TradFi will sit out DeFi growth until security issues are resolved, executives say

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.

Speaking on a panel at the Proof of Talk conference in Paris, the executives said legacy financial institutions are eager to adopt blockchain technology, but that’s unlikely to occur given the weaknesses in onchain security, especially in bridges that link 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 in exploits that drained nearly $600 million from the two lenders.

“I don’t think you see a growth in DeFi until we fix 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 solve the bridges. I don’t think that DeFi grows outside of the DeFi degen community … until they fix probably a whole stack.”

Her comment echoed Ben Nadereski, co-founder and CEO at Solstice, a Solana-based DeFi yield protocol, who told CoinDesk in an interview that DeFi’s growth is being held back by the onslaught of exploits, a flaw he blamed on developers frequently building innovative code while not paying enough attention to the core responsibilities of managing capital.

Working on a fix

Stéphanie Cabossioras, chief strategy and global policy officer of Societe Generale Forge, said traditional banks are already working to fix these structural gaps.

She pointed to the company’s record of tokenizing structured products and green bonds on public blockchains. To make those digital assets work, she said SG-Forge had to fix the cash settlement layer by developing its own regulated stablecoins, such as EURCV and USDCV.

“At the end of the day, we were stuck because there was only the securities leg on the blockchain, and we had no cash leg on the blockchain,” Cabossioras said. “That’s why we started to issue a stablecoin.”

Institutional clients, Cabossioras said, prefer the safety of a regulated bank over open-source, non-custodial DeFi protocols.

“In everyday life, anybody — individual, medium, or large enterprise — we want to have a trusted party,” Cabossioras stated. “We don’t want to keep our assets in our private wallets, in our safes 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.”