to take shots at DeFi for the occasional loss. But that’s the problem: DeFi losses are anything but rare. Each year, around 3% of DeFi TVL is stolen, a level that’s simply unacceptable for traditional finance firms contemplating entering the space.
Then there’s the risk of fatal user error to factor in, like accidentally sending funds to the wrong address. Crypto has no back button and while DeFi users will say this is a feature, not a bug, Traditional finance will differ.


Rome wasn’t built in a day, the Sistine Chapel wasn’t painted in a weekend, and traditional finance isn’t about to descend on DeFi overnight. But behind the scenes, at the protocol level, real progress should be made encoding the permissions, protections and privacy tech for institutions to arrive.
Ramon Recuero is cofounder and CEO at Kinto. Previously, he founded Babylon.finance, a DeFi protocol that reached more than $50M in AUM. Before that, he worked at Y Combinator, building products and helping founders, and built apps and games for Moz, Google and Zynga. Earlier in his career, he founded Netgamix, a user generated trivia platform that reached more than 100K MAU.