Exploring DeFi's disruptive ecosystem: how to empower financial institutions with smart contracts and blockchain.
WHAT IS DEFI?
DeFi services primarily target individual investors in an unregulated environment, where safeguards are lacking and significant risks exist. To encourage institutional participation in this traditionally unregulated and permissionless space, platforms are emerging to facilitate their involvement in DeFi while ensuring strict regulatory compliance measures. Currently, numerous decentralised applications (dApps) operate within the DeFi ecosystem, serving three key purposes:
Enabling the utilisation of advanced financial instruments, particularly decentralised exchanges.
Facilitating peer-to-peer lending and borrowing platforms.
Providing monetary banking services, including the creation and management of stablecoins.
Through the collaboration of Cetif Advisory, Fireblocks, Reply, and Linklaters, the Institutional DeFi For Security Token ecosystemical project was launched. Its objective is to establish the first Italian ecosystem for institutional experimentation with DeFi, enhancing the Security Token tool for the secondary market. The Institutional DeFi ecosystem project aims to enable institutional players to participate in a compliant manner, adhering to regulatory guidelines and requirements, while providing their clients with financial services which are inherent to the DeFi ecosystem.
This initiative significantly mitigates security and operational risks while maintaining substantial returns, ensuring the protection of all stakeholders involved.
The project's primary goal is to implement an Institutional secondary market utilising Automated Market Makers (AMMs). AMMs are algorithms used in decentralised exchanges that facilitate the trading of digital assets without relying on traditional order books. Instead, the price is determined on-chain, utilising smart contracts and liquidity pools. AMMs employ mathematical formulas and predefined rules to establish asset prices and execute trades.
The platform allows financial institutions to act as liquidity providers for these pools by depositing tokens and enabling trading, in return they receive fees for this service. Meanwhile, traders can swap tokens within the pools to facilitate their transactions.
The solution offers a multitude of benefits for financial institutions, including:
Enhancing existing offerings: this involves leveraging a daily infrastructure repository to accumulate capital or accessing tokenised funds to provide additional guarantees.
Innovative business models: financial institutions can explore new business models by using a platform that enables 24/7 operations, reducing information asymmetry.
Enhanced operational efficiency: Lower costs thanks to instant settlement, reduced counter-party risks and global accessibility.
Furthermore, these benefits extend to end customers as well, and offers the following advantages:
Lower fees: decentralised exchanges typically offer lower fees compared to centralised exchanges. By automating transactions through smart contracts, decentralised exchange (DEX) platforms provide users with cost-effective trading options.
Secure and safe approach: customers can approach these new platforms and businesses with confidence, knowing that security measures are in place to protect their interests.
The initial co-design meetings are currently in progress with participants of the solution, which will be tested in an ecosystemic and pre-competitive way from the last quarter of 2023.