Source: Cointelegraph Original: "{title}"
Views from: Sergej Kunz, Co-founder of 1inch
Institutional players have been closely monitoring the growth of decentralized finance (DeFi). Building a secure and compliant DeFi platform is the only solution to establish trust and attract more institutional participation.
Clear waters attract large ships
In the past four years, institutional acceptance of DeFi has grown from 10% among hedge funds to 47%, and it is expected to rise to 65% by 2025. Goldman Sachs is reaching out to DeFi for bond issuance and yield farming.
Early adopters have already carved out a niche in on-chain finance, including Visa, which has processed over $1 billion in cryptocurrency transactions since 2021 and is now testing cross-border payments. Institutional adoption will accelerate in the next two years. Establishing a compliant regulatory framework while maintaining the core advantages of DeFi is crucial for institutions to confidently participate in DeFi.
The institutional dilemma in DeFi
It is no secret that many DeFi security vulnerabilities occur every year. Recently, the Bybit hack reported losses of $1.4 billion. This vulnerability occurred during a susceptible transfer process. Such attacks have raised concerns about multi-signature wallets and blind signatures. Blind signatures refer to users approving transactions without fully understanding the transaction details, making blind signatures a significant risk. This incident calls for stronger security measures and improved user experience.
The threat of theft due to vulnerabilities in smart contracts or errors by validators makes institutional investors hesitant to deposit large amounts of funds into institutional staking pools. The lack of a clear regulatory framework also poses compliance risks for institutions, exacerbating their hesitation to enter the space.
The user interface in DeFi is often designed for tech experts, while institutional investors need a simple and user-friendly experience that allows DeFi staking to proceed smoothly without third-party intermediaries.
If built properly, they will come
Institutions have a huge interest in bringing traditional assets onto the blockchain, with the tokenized asset market expected to reach $16 trillion by 2030. To confidently participate in DeFi, institutions need verifiable counterparties to ensure compliance with regulatory requirements. The entry of traditional institutions into DeFi has also led some privacy advocates to point out that this could undermine the essence of decentralization, which is the cornerstone of the entire ecosystem.
Institutions must be able to trust DeFi platforms while maintaining compliance standards and providing a secure, seamless user experience. A balanced approach is crucial. The permissionless nature of DeFi can be achieved through identity profiles while maintaining compliance, allowing for secure transactions. Similarly, transaction screening tools can monitor and assess risks in real-time.
Blockchain analytics tools help institutions comply with anti-money laundering (AML) regulations and prevent interactions with blacklisted wallets. Integrating these tools can help detect and prevent illegal activities, making DeFi safer and attracting institutional participation.
Intent-based architecture can enhance security
The relationship between intent-based architecture and security is evident; its design is inherently aimed at reducing risks and creating a more reliable user experience. This can prevent MEV (Maximal Extractable Value) vulnerabilities, which are common issues where automated bots scan and exploit large profitable trades. Intent-based architecture also helps implement compliance frameworks. For example, it restricts order submissions only to clean wallets and allows resolvers to settle only acceptable orders.
In traditional DeFi trading, users often rely on intermediaries, such as liquidity providers, to execute trades or manage funds. This leads to counterparty risk, unauthorized executions, and settlement failures. Intent-based architecture supports trustless settlement, ensuring that users only submit trades when all conditions are met, reducing risk and eliminating blind trust.
DeFi platforms must simplify interactions and user experiences for institutional investors. This system bridges the gap between the two. By executing off-chain operations and ensuring security, intent-based architecture makes DeFi safer and more efficient. However, one of the challenges is integrating off-chain order matching while maintaining on-chain transparency.
Latecomers to DeFi will struggle to keep up
For early adopters of DeFi, they have a competitive advantage in liquidity access and yield benefits, while latecomers will face more regulatory scrutiny and entry barriers. By 2026, institutions that fail to adopt DeFi may find it difficult to keep up. For example, JPMorgan and Citi's early tokenization projects show that traditional finance leaders are already preparing for on-chain finance.
The road ahead
Regulators, regulatory bodies, and policy leaders must provide clear, standardized guidelines to facilitate broader institutional participation. The unified protocols that broader institutional participation relies on are being developed. DeFi platforms must be prepared in advance to provide all necessary pillars of compliance and security to support those institutions looking to achieve mainstream adoption. Executing this will require a collaborative effort from regulators, developers, and institutions.
Views from: Sergej Kunz, Co-founder of 1inch
Related: Speculation is a double-edged sword for DeFi
This article is for general informational purposes only and should not be considered legal or investment advice. The views, thoughts, and opinions expressed in this article are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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