The Institutionalization of Crypto Assets and Decentralized Financial Markets

The interest in decentralized financial markets and cryptoassets is growing steadily, with by now an operationalized asset volume and assets under management (AUM) accounting towards a monetary equivalent of several billion USD. With growing public and investment interest, an intense academic debate surrounding the analysis of these alternative concepts in terms of financial market theory has started. In this context, the actual institutionalization of these new opportunities is a previously unaddressed field. This paper will deliver a first framework on the institutionalization process that cryptoassets and decentralized financial markets undergo within the current transition from experimental to institutional phases of the ecosystem with the help of selected literature and hypotheses derived from current trends in Decentralized Finance (DeFi). Furthermore, the paper will discuss the form of dependency of these new forms of financial markets, which are mostly based on the use of distributed ledger technologies (DLT), on institutional structures, outlining specific examples from a market organization perspective. The argumentation underlines the hypothesis that institutional components, such as decentralized governance features and proper incentive management systems, are key for widespread acceptance of alternative financial market concepts.