An article published this week by a media outlet specializing in crypto assets offers important insights into the future of DeFi (decentralized finance). While DeFi has experienced rapid growth, challenges remain in gaining the trust of institutional investors (corporate investors such as pension funds and hedge funds that manage massive amounts of capital).
In the article, Ben Nadareski calls on DeFi developers to act not merely as software developers, but as accountable asset managers. This perspective is essential for DeFi to mature further and attract players from traditional financial markets.
Additionally, Stephen Stonberg proposes the use of reinsurance—a mechanism whereby an insurance company transfers a portion of the risks it has underwritten to another insurance company—as a concrete method for Bitcoin (a type of cryptocurrency traded online) holders to protect their assets from market crashes and even generate returns.This is gaining attention as a new risk-hedging strategy against the volatility—or sharp price fluctuations—unique to the crypto assets market.
In this article, based on the opinions of these experts, we will explain to Japanese readers the nature of the “accountability” required for DeFi to gain the trust of institutional investors, as well as practical approaches to protecting crypto assets. We will further deepen the discussion toward the sound development of DeFi and the strengthening of investor protection.
The Current State of DeFi and the Institutional Investor Perspective
DeFi (Decentralized Finance) is an innovative field that provides financial services on the blockchain (a technology that links transaction histories in a chain-like structure and manages them in a decentralized manner). In recent years, its technological progress and market expansion have been remarkable.
However, behind this growth, challenges such as security incidents (including data breaches and system failures) and rapid market volatility have also come to the fore. These issues act as barriers to entry into DeFi, particularly for institutional investors who demand strict risk management.
Given their role as custodians of client assets, institutional investors place a high priority on transparency (the public disclosure of information that anyone can verify) and accountability (taking responsibility for and explaining their actions and decisions). It has been pointed out that the current DeFi ecosystem (economic sphere) requires improvements to meet these requirements.
The Importance of “Accountability” for Developers
Ben Nadareski points out that a shift in developers’ mindset is essential for the further development of DeFi. His view is that developers should not merely write code but also take responsibility for the funds that code manages. Source
This means incorporating the ethical standards and professionalism—the high level of professional consciousness—exhibited by asset managers (experts who manage clients’ assets) in the traditional financial industry into the world of DeFi.
Behaving as a fund manager means, for example, establishing systems to respond swiftly and appropriately when unexpected system issues arise, thereby minimizing the impact on users.
It also involves identifying potential risks from the product design stage and implementing measures to mitigate them. This allows users to use DeFi services with greater peace of mind.
Bridging the Gap with Traditional Finance
For DeFi to gain the trust of institutional investors, it must incorporate the risk management expertise that traditional finance has cultivated over many years. Establishing a transparent governance framework (the organization’s operational and management structure) is one such step.
Clarifying who decides on changes to DeFi protocols (programs running on the blockchain) and the processes involved is crucial for ensuring accountability.
Furthermore, the introduction of external audits (verification of system security and appropriateness by third-party organizations) and the establishment of emergency response protocols (procedures) are also required. These are critical elements for preparing for contingencies and minimizing damage.
Dialogue with regulatory authorities is also essential. Adapting to appropriate regulations paves the way for DeFi to gain social recognition and be accepted by a broader audience.
New Strategies for Protecting Bitcoin Assets
Meanwhile, Stephen Stonberg proposes a new strategy for Bitcoin holders to generate returns while protecting their assets. In particular, he cites the use of reinsurance as a way to safeguard assets even during market crashes. Source
By its very nature, the crypto assets market is characterized by extreme price volatility. While this volatility is attractive to many investors, it also poses significant risks.
Traditional asset protection measures have generally included diversification (investing in multiple different assets) and storage using hardware wallets (physical devices that store private keys offline).
However, Stonberg’s proposal suggests the possibility of a more advanced risk hedging strategy—one that not only directly responds to market fluctuations but also aims to generate profits from them.
Risk Hedging Using Reinsurance
Reinsurance is a mechanism whereby an insurance company transfers a portion of the risk associated with the insurance policies it has underwritten to another reinsurance company. This allows insurance companies to prepare for massive insurance payouts resulting from large-scale disasters and other events.
By applying this concept of reinsurance to the crypto assets sector, Bitcoin holders may be able to obtain protection against the risk of market crashes while simultaneously earning reinsurance premium income.
Specifically, one possible scheme involves providing Bitcoin as collateral (assets provided to guarantee debt repayment) and trading that risk on the reinsurance market.
This would make it possible to receive compensation from reinsurance in the event of a market crash. Additionally, holders could expect to earn stable returns in exchange for assuming the risk.
Contributing to Market Stability
When DeFi developers act as responsible stewards of funds and Bitcoin holders protect their assets through innovative methods such as reinsurance, this contributes to the stabilization of the entire crypto asset market.
If an environment is established where institutional investors can enter DeFi with confidence, the DeFi ecosystem will achieve further growth. This will bring new liquidity (ease of buying and selling assets) to the market and accelerate innovation (technological advancement).
It will also lead to the provision of safer and more reliable services for individual investors. Strengthening investor protection lays the foundation for the widespread societal acceptance of crypto assets.
The maturation of DeFi and efforts to build a sustainable ecosystem will continue to be key themes moving forward.
[Source: Original Article]
Related Articles
* We are the official distributor of RedotPay in Japan.