Defi security and compliance needs to be improved to attract the system

Opinion: Sergej Kunz, co-founder of 1inch

Institutional players have been closely watching the decentralized growth of their finances. Creating a secure, compliant defi platform is the only solution that builds trust and attracts more institutions.

Clear sea attracts big ships

Over the past four years, adoption of institutional debt is projected to rise from 10% to 47% for hedge funds, and to 65% in 2025. Goldman Sachs has reached Defi for bond issuance and yield agriculture.

Early adopters have already placed themselves in on-chain finance, including Visa, who has processed more than $1 billion in crypto transactions since 2021 and is now testing cross-border payments. The adoption of the system will be accelerated over the next two years. A compliant regulatory framework that maintains Defi's core interests is necessary for institutional adoption to be confidently involved.

Defi's institutional triller

It's no secret that many Defi security exploits occur every year. The recent Bybit Hack reported a loss of $1.4 billion. Violations occurred through a transfer process that was vulnerable to attacks. Such attacks raise concerns about multi-signature wallets and blind signatures. This occurs when a user approves a transaction without full details, leading to blind signing risks. In this case, stronger security measures and improved user experience are required.

The threat of theft due to vulnerabilities in smart contracts or vulnerabilities in errors by validators makes institutional investors hesitant when they deposit large amounts of money into the institution's staking pool. Institutions also have the risk of violations and are reluctant to enter the space due to lack of a clear regulatory framework.

DEFI's user interface is often designed for users with technical expertise. Institutional investors need user-friendly experience that enables debt without resorting to third-party intermediaries.

If you build it right they'll come

Institutional interest in making traditional assets on-chain is enormous, with the tokenized asset market estimated to reach $16 trillion by 2030. The entry of traditional institutional players into DEFI has led some privacy advocates to point out that they can counter the nature of decentralisation that forms the basis of ecosystems.

Recently: Securitization of Buidl tokenized funds to Defi with Redstone Price Feeds

Agency must be able to trust the Defi platform to maintain compliance standards while providing a secure and seamless user interface. A balanced approach is important. The unauthorized nature of Defi allows for secure transactions while maintaining compliance through identity profiles. Similarly, transaction screening tools facilitate real-time monitoring and risk assessment.

Blockchain analytics tools help institutions to maintain compliance with anti-money laundering regulations and prevent interaction with blacklist wallets. Integrating these tools can help detect and prevent illegal activities and make institutional engagement safer.

Intention-based architectures can improve security

The relationship between intention-based architecture and security is clear. The very design is built to reduce risk and creates a more reliable user experience. This protects users from MEV exploits. This is a common problem with automated bots scanning large profitable transactions available. Intention-based architectures also help implement compliance frameworks. For example, limit order submissions to clean your wallet, allowing resolvers to resolve only acceptable orders.

It is well understood that in traditional Defi trading, users frequently rely on intermediaries such as liquidity providers to execute transactions and manage funds. This leads to counterparty risk, fraudulent execution, and payment failures. Intention-based architecture supports unreliable settlements that ensure that users commit only when all conditions are met, reducing risk and removing trust from the photos.

The Defi platform needs to simplify institutional interaction and UX. This system bridges the gaps between them. By running off-chaining while ensuring security, intention-based architecture makes it safer and more efficient. However, one challenge to this involves consolidating off-chain order matching while maintaining on-chain transparency.

Defi's slow recruits have a hard time keeping up

For early Defi recruits, there is a competitive advantage in liquidity access and yield benefits, while slower recruits face more regulatory scrutiny and barriers to entry. By 2026, players at agencies that did not adopt Defi could have a hard time catching up. This can be seen in examples of early adopters such as JPMorgan and City's early tokenization projects. Tradfi leaders like them are already preparing for Onchain Finance.

Future path

Regulators, regulators, and policy leaders should provide clear and standardized guidelines to promote broader institutional participation. Uniform protocols are underway to support wider institutional engagement. The Defi platform must be prepared in advance to provide all the necessary pillars of compliance and security to institutional players who want to accept mainstream adoption. This will require a combined effort from regulators, developers and agencies.

Opinion: Sergej Kunz, co-founder of 1inch.

This article is for general informational purposes and is not intended to be considered legal or investment advice, and should not be done. The views, thoughts and opinions expressed here are the authors alone and do not necessarily reflect or express Cointregraph's views and opinions.