As Bitcoin continues to outperform all other major asset classes the wider crypto market is becoming increasingly hard to ignore by institutions looking for portfolio diversification. Once the outlier of traditional finance the sentiment around digital assets is turning in favour of crypto with recent reports showing that most institutions have already invested or are planning to invest in cryptocurrency.
The existing market has largely evolved around retail with security and regulation challenges playing catch-up in this fast-moving space. To bridge the gap brokers are pre-empting the future requirements of professional investors looking for returns without the costly burden of complexity in maintaining access to the digital asset market.
Centralised exchanges such as Coinbase and Gemini have provided investors a place to buy and hold a selected group of coins and tokens and CeFi platforms continue to work with regulators introducing centralised controls such as KYC ramps.
And while CeFi exchanges continue to develop new services, such as lending and borrowing, decentralised exchanges like Uniswap and SushiSwap offer unique DeFi protocols for users to earn a return on their crypto. With no centralised authority the decentralised finance market has grown quickly with the total value locked (TVL) in DeFi protocols soaring from $1bn at the beginning of 2020 to over $200bn.
While the freedoms of the decentralised space continue to innovate at this pace brokers are looking to leverage centralised finance to bridge the gap between these two distinctly separate worlds for institutional players.
CeFi has matured since the first exchanges began to appear and has provided a lot of the infrastructure and liquidity used in the crypto market today. As a result CeFi is well positioned to do the heavy lifting needed for brokers to give institutions easier access to DeFi opportunities.
Brokers are using CeFi to enable those in traditional finance to convert their fiat using regulated ramps and are then able to lend on DeFi platforms by locking crypto into smart contracts that act as liquidity pools. These locked in crypto deposits are made available to borrowers with lenders earning APY interest on loans. Borrowed tokens can be then used for margin trading.
Liquidity is also needed for the exchange of tokens on a DEX (decentralised exchange) and those that provide liquidity (LP) are rewarded with a percentage of the transaction fees generated. Experienced investors can also look for the maximum yield for their funds by switching between liquidity pools to increase their returns.
Without CeFi one of the main barriers to DeFi is the absence of accountable help when it comes to any form of customer support. While there are online communities of users, DEX platforms are unsupported on-chain technology available to brokers to provide a managed CeFi layer to help professional investors manage risk and earn additional profit using DeFi protocols.
The technical complexity of leveraging several DEX for maximum exposure also comes along with adapting to changes that may occur on these platforms at any time. At the centre of DeFi is the smart contract that has been largely responsible for powering its incredible growth in recent times.
It is possible for smart contracts to have errors or bugs and they should be audited for risk before locking in funds. Brokers can also provide custody with CeFi for funds which is not something that can be found on a decentralised exchange. CeFi custody will also help to bridge the two ecosystems of traditional finance and DeFi with existing payment rails and banks.
The leap required for traditional finance to profit from the crypto market highlights the importance of the critical infrastructure needed for institutional players to be active in this burgeoning space. Chris Aruliah, CPO of BCB Group said:
“Our recently launched BCB Yield product represents a sea change for institutional and professional investors using CeFi as a compliant and secure way to earn a return on their funds. We provide products that account holders can use to put their money to work, earning a yield on their funds by lending to the crypto market. We don’t want to stop here as we see DeFi as the next logical step for our customers who will be able to use our CeFi platform as an ideal gateway into new products we have in the pipeline for later this year”.
This hybrid approach has changed the conversation to one of collaboration and is a reminder that DeFi has evolved from and is still influenced by centralised ecosystems such as Web 2.0 and traditional finance.
The institutional infrastructure put in place by companies like BCB Group and Trustology is enabling a CeFi gateway and the tools for brokers to provide DeFi access to their customers.
“It has always been the broker’s job to make their users' experience better. With DeFi, there is an increasing use by brokers seeking yield on deposits for their customers. So they are in need of a custodian who can capably provide the Web 2.0 experience off the back of the benefits of Web 3.0 with a secure DeFi custodial wallet,” notes Alex Batlin, former Founder and CEO of Trustology and now Managing Director of Bitpanda Custody post acquisition of Trustology by Bitpanda.
The union positions Bitpanda Custody as one of the largest custodians in the world for safeguarding and administering cryptoassets across blockchains, exchanges and DeFi protocols.
As well as compliant access, brokers play a vital role in educating those in traditional finance, many of whom already own digital assets and are using CeFi products like BCB Yield. Decentralised exchanges have grown around leading crypto pioneers and the blockchain developer community and DEX platforms tend not to have intuitive user interfaces for those less experienced.
From compliance to technical integration to investment opportunities and customer support, reducing the complexity of the DeFi opportunity can be more easily achieved by brokers with the right CeFi infrastructure and tools that are now on offer.
