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What Is Institutional DeFi?

Institutional DeFi: a term that is still pretty young. Institutions are getting more attracted by DeFi. The term first hit the mainstream in the crypto space when Stani Kulechov, Co-founder of AAVE, introduced AAVE Pro. But what is institutional DeFi? And why are so many people excited about institutional DeFi?

History of DeFi

DeFi (Decentralized Finance) is the fastest-growing sector in the crypto industry. Now, even institutions get an appetite for DeFi.

On January 1st, 2020, not even $700 million was locked in DeFi. One year later, around $15 billion was locked in DeFi. Today, about $58 billion is locked in DeFi. So, in 1 ½ years, the sector made an 82X regarding total value locked! This proves: people trust DeFi!
But what is DeFi anyway?

If you haven’t heard of DeFi yet, check out this article first.

Learn more about the most trusted and used DeFi protocols here.

Institutional DeFi – Why is DeFi so attractive to institutions?

So, why should DeFi attract institutions? And what is institutional DeFi anyway?
Is institutional DeFi not a repetitive term?

DeFi is generally permissionless. The permissionless nature of DeFi is wonderful, but it also bears risks! Everybody can launch a cryptocurrency on Uniswap. And everybody can provide liquidity on protocols like AAVE. But institutions have more responsibilities than private investors. Institutions have other interests!

That’s why protocols like AAVE introduced new services – tailored to institutions.
A new term was born: institutional DeFi.

Let us take a closer look at how DeFi makes business better for institutions:

DeFi generates more yield

Institutions have to deal with DeFi – so or so! Many DeFi enthusiasts believe that institutional DeFi will disrupt traditional banking.

The theory:

Institutional DeFi means that institutions rule the user-friendly frontend. And DeFi provides a highly efficient backend.

Today, central banks determine the interest rates. Commercial banks then can offer these rates to their customers. But as central banks print vast amounts of money, lots of “cheap” money is on the market.

The consequence: interest rates are low. They are so low that customers actually lose money when depositing money into a bank account – the inflation rate is higher than the interest rate!

That’s not the case with DeFi protocols! Some of them are decentralized money markets and work in a different way. At protocols like AAVE or Compound, market dynamics determine the interest rate.

If a user provides liquidity on AAVE with DAI, he earns an APY dependent on the market demand for borrowing DAI.

The result: on AAVE, the current APY is 2,68% (7/11/21). Much better than the negative interest rates in CeFi, right? But APYs like this is the tip of the iceberg. In DeFi, interest rates can go far higher than that – by a lot!

DeFi is faster and more efficient than banking

You hear this quite often: the internet disrupted every industry.

But is this true?

One industry basically kept untouched: the banking sector.

The digital revolution was all about:

  • making services and information available for everyone
  • improving customer services
  • making services faster and more efficient

Software disrupted several industries. Booking.com and Airbnb revolutionized the hotel industry. Uber and Lyft disrupted the taxi industry. And Google made information accessible to everyone. But the banking industry?

Yes, Fintech changed this sector as well. Online banking, PayPal, and Co digitized this sector significantly. But we are talking about the frontend here, not the backend. It makes no difference if you would walk to a bank and transfer money to someone else or do this via online banking. The money transfers are executed in the same way – with the bank as a middleman!

More shockingly:

According to a newsletter by Bankless, wire transfers haven’t gotten faster than telegraphs in 1871!

So, the internet disrupted many industries. But not the banking sector. Banking is still inconvenient and slow. Fintech made just the user experience better.
But as the world is getting more digitized and connected every day, this has to change. Businesses can not afford to wait two days for a bank transfer anymore, just because it is Friday noon.

And DeFi? DeFi has no closing times and doesn’t know any borders!
Because of this, decentralized money markets threaten everyday business from traditional financial institutions. DeFi is faster, more efficient, and more profitable.
In short: traditional finance has to deal with DeFi! It is profitable for them, but it also threatens banks’ everyday business.

One of the first banks that dived deeper into DeFi was the Dutch bank ING. ING published a white paper, back in February 2020. The bank claimed that DeFi could disrupt banks even more than bitcoin did. Now, ING seeks opportunities in DeFi. To make more profits but also not to get obsolete.

AAVE – Main driver for institutional DeFi

But where is the difference between “traditional” DeFi and institutional DeFi?
Let us take a look at AAVE. Recently, AAVE introduced AAVE Pro.

Generally, AAVE is permissionless. Everybody can lend and borrow money on AAVE.
But, institutions have other needs than private investors. For example, they need KYC (Know Your Customer). Institutions have to follow strict regulations.

That said, AAVE collaborated with Fireblocks to make this process possible.
The protocol will host private pools. These pools are tailored to institutional investors. But with direct access to decentralized money markets. They will be separate from existing liquidity pools on AAVE.


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So, institutions can profit from the efficiency and profitability of DeFi. But without sacrificing KYC! AAVE is the main driver for institutional DeFi!

And more institutions will use institutional DeFi services!

Institutional DeFi will drive mass adoption

Institutions are getting more attracted by DeFi. Institutional DeFi services will not only make DeFi big. No, it will drive crypto mass adoption.

Many banks are no fans of bitcoin. And as we saw recently: bitcoin is highly dependent on how society views the asset! Elon’s tweets, China’s ban, and the energy debate affected bitcoin’s price.

Indeed, this is temporary. But bitcoin is a finished product! It is a store of value, and people can pay with bitcoin—end of the story. But if nobody wants to secure their wealth in bitcoin or the narratives change, bitcoin is pretty much useless.

But DeFi is not dependent on how society views it.

DeFi works and financially incentives people and institutions to use it!

And when institutions are on board, it is just a question of time when even the average Joe uses DeFi.
And here is the thing: institutional DeFi brings DeFi to the masses. Many people will most likely not even recognize that they use DeFi. They will deposit money on a bank account and be happy to earn 2,68% APY instead of 0,1%. So, institutional DeFi focuses on making DeFi the highly efficient backend.

Institutional DeFi is crypto mass adoption that takes place behind the curtain.

Institutional DeFi will not exclude people from financial services

A common misconception is that institutional DeFi would exclude people from finance again.

But this is not true!

DeFi is for everyone – also, for institutions! That said, institutions will use DeFi services as well. Because institutions have other needs than private investors, they will use DeFi differently.

Still, DeFi protocols like AAVE remain open-source. DeFi protocols stay permissionless! DeFi will bank the unbanked but will also provide special services for institutions.

Conclusion Institutional DeFi

Nowadays, banking is still inconvenient, slow, and expensive. DeFi will change this! But institutions are more affected by regulations and need KYC.

That’s why institutional DeFi emerged.

Institutional DeFi offers special characteristics to provide DeFi services for institutions. Because DeFi is for everyone. Also, for institutions!

So, institutional DeFi is DeFi.

Besides, institutional DeFi brings not only DeFi but also crypto to the masses. One day, most people will use DeFi without recognizing it. Still, institutional DeFi will not exclude people from financial services again! Institutional DeFi is just another form of DeFi.

So or so:

Institutional DeFi will disrupt traditional banking and makes financial services faster and cheaper.

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