Why institutional investors are challenging banks and looking into DeFi

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BBetween negative yielding bonds, the foamy stock market and looming inflation, institutional asset managers have been forced to look for other ways to generate yield.

In the last year or so, a growing list of institutional players have started to rack up massive sums of Bitcoin and Ethereum, not only to combat lingering fears of inflation, but also to generate stable income streams. , tangible and fixed.

In fact, according to the Core Personal Consumption Expenditure Index – the Federal Reserve’s preferred inflation reading – projected inflation rates are currently at their level. upper level in nearly three decades. Speaking to Bloomberg at the Qatar Economic Forum, Bridgewater founder Ray Dalio and former Treasury Secretary Larry Summers shared the feeling that financial asset inflation is a concern, mainly because there is a significant amount of liquidity in the market, which makes it difficult justification of returns. As a result, companies have a greater incentive to hedge their cash flow in favor of crypto.

The Decentralized Finance (DeFi) market has offered many forward-thinking institutional investors the opportunity to go beyond Bitcoin and explore crypto lending, borrowing, cash mining, and staking. This has facilitated the means of generating stable returns which are often much larger than they traditionally would.

Why DeFi?

“Yield farming” has become synonymous with the DeFi sector. In its most basic sense, yield farming allows users to deposit digital assets and be rewarded with other digital assets in return. For example, deposit ethereum and earn a third-party token in return.

One of the most popular methods, known as liquidity extraction, requires investors to provide liquidity to a decentralized exchange (DEX) in exchange for rewards. The process involves funds placing multiple digital assets, typically a trading pair, into a cash pool and earning a percentage of the trading fees as a reward.

Another avenue favored by bond-style funds playing with DeFi is staking, where users agree to deposit their crypto in smart contracts on a specific network (Ethereum, Algorand, Cardano etc.,) to secure the platform and validate transactions. In return for this service, the individual receives incentives, mainly in the form of token rewards.

Tokens harvest via the staking of these companies can then be compounded via similar DeFi protocols, creating a cyