Those who have been observing the journey of DeFi since the very beginning may find the term "enterprise" DeFi oxymoronic because DeFi is based on strong anti-establishment ideas. However, with blockchain technology already building value for accounting and trading, enterprises exploring the competitive leverage of DeFi was a matter of "when," not "if."
In this article, we’ll outline the opportunities that can be seized by embracing DeFi at the enterprise level and point out the complications that are part of any innovation adoption.
According to a Deloitte AFR Banking Summit survey, 36% of respondents see DeFi as an opportunity rather than a threat to their existence. 43% of respondents intend to influence DeFi policies and regulations, and 38% plan to partner with DeFi platforms to expand their service range. This signifies that not only do BFSI organizations realize the disruptive potential of DeFi, but they also acknowledge the technology’s novelty and the impact they can make by participating in the change instead of avoiding it.
Indeed, enterprises and organizations seeking to harness disruptive technology are nothing new. But there is another, more controversial reason for the existence of "enterprise DeFi"—to evolve and become mainstream, DeFi needs to involve enterprise.
While DeFi rejects the notion of central authority and can perform without intermediary organizations, it's important to remember that central authority organizations, such as central banks, courts, and supranational organizations, exist for a reason. In the case of finance, they oversee the integrity of the financial system, its influence on society, and customer rights protection.
Such organizations aim to offer balanced and unbiased regulations to provide a fair and safe experience for all citizens using financial services. The DeFi alternative to these institutions remains rather vague.
Although DeFi platforms and systems are mostly trust-based, this doesn't exclude the risk of exploits or uncontrolled market forces trying to shape financial systems in a way that profits them. Therefore, enterprise DeFi provides a way to preserve the best elements of DeFi and offer measures to protect user interests and prosecute scammers.
Despite the well-deserved criticism, banking institutions are the supporting pillar of our financial system—and this isn't going to change anytime soon.
Banks fulfill a diverse set of functions and play a large role in promoting policies that improve the health of the overall financial system. Removing banks from financial operations entirely and replacing them with DeFi wouldn't result in a faster and more customer-centered financial system. However, it would quite likely break the integrity and bring chaos into previously regulated processes.
So, the possibility of DeFi fully replacing or "killing" banks remains low. Quite the opposite, enterprise DeFi helps BFSI organizations discover new ways to transform and change for the better.
Extra-legal peer-to-peer DeFi apps are solutions without party representatives or adjudicators to resolve service delivery issues. Although DeFi evangelists claim that DeFi service delivery is infallible as smart contracts, not humans manage it, that doesn't eradicate the risk of potential disputes between clients and platforms.
To become mainstream, DeFi developers must include a set of measures for resolving issues that may arise in case of an incident—or partner with an enterprise that can adjudicate disputes and represent them.
Additionally, cooperation with enterprises provides DeFi with more benefits regarding cybersecurity damage control. While decentralized databases are less vulnerable to hacking and data theft, they aren’t completely immune to cyber attacks. Whenever it happens, the lack of intermediaries usually backfires as clients have nobody to represent their interests or compensate for their financial loss. However, an enterprise DeFi framework has a place for compensation mechanisms that guarantee consumer safety during DeFi operations.
So, despite the claims that DeFi challenges banking systems and will replace them in the near future, the reality shows that banks and enterprises are more likely to become the solid foundation that DeFi will be able to build and evolve from—which paints a more exciting and opportunity-rich picture.
Calling every e-commerce network that adds cryptocurrency to their payment options a “DeFi adopter” would be far-fetched—and yet, it’s still technically a part of enterprise DeFi.
However, some retail enterprises go even further via custodian solutions that convert currency into tokens. For instance, clients have an option to pay with cryptocurrency when buying a product. After choosing this option, they commonly pay with “stablecoins” (where the price of each token usually equals 1$). So, if a client makes a purchase that costs 100 USD and chooses to pay with 100 stablecoins, the system tracks this process and approaches it as a traditional credit card transaction.
Such solutions can be used to help enterprises directly participate in DeFi financial processes as well as explore new trading and investment options.
