What is Institutional DeFi?

Martin Worner
Published in
4 min readNov 2, 2021


Institutional DeFi under the microscope : photo by Trust "Tru" Katsande on Unsplash

Introducing Institutional DeFi

The term “Institutional DeFi” has become a hot topic in 2021, and it broadly refers to bringing financial institutions into the DeFi space.

The important question is why do financial institutions need their own DeFi? Financial Institutions work in a regulated environment and as such it is difficult to engage in DeFi as the pseudo-anonymous nature of blockchain means that you have no idea who is on the other side of a trade. Financial Institutions need to know this to comply with Know Your Client (KYC) and Anti-money Laundering (AML) regulations.

Who is doing what?

What are the various projects and banks doing to address the compliance issue and create Institutional DeFi?

Aave Pro is a badly kept secret that was widely discussed in July 2021 and while details have not been shared the approach is to partner with Fireblocks to create a version of the popular DeFi protocol for institutional investors with Fireblocks doing the necessary compliance checks.

Swarm is a DeFi marketplace regulated by BaFin, and AllianceBlock’s DeFi Terminal both require participants to create a passport which follows an onboarding process. The approach of adding the onboarding layer ensures that the participants have identified themselves and create a link to blockchain addresses. This covers the retail market at the moment, however, the mechanism can also be used for the institutional market as it addresses the compliance issues faced by institutions.

The crypto banks Seba and Sygnum have a curated approach to DeFi and both offer services around the institutions with onboarding, compliance, trading and custody giving access to the popular DeFi protocols.

There is also the school of thought that the ethereal structures of DeFi with the use of DAOs, Governance Tokens and anonymous developers building open source protocols makes the regulation of DeFi too hard as there is no central organisation to regulate. As I discussed in a previous article The Inevitable the regulators are taking action and they have the tools to restrict DeFi in their jurisdictions.

Where are the boundaries for regulation? Photo by Jan Canty on Unsplash

The intent of the regulations

The two regulatory pillars are for investor protection and fair and orderly markets.

The fair and orderly markets cannot be solely achieved by tokenomics and code-is-law, indeed we can see from history where there are no rules price manipulation flourished and the Amsterdam exchange introduced the first rules to address this in the early 1600s. In the pseudo-anonymous, decentralised world of DeFi it is hard to implement rules on market manipulation, and the only way to tackle this is to link identity to a blockchain address and have mechanisms to sanction the perpetrator. The link to identity being important as otherwise someone could simply create another address and continue their activities.

The KYC and AML are important pieces of the investor protection element and in order to achieve this there must be a link between an off-chain identity and a blockchain address. We see some of the platforms offering Institutional DeFi requiring an KYC/Onboarding process with the KYC checking being a single provider. This raises questions whether this centralises the platform or whether there is a one-size-fits-all approach to the compliance requirements around KYC and AML.

The approach taken by Tgrade is to recognise that each jurisdiction is different and that the compliance is done off-chain. The reason for the off-chain compliance is a practical view that all financial institutions have invested in and run a compliance department with the required processes which is why this does not need replicating. The key in Tgrade is that the self-sovereign governance tools facilitate the connection between the off-chain identity and the blockchain address where the link is recorded on chain as part of the Trusted Circle mechanism without revealing the identity.

Tokens and the origin of funds

The final part of the puzzle of Institutional DeFi is the question of how tokens are issued and to whom? This is often overlooked where there is careful curation in providing a “regulated access” to the protocols but if the institutions are trading DAI who is depositing the Ethereum in the first place that minted the DAI token? It seems that while providing the trading tools, curated access, and custody, the very nature of DeFi means that at some point the tokens are created in a fully decentralised, anonymous manner and by the very nature there is no transparency of the origin of funds.

This is addressed in Tgrade by giving the facility of the members of a Trusted Circle to issue a Digital Asset or DeFi protocol and permission it to the Trusted Circle. This means that at issuance the tokens are institutionally compliant from the outset. There is the sacrifice that the DeFi protocol no longer has the global liquidity pool but given the volumes that institutions trade that will more than compensate the loss.

For more information on Tgrade visit http://try.tgrade.finance



Martin Worner

Growing Tgrade, a business focussed, public blockchain, which solves real world issues.