The size of the global decentralized finance market was valued at $11.78 billion in 2021. This figure is expected to increase as DeFi progresses, although it is still in its infancy. Therefore, a number of traditional banks and financial institutions are still unaware of its potential.
While this may be, industry experts within the cryptocurrency sector predict that decentralized finance will overtake traditional financial institutions in the coming years. For example, Mike Belshe, CEO and co-founder of BitGo, a digital asset custody provider, told Cointelegraph that he believes DeFi will replace institutions in the next three to four years. Belshe delved into this point during an exclusive interview at Activate, BitGo’s developer conference in Mountain View, California on October 25.
Cointelegraph: Why do you think DeFi will replace institutions?
Mike Belshe: I think DeFi will replace institutions based on innovative use cases that we are starting to see today. For example, automated market makers, or AMMs, have great potential for disruption.
Although market makers have played a critical role in ensuring the efficient functioning of markets and exchanges, fast-moving markets such as cryptocurrencies can make it difficult for traders to determine asset prices. individuals. This is also often the case with traditional markets such as stocks and commodities. For example, if a market crashes, market makers may think the assets should be sold, but this could drive prices down even further. Market makers also tend to close trades at times of volatility, which can be detrimental. Additionally, market makers are heavily regulated by the US Securities and Exchange Commission and the Financial Industry Regulatory Authority. Market makers are monitored daily by regulators, which involves many hours of manual work.
DeFi applications are now capable of plugging market maker research into smart contracts, eliminating the need for human brokers. Known as AMMs, money creators can now become a piece of code that the SEC or FINRA can review. Investors can also review this code. As a result, regulators do not have to monitor broker operations and investors can get a better price on assets.
Of course, MMAs come with challenges, such as code bugs and security issues associated with DeFi applications. But now we are at a point where computer programmers are working to ensure that smart contracts have fewer bugs and that the code is more secure and easier to review. Still, regulatory and compliance issues remain. Considering this, it is still too early for DeFi to overtake traditional financial institutions, but I believe that with three or four years of hard work, the sector will see changes taking place.
CT: Is BitGo focused on enabling DeFi for institutions?
MB: Not at the moment, but we are currently focused on the developer community. For example, a number of new blockchains want to build gaming applications, DeFi, and non-fungible tokens. This is where the BitGo development platform comes into play. We want to make sure that the APIs we provide are fully capable of connecting to DeFi platforms, so those applications can be built on top of BitGo. This will allow applications to be faster while connecting those blockchain networks to our customers.
BitGo is also adding features around DeFi for smart contracts. For example, MetaMask currently allows blind signing of transactions. BitGo wants to create a transaction emulation to solve this problem. This will essentially show users what will happen step by step before the transactions take place. This is important because DeFi will only conquer the institutions once we figure out how to solve the security issues the industry is currently facing.
CT: Considering this innovation, do you think that cryptocurrency companies will eventually overtake traditional banks?
MB: I think software changes everything, and it’s changing the financial services industry right now. Banks now have to think about how to use software to advance financial services, or else smaller companies will jump ahead.
I also believe that Wall Street faces the innovator’s dilemma. They know that cryptocurrencies are coming and that they have the potential for disruption, but at the same time, cryptocurrencies are too small to have any real impact. Therefore, Wall Street is not ready to change operations, but smaller crypto firms will continue to iterate. As a result, larger companies will take much longer and won’t be able to get in as quickly. This is what we have seen happen in the tech sector for decades, and it is why the smaller players often beat the big ones. We are also seeing how big tech companies are getting interested in DeFi, while banks are staying on the sidelines. For example, Google Cloud is now rolling out infrastructure for cryptocurrencies. This will put banks at an even greater disadvantage.
CT: Changing the subject a bit, you are passionate about getting a Bitcoin Spot ETF approved. Why is it important for the cryptocurrency sector?
MB: I think the SEC is increasingly to blame for those who have lost money within the cryptocurrency industry. If the SEC were to approve a Bitcoin Spot Exchange Traded Fund, the sector would have a much safer investment structure. This would allow individuals to gain exposure to the asset class through traditional companies that are regulated and supervised. Instead, the SEC continues to deny this and we end up with insolvent exchanges and bad actors.
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