Decentralized exchanges (DEXs) are the shining example of how enterprise DeFi can challenge the finance industry. Unlike centralized exchanges (CEXs), DEXs enable users to act without middlemen, which in addition to granting more autonomy to traders and users, lowers the probability of default from one of the transaction participants.
All funds are stored in the traders' digital wallets, giving them tighter control over their assets and offering improved security. These benefits enable enterprises to manage various trading assets while providing extremely unique and competitive advantages to participants due to an entirely new perspective on liquidity.
In DEX, liquidity is balanced and optimized by liquidity pools that are created when users (called liquidity providers) add their tokens to a pool. A DEX platform aims to incentivize users to keep their assets idle via exclusive rewards and bonuses.
Depending on the platform, as a reward for keeping their assets idle, governors have a say in changes on the platform, can add new parameters to smart contracts, and gain valuable tokens.
Emerging hedge funds have shown a strong preference for DeFi—and there is a good reason for that. Within traditional hedge funds, investors often had to rely on the fund manager and their vision of the market—they had no idea of what was going on with their assets, no way to opt out or legally obligate their fund manager to provide information on the current state.
DeFi hedge funds do more than let investors manage their assets freely, remove them at any point or increase their investments (if they like their current progress), and build customized strategies.
Also, DeFi hedge funds don't necessarily mean investing in crypto only—some funds enable both investments in cryptocurrency and commodities, stocks, or derivatives.
Although DeFi funds require lofty fees and thus are meant for high-value investors, these expenses are compensated by versatility, transparency, and robustness. The average investment team size for DeFi hedge funds has grown from 7 to 9 people since 2020, signifying the crypto hedge fund’s capability to draw investment talents.
Despite the promising future of enterprise DeFi and large organizations like Earnst & Young announcing their first DeFi apps, we are yet to see wide-scale DeFi adoption by traditional BFSI companies.
Enterprise DeFi isn't precisely an extension of existing services—it introduces an entirely new system into the enterprise, making it click together with the current tools and employees knowing what to expect. Adopting DeFi requires investing time, money, and patience as well as a flexible mindset—which is why many enterprises prefer to enter the world of DeFi with the help of experienced blockchain advisors and developers.
While enterprise has the weight and influence to balance out the volatility of DeFi, there is still much work to be done when it comes to educating potential clients and employees about enterprise blockchain.
Enterprises will undoubtedly have to deal with “crypto pessimists” (conservative elder audiences that are unhappy with the change and have wrong assumptions about DeFi) and “crypto optimists” (younger audiences that idealize DeFi and see it as the source of easy income). They will need to educate both groups on the changes and the principles behind their newly-added DeFi elements to prevent irrational concerns that may damage their reputation in the long run.
This dictates the need for strong marketing campaigns and puts a strong emphasis on user-centered design of future enterprise DeFi apps.
DeFi operations and transactions are well-known for their solid data protection due to the decentralized approach to storing data. However, that doesn't make them a silver bullet for cybersecurity.
Companies that want to adopt enterprise blockchain for safer and more reliable financial operations need to abandon the "nothing can ever go wrong" mentality and pay close attention to their safety audits and reports containing information on potential exploits and issues. It's important to remember that cybersecurity is an ongoing process that needs monitoring and compliance checks. Even though blockchain adds many new sophisticated security layers, security can and should be improved.
Being an extremely young technology, DeFi still has a long way to go. It's not likely to replace banks or traditional financial service providers, but it can revolutionize their approach to service delivery.
The next generations of customers and business partners have already gotten used to the autonomy, convenience, and transparency that come with DeFi—and this is what they will be expecting from their interactions with enterprises.
Therefore, to stay connected with their target audience, enterprises need to evolve and incorporate the best elements of DeFi into their service arsenal.
This makes enterprise DeFi the future of BFSI, where we're likely to see the new DeFi platforms that combine lightning-fast translation, free asset management, and unrestricted liquidity with regulations that maintain the health of the overall financial system. The impact on that future starts today—from the decision to contribute and innovation.
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