The long-term value of decentralized finance (DeFi) depends on its ability to transform the back-office operations of global banking institutions rather than providing alternative trading environments, according to asset management and banking executives.
During a panel discussion at the Proof of Talk conference in Paris, executives said that legacy financial institutions are eager to adopt blockchain technology, but that this is unlikely to happen given weaknesses in on-chain security, especially in the bridges that connect different blockchains.
In April, breaches were reported in 27 out of 30 days, prompting CertiK CEO Ronghui Gu to describe it as DeFi’s worst month in four years. Drift Protocol and Kelp Dao alone were hacked by North Korean cybercriminals, with exploits taking nearly $600 million from the two lenders.
“I don’t think you’ll see growth in DeFi until we solve the first problem… which is the hacks,” said Maja Vujinovic, CEO of investment and advisory firm OGroup. “I think it’s an absolute problem until we fix the bridges. I don’t think DeFi will grow outside of the DeFi community… until they probably fix a whole stack.”
Her comments echoed Ben Nadereski, co-founder and CEO of Solstice, a Solana-based DeFi yield protocol, who told CoinDesk in an interview that DeFi growth is being held back by the onslaught of exploits, a mistake he attributed to developers regularly building innovative code while not paying enough attention to the core responsibilities of managing capital.
Working on a solution
Stéphanie Cabossioras, head of strategy and global policy officer at Societe Generale Forge, said traditional banks are already working to close these structural gaps.
She pointed to the company’s track record in tokenizing structured products and green bonds on public blockchains. To make these digital assets work, she said SG-Forge needed to fix the cash settlement layer by developing its own regulated stablecoins such as EURCV and USDCV.
“We ended up being stuck because there was only the securities part on the blockchain and we didn’t have the cash part on the blockchain,” Cabossioras said. “That’s why we started issuing a stablecoin.”
Institutional clients, Cabossioras said, prefer the security of a regulated bank over open-source, non-custodial DeFi protocols.
“In everyday life, everyone – individual, medium-sized or large company – wants to have a reliable party,” says Cabossioras. “We don’t want to keep our assets in our private wallets, in our safe deposit boxes at home. We want to delegate this peace of mind to a third party. And that’s why custodians or banks still have a future.”