The paper examines the evolution of decentralized finance (DeFi) and its driving forces, demystifies its frequently used terms and considers how it will shape the future for financial institutions.

The evolution of DeFi and its potential to be applied to institutional use cases (in which financial applications are built on blockchain technologies deploying smart contracts) is of increasing interest to the financial services industry.

While progress to date has been cautious due to the continuously evolving macroeconomic and regulatory landscape, early successes that showcase the potential of DeFi to change market structures and operating models when adopted by financial institutions, have been achieved.

The paper was authored by Boon Hiong Chan, Deutsche Bank’s Industry Applied Innovation Lead and Head of Securities & Technology Advocacy for Asia Pacific and Dan J Sleep, Northern Trust’s Head of Digital Assets and Financial Markets for Asia Pacific. The report briefly reviews the history of native DeFi, summarizes key features of decentralization that can be adapted for institutional use and highlights how institutional DeFi is taking shape.

Institutional DeFi is an enabler that can give rise to a new financial paradigm that reduces historical industry costs, potentially without incurring significant new ones, depending on the blockchain type and other choices made. Today’s implementations can be seen in tokenized funds in asset management.

Mike Clarke, Global Head of Product Management, Securities Services, Deutsche Bank said: “While we are currently in the early stages of institutional DeFi adoption, the technology and regulatory frameworks have reached a good level of maturity. We are at the stage where we can achieve the balance between new regulatory compliance and new inherent operating models. By engaging with regulators and the industry, closely collaborating with clients and strategic partners, and undertaking our own projects, we can work together to encourage further institutional adoption of DeFi and create sustainable growth.”

Justin Chapman, Global Head of Digital Assets and Financial Markets Northern Trust said: “The next stage of the digital markets and product evolution in the DeFi space is certainly an exciting one. Leveraging on the inventory of capabilities we continue to develop; we see significant opportunities to innovate and deliver benefit across the value chain. With an increased need for transparency, liquidity and efficiency while adding enhanced product through augmented data and actionable insights. Substantive progress will require a continual focus on data, risk management and governance and through collaboration with strategic partners to develop an interoperable and connected ecosystem to bring all this to life.”