The new buzz in cryptocurrencies could use some old-school help. Trading using decentralized finance, or non-traditional platforms for cryptocurrencies known as DeFi, has exploded 10-fold from 2020 to $150 billion in total value at its peak this year. But reducing hacks, as evidenced by some recent whoppers, are just one way that traditional financial firms like BlackRock can reshape the market.
The DeFi market is dangling plenty of tempting financial promises for the likes of BlackRock and its clients. The applications used to facilitate the movement of cryptocurrencies replicate traditional financial services like lending out, borrowing or swapping money on a blockchain. On the Venus platform, a user lending out certain stablecoins could rake in as high of an annual percentage yield as nearly 21%. Those returns are attractive for financial firms that can promise little more than mid-single digits in a low rate environment.
The companies themselves make fees by charging for transactions, and the higher the returns, the more popular the platform can be. Online payments firm Square is also getting into DeFi while financial giant JPMorgan is looking at ways into the market, as is BlackRock.
But the risks can be punishing. Unlike banks or brokerages, there’s no sector-wide insurance to cover the loss of funds or securities if a firm fails. If there are flaws in a software’s code, the DeFi application becomes vulnerable to errors that can disrupt operations or spur hacks. That’s what happened to Poly Network this month. The platform that allows users to transfer or swap tokens across different blockchains saw $610 million worth of digital coins disappear.
A financial firm could also be on the hook for losses if investors and regulators feel like the firms didn’t do enough to protect them. There are other problems, too. DeFi participants who facilitate transactions can lose money if the price of the asset changes after a user deposits money.
That’s where traditional players can make a difference. Companies like BlackRock know how to manage liquidity, volatility, and risk. Fink’s firm could create a hybrid model that helps to better manage the price mismatches amid the speed of transactions. It also has more resources to stop hackers. The risks are still greater than plugging along in its day job. But the growth of the industry and high returns for clients may be enough for BlackRock to demystify DeFi.