Main challenges affecting institutional adoption of DeFi: IntoTheBlock

The decentralized finance (DeFi) sector has seen explosive growth over the years, but several challenges are causing slower institutional adoption. With its total value locked above $100 million, DeFi has yet to clear the redoubts that prevent institutions from getting involved in the industry.

Crypto market intelligence platform IntoTheBlock believes that these challenges are multifaceted; therefore, DeFi must be developed from multiple angles to create a market that can handle the needs of a wide range of participants.

Challenges hindering DeFi adoption

One of the main problems in the DeFi sector is regulatory uncertainty. The lack of clear regulations in the United States and other major markets hinders participation and limits the adoption of DeFi. Market players are forced to look for regions with regulatory clarity and countries that have shown greater openness to the crypto sector.

While battling regulatory uncertainty, crypto entities have created foundation companies and decentralized autonomous organizations (DAOs) to establish a structured entry route for private institutional capital in the DeFi space.

“In short, regulatory challenges hinder institutional DeFi adoption by increasing compliance costs, restricting the use of stablecoins, and creating uncertainty, making it difficult for institutions to deploy capital and access liquidity,” added IntoTheBlock.

Another challenge that hinders institutional adoption of DeFi is the underlying infrastructure around crypto wallets and direct access to liquidity. IntoTheBlock found a lack of institutional-grade solutions, as even leading wallets like MetaMask do not meet the needs of institutional players. This limits institutional participation and capital flow to DeFi.

Limited liquidity and weak incentives

Additionally, insufficient coordination of asset listings and liquidity in DeFi ecosystems is hindering industry adoption. Insufficient asset listings prevent the use of DeFi tokens in the crypto ecosystem, while limited liquidity can lead institutions to bad debt or risk slippage and price impact on their lending strategies. IntoTheBlock mentioned Liquid Staking Tokens (LST) as an area of ​​concern for this challenge.

In addition, the DeFi sector lacks adequate risk management and incentive structures. The space is full of unpredictable and short-term programs that affect medium-term capital allocations due to unreliable timelines and a lack of strategic planning. On the other hand, DeFi needs strong risk management practices to protect institutional funds from technical exploits.

Despite these challenges, IntoTheBlock said institutional investors are increasingly looking at DeFi. Growing demand for institutional-grade DeFi solutions and initiatives could see the sector attract millions of dollars in capital in the coming years.

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