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Why Institutional Investors Need To Adopt Hybrid Finance Now

CryptocurrencyJul 02, 2021 10:00AM ET
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Why Institutional Investors Need To Adopt Hybrid Finance Now

The upward trajectory of the decentralized finance market is symbolic of the disruptive power of blockchain technology, especially in the financial industry. In particular, the promise of high-yield investment opportunities has increasingly attracted institutional investors such that the total value of assets locked in the DeFi market has exceeded $100 billion.

Remarkably, about $80 billion of that total value has been added since the year began. Hence, there is every reason to believe that institutional investors have started to embrace the idea of investing and engaging in the decentralized financial market.

However, while there is a lot to admire about the unprecedented rise of DeFi, the fact remains that it is still a risky venture. Even though more organizations and investors have shown interest in DeFi, we cannot help but notice that such entities often opt for a cautious approach. It is worth mentioning that much of this skepticism stems from the unregulated nature and nascency of DeFi.

For one, it is hard to gauge the long-term viability of DeFi protocols accurately. There is no guarantee that the projects making waves today have what it takes to remain prominent 5-10 years from now when the technology and market fully matures. Hence, for now, institutional investors are restricting themselves to the peripherals, despite the high-yielding potentials of DeFi investments. However, there is reason to believe that this would not be the case for much longer, especially now that Hybrid Finance (HyFi) has entered the fray.

What Is Hybrid Finance?
Hybrid Finance is the convergence of DeFi and centralized finance (CeFi) such that the strengths of both financial orders are amplified while their weaknesses are constricted. In other words, HyFi solutions find a balance between DeFi and CeFi to enable products that reflect the ethos of permissionless blockchain ecosystems and still keep some of the beneficial features of conventional finance methods.

In most cases, HyFi-based solutions focus on simplifying DeFi products, integrating them with existing financial networks, and complying with financial standards and regulations. With this hybrid design, these solutions can appeal to the mainstream and retain the optimized investment and financial offerings associated with DeFi.

Why Should Institutional Investors Adopt HyFi?
Regulatory Certainty. The lack of regulations exposes investors to all sorts of uncertainties. Since there are no standard practices or requirements in the DeFi landscape, it is easy to fall victim to scams, market manipulations, and flawed project designs or executions. Hence, it makes sense for institutional investors to opt for solutions that eliminate such limitations by adopting a fully compliant approach to open finance.

A prime example of solutions utilizing such a design is, a product of Estonia-based Woonkly Labs. The platform is designed to meet the infrastructural and regulatory requirements of institutional investors interested in using an Automated Market Maker (AMM) to trade digital assets. Woonkly Labs understands the pain points of using unregulated AMMs, especially for institutional investors. And so, it has set out to offer investors a licensed and regulated crypto exchange that leverages an automated market maker.

Hence, the platform will comply with KYC and AML regulations and other customer protection practices expected of a centralized exchange. In turn, institutional investors can adopt as a regulated channel to the DeFi market. The influx of similar HyFi products could give credence to the emerging DeFi landscape and trigger the inflow of more capital.

Potential Mainstream Status. Notably, the emergence of HyFi solutions is a clear reflection that DeFi and CeFi will co-exist and form the foundation for the future economy. Before now, DeFi proponents constantly argued that DeFi would eventually replace CeFi. On the other hand, conservatives saw DeFi as an unsustainable financial model that would hardly stand the test of time. What if we told you that both financial orders have pivotal roles to play in the grand scheme of things.

Contrary to popular belief, the convergence of CeFi and DeFi seems to be the most formidable financial system. While DeFi provides an open, fair, inclusive, and transparent outlook to finance, CeFi, on the other hand, offers much-needed convenience and protection to users. Hence, it is advantageous for institutional investors to be a part of this unfolding saga as it would likely forge the bedrock for the future of the global economy.

Regulatory compliance and first-mover advantage are the core critical benefits of adopting hybrid finance today. Remember that regulation remains one of the core barriers to entering the DeFi landscape. It is almost impossible to completely embrace DeFi, knowing fully well that no unifying standards or regulations govern the landscape. More often than not, institutional investors prefer to operate in regulated markets for obvious reasons.

Also, the effectiveness of HyFi solutions sheds some light on the economic potential of bridging the gap between DeFi and CeFi. HyFi has a more reliable shot at becoming mainstream. Therefore, institutional investors have every reason to explore this opportunity and determine how they can fully take advantage of it.

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Why Institutional Investors Need To Adopt Hybrid Finance Now

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