Decentralization ‘absolutely essential’ in building crypto capital markets

Published at: April 25, 2022

If crypto capital markets have a chance of becoming an institutional reality, decentralization will be one of the key aspects according to one industry insider.

Capital markets bring suppliers and those in need of capital together to initiate supposedly efficient transactions. Investments or savings are often funneled between suppliers of funds like banks and those who need capital like businesses, governments and individuals.

Co-founder of crypto financial service provider VegaX Holdings Sang Lee told Cointelegraph on Monday that incumbent financial institutions have simply been left behind by the rapid pace of developments in the crypto industry.

VegaX Holdings is building a suite of crypto-based financial services. Its VegaX decentralized finance (DeFi) platform allows staking, while its Konstellation ecosystem is a DeFi ecosystem based on Cosmos.

Lee believes decentralization is likely the most important thing that will help crypto enter capital markets. Decentralization involves removing costly intermediaries in decision-making and in executing transactions.

Lee decried the current state of centralized payments platforms by saying, “You can’t send a wire on the weekend, which is atrocious. And, the amount of times a stock changes hands when you buy it is atrocious.” He added:

“We have evolved far enough to say we don’t need people as intermediaries. It was necessary before but not anymore.”

Intermediaries tend to increase the number of fees spent and the amount of time required to make an investment, thereby potentially reducing potential returns. Removing them through decentralization may be a viable way to make markets more efficient and help investors earn higher returns.

Lee also believes stablecoins will play an essential role in expanding capital markets in crypto. To him, stablecoins have the strongest potential to leapfrog other digital assets and even fiat currency because most stablecoins such as Tether (USDT) and Dai (DAI) are still denominated in United States dollars.

He emphasized that stablecoins allow investors to have a universal unit of account with which to transact. More importantly, stablecoins are things that everyone will be using since they add a sense of constancy, especially if markets become frothy. Lee said:

“In an economy where things become murkier and harder to track, a stablecoin helps even things out.”

The world’s second-largest stablecoin by market capitalization is Circle’s USD Coin (USDC) and has already begun to make a bid to enter capital markets with new partner BlackRock’s backing.

Ultimately, Lee believes the flow of money, people and things will go from the traditional financial world into blockchain, and not the other way around. As he put it:

“Crypto will probably refuse to be brought into the incumbent fold. Things off-chain will move on-chain, but it won’t go in reverse.”

However, he believes that “DeFi and crypto markets need to have a lot more efficiency” to help the rate of adoption increase as the technology improves. In his view, a good deal of inefficiency comes from the “unusable” platforms designed to help inexperienced users bring funds into crypto. He added:

“People are avoiding the best performing asset class in history because there’s no way to get there. If platforms were more usable for the layperson, adoption would be a lot higher than it is now.”

This opinion echoes an analysis made by Cointelegraph on April 12 that sees traditional financial resistance to using crypto as an increasingly obvious exercise in futility.

Bringing things onto the blockchain and into crypto requires token bridges, which Vitalik Buterin raised concerns about in early January. They have also been the target of several security breaches already in 2022, amounting to nearly $1 billion in losses.

Regardless, Lee sees them as an essential part of the capital markets infrastructure. He said that “we need bridges to build out the capital markets, but the problem is most bridges are pseudo-centralized.”