Why Big Businesses Still Hesitate to Dive into the DeFi Pool

Data & Research / 17.09.2020

Few other financial sectors relish a prosperous period as the Decentralized Finance (DeFi) market enjoys nowadays. With assets that trade for four times as much as Bitcoin and more than $13.5 billion in DeFi market cap, the DeFi services are some of the most sought for assets for crypto investors in 2020.

Still, not everything is rosy when it comes to DeFi. Something is lacking from the ideal venture recipe, which Decentralized Finance doesn’t quite seem to know how to prepare yet. The missing ingredient may very well be the endorsement of big businesses.

Major brands would otherwise jump on the bandwagons led by innovative technologies and spiking markets. Now, they are staying quiet, and they may have a good reason for it.

Decentralized Finance in 2020

Decentralized finance, also known as DeFi, is one of the fastest-growing niches of the crypto market. Within this sector, developers provide decentralized financial instruments that do not require the validation or supervision of a third-party authority, as it is in the case of Centralized Finance (CeFi).

In the DeFi ecosystem, users engage in peer-to-peer financial transactions powered by code that is running on the decentralized infrastructure of the Ethereum blockchain. The absence of a central, validating authority is supplemented by smart contract technology.

Decentralized Finance emerged in the aftermath of the great Bitcoin Bubble Burst of December 2017. It increased in value and prominence for more than two years before exploding in the early summer of 2020. As of now, DeFi is an overnight success that took years to get here.

DeFi had a spectacular surge in 2020, especially after the first wave of the COVID-19 pandemic. It continued to increase in value even when Bitcoin took a slump or when some security firms warned investors of potential DeFi scams.

Big businesses have better “financial brains” to know better than to associate their brands with a shady enterprise. However, a market that amasses more than $8 billion and counting in less than a year can’t be that repulsing.

So, what is still keeping major corporations at bay?

A closer look at their current investment strategies within the traditional finance ecosystem may help us find a relevant answer.

How the Big Brands Prefer to Do Business

Centralized Finance (CeFi) is a safe playground for big businesses. It has been in place for almost two centuries. The rules are clear, and the actors are well-known. Furthermore, there is always a central referee to resort to when conflicts emerge.

For many enterprises, DeFi appears as a closed market where services are rendered through apps and protocols. In traditional finance, investments usually correlate to material, real-life assets like land properties, homes, cars, and various forms of equipment.

In the traditional financial ecosystem, businesses have a palpable representation of their investments. They can lock billions of dollars in physical holdings, which for now seem more assuring than any DeFi project that they would fund through yield farming.

Nevertheless, there are huge benefits to transition from CeFi to DeFi.

If they were to enter the DeFi sector, big businesses would enhance their profits considerably. All their financial operations would take place instantly, instead of taking 1-3 days as they do through the old banking system.

More so, through blockchain technology, big companies would have a paperless, immediately accessible database. On it, they could store their records in a decentralized and immutable fashion.

So, even without material collaterals for their financing, big corporations would still gain immense benefits from migrating to the DeFi ecosystem.

Why Big Biz Stays Away from DeFi (for now)

Thanks to the Ethereum blockchain, DeFi operations offer complete transparency and reduce the risk of money laundering significantly. The network even enables you to trace every transaction back to the entities that took part in it.

Sounds like a clean way of doing business! Isn’t that great?

Yes, if you are a regular user trading digital assets in the crypto ecosystem. Unfortunately, this level of visibility is not good news for big businesses.

Large corporations may sometimes want to move assets from one place to another without disclosing any transaction details. On the blockchain, their trading secrets would be out into the open.

With the use of analytics tools provided by the blockchain or other applications, a company could track the transactions of their competition. They would be able to trace their capital movements, discover their collaborators, and even uncover their business strategy. Not too many corporations would like to be caught with their pants down like that.

So, yes big businesses fear that the lack of privacy in the DeFi sector would damage their performance. They do not necessarily fear market regulators or other third-party auditors, but they shun each other.

If a company would sign and take ownership of a smart contract in the DeFi ecosystem, it would have to disclose the other parties involved in the contract and the required conditions for the smart contract to conclude.

One solution to the transparency monster that keeps big businesses from jumping into the DeFi pool is the Baseline Protocol.

The Baseline Protocol aims to make the Ethereum blockchain more accessible for big enterprises. It is an open-source initiative that uses cryptography, messaging, and blockchain technology to provide businesses with secure and private operations at a ridiculously low cost via the public Ethereum Mainnet.

The Baseline Protocol would enable the use of privacy tools that would help companies keep their business strategies away from the public eye.

The market would still operate in full transparency. However, purchase orders, invoices, and capital asset leases would be tokenized in such a way that the buyer and seller identities while still exposing relevant information about the transaction. This level of transparency would mimic the one in the stock market, where information about the total volumes and prices is always available, but not the one about the buyers and sellers.

The Bottom Line – Why Big Businesses Still Hesitate to Dive into the DeFi Pool

The DeFi Universe is expanding at a remarkable speed. Its evolution is nothing but good news for the cryptocurrency industry, which had to rely on Bitcoin’s popularity only until now.

The further development of the DeFi space would attract big businesses and their real-world assets on the market in a financial life-enabling explosion similar to the Big Bang.

As soon as they will get their preferred level of privacy, big enterprises should gather up the courage to jump into the DeFi pool with a big splash.

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A creative writer in the field of content writing for the past 7 years. Iulian is passionate about his work and his interest in areas such as technology, travel, sports, literature and gastronomy have aided him to the research quality in articles that reflect these themes. Recently, he discovered the Bitcoin and the blockchain technology and he’s a big fan now.