The decentralized finance (DeFi) market is currently valued at $11.78 billion in 2021 and is expected to grow as it continues to develop. However, many banks and traditional financial institutions are still unaware of its potential.
Crypto industry experts predict that DeFi will surpass traditional financial institutions in the coming years. Mike Belshe, CEO and co-founder of BitGo, a digital asset custody provider, believes that DeFi will replace institutions within the next three to four years. Belshe explained his reasoning during an interview at BitGo’s developer conference in California.
Belshe believes that DeFi will replace institutions based on the innovative use cases that are currently emerging. For example, automated market makers (AMMs) have the potential to disrupt traditional market makers. Market makers play a crucial role in ensuring the smooth functioning of markets and exchanges, but they can struggle to determine asset prices in fast-moving markets like crypto. This is also true for traditional markets like stocks and commodities. DeFi applications can now incorporate market maker research into smart contracts, eliminating the need for human brokers. This allows regulators and investors to review the code, resulting in better asset prices.
While there are challenges associated with AMMs, such as code bugs and security issues, programmers are working to improve smart contracts and make the code safer and easier to review. However, regulatory and compliance questions still need to be addressed before DeFi can fully replace traditional financial institutions.
BitGo is currently focused on enabling DeFi for the developer community. They are working on providing APIs that can integrate with DeFi platforms, allowing faster applications and connecting blockchain networks with clients. BitGo is also adding features around DeFi for smart contracts, such as transaction emulation to address security concerns.
Belshe believes that software is changing the financial services sector, and banks need to embrace software advancements to stay ahead. He also believes that Wall Street is facing an innovator’s dilemma, as they recognize the potential disruption of crypto but are hesitant to change their operations. Smaller crypto companies are iterating faster and gaining an advantage, while larger companies will take longer to adapt. Big tech companies are also showing interest in DeFi, putting traditional banks at a disadvantage.
Belshe is passionate about the approval of a spot-based Bitcoin exchange-traded fund (ETF) by the SEC. He believes that this would provide a safer investing structure and allow individuals to access the asset class through regulated and monitored traditional firms. The SEC’s denial of a spot-based Bitcoin ETF has led to insolvent exchanges and bad actors in the industry.