The global decentralized finance (DeFi) market size was valued at $11.78 billion in 2021. This number is expected to increase as DeFi advances, yet it is still in its infancy. Therefore, a number of banks and traditional financial institutions still tend to be unaware of DeFi’s potential.
While this may be, industry experts within the crypto sector are predicting that decentralized finance will overtake traditional financial institutions in the coming years. For instance, 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 elaborated on this point during an exclusive interview conducted at Activate, which was BitGo’s developer conference that took place in Mountain View, California on Oct. 25, 2022.
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 a lot of potential for disruption.
While market makers have played a critical role in ensuring markets and exchanges effectively work, markets that move fast like crypto can make it difficult for individuals to determine asset prices. This also tends to be the case with traditional markets, like stocks and commodities. For example, if a market is tanking, market makers may think assets should be sold, yet this could drive prices down even more. Market makers also tend to shut off operations at volatile times, which can be harmful. Moreover, market makers are heavily regulated by the United States Securities and Exchange Commission (SEC) as well as by the Financial Industry Regulatory Authority (FINRA). Regulators watch market makers daily, 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 makers can now become a piece of code that the SEC or FINRA can review. Investors can review this code as well. As a result, regulators don’t have to monitor broker deals and investors can get a better price on assets.
Of course, there are challenges that come with AMMs, like code bugs and security issues associated with DeFi applications. But, we are now at a point where computer science programmers are working to ensure that smart contracts will have fewer bugs and that code will be safer and easier to review. Even so, regulatory and compliance questions remain. Given this, it’s still too early for DeFi to overtake traditional financial institutions, yet I believe with three to four years of hard work, the industry will see changes occur.
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, DeFi and nonfungible token (NFT) applications. This is where the BitGo development platform comes to play. We want to make sure the APIs we provide are fully capable of plugging into DeFi platforms, so those applications can build on top of BitGo. This will enable faster applications while connecting those blockchain networks with our clients.
BitGo is also adding features around DeFi for smart contracts. For example, MetaMask currently enables blind signing for transactions. BitGo wants to create transaction emulation to solve this problem. This will essentially show users what will happen step-by-step before transactions take place. This is important because DeFi will only conquer institutions once we figure out how to solve security concerns the industry is currently facing.
CT: Given this innovation, do you think crypto companies will eventually overtake traditional banks?
MB: I believe that software changes everything, and it’s currently changing the financial services sector. Banks now need to think about how to use software to advance financial services, or else smaller companies will get ahead of the game.
I also believe that Wall Street is facing an innovator’s dilemma. They know crypto is coming and has the potential for disruption, but at the same time, crypto is too small to currently make a real impact. Therefore, Wall Street isn’t ready to change operations, but smaller crypto companies will continue to iterate. As a result, larger companies will take much longer and won’t be able to get in as fast. This is what we have seen happen in the tech sector for decades, which is why smaller players usually beat the big guys. We are also seeing big tech companies take an interest in DeFi, while the banks sit on the sidelines. For example, Google Cloud is now deploying infrastructure for crypto. This will put banks at an even greater disadvantage.
CT: Changing the subject a bit — You are passionate about the passage of a spot-based Bitcoin exchange-traded fund. Why is this important for the crypto sector?
MB: I think the SEC is increasingly to blame for anyone who has lost money within the crypto industry. If the SEC would approve a spot-based Bitcoin exchange-traded fund (ETF), the industry would have a much safer investing structure. This would allow individuals to get exposure to the asset class through traditional firms that are regulated and monitored. Instead, the SEC continues to deny this and we end up with insolvent exchanges and bad actors.