JPMorgan analysts have pointed out two main factors as the main barriers towards institutional adoption. According to a recent report, repeated security breaches and sluggish growth are still making large investors hesitant about putting more money into decentralized finance.
In a recent report led by managing director Nikolaos Panigirtzoglou, the bank said confidence in the sector remains shaky, especially after a series of high-profile hacks that continue to expose weaknesses in the system.
Kelp DAO exploit shakes DeFi
One of the biggest recent incidents involved Kelp DAO, where an exploit quickly rattled the broader market. As explained by the experts, the incident led to a sharp decline in TVL of DeFi, resulting in an estimated loss of approximately $20 billion.
The hacker used a weakness in the cross-chain bridge protocol to mint fake rsETH tokens valued at about $292 million.
Those tokens were then used as collateral on the lending platform Aave to borrow real Ether, leaving behind an estimated $230 million in bad debt.
What stood out to analysts was how quickly the shock spread beyond the affected platform. The withdrawal of funds from other pools that were not affected by the vulnerability revealed the interconnectedness of the DeFi ecosystem and how panic could spread through the entire ecosystem when under pressure.
Security researchers, including teams linked to LayerZero, have suggested the attack may be tied to Lazarus Group, a group frequently associated with large-scale crypto thefts. While some of the stolen assets have been frozen, the rest continue to move across wallets, making recovery more challenging.
Beyond security concerns, JPMorgan also pointed to a deeper issue: growth in DeFi has not been as strong as many expected. While the total value of assets in the sector has risen in dollar terms alongside the broader crypto market, activity measured in Ether terms has remained mostly flat. That suggests usage itself has not expanded significantly.
Taken together, the analysts believe these factors are keeping institutions cautious. Until security risks ease and the sector shows clearer, sustained growth, many large investors are likely to stay on the sidelines rather than fully commit to DeFi.
DeFi exploits push investors toward stablecoins
Analysts at JPMorgan also say recent decentralized finance (DeFi) exploits are shaping investor behavior in ways that resemble traditional financial markets during times of stress.
Instead of staying fully invested in riskier assets, many participants are shifting funds into stablecoins, digital tokens designed to hold a steady value, much like investors move into cash when uncertainty rises.
According to the report, one of the key winners of the “flight to safety” process has been Tether (USDT), which was praised by analysts as an excellent way for users to take a step back into DeFi due to its high liquidity in central exchanges and immediate and reliable option to leave during disruptions.
Specifically, in situations where there is an exploit or any kind of other danger that might affect the ecosystem, the best way for traders to act would be to switch to tokens or coins that are easily tradable and withdrawable. As for USDT, it is available on most exchanges, which makes it a great asset for this purpose.
Nonetheless, as was mentioned earlier, the analysts also found out that even though the trend is clearly observable, it has not led to an increase in the market cap of USDT. This means that users tend to put money into stablecoins temporarily, not permanently.
To sum up, JPMorgan analysts have concluded that security vulnerabilities and poor TVL growth will likely remain barriers to attracting institutional investment in DeFi going forward.
Separate data from on-chain analytics firm CryptoQuant supports this view. According to their recent report, the company highlighted that the Kelp DAO hack has caused a visible liquidity squeeze in the DeFi ecosystem, where borrowing costs have spiked due to reduced liquidity. The liquidity squeeze highlights how trust remains low following such cybersecurity threats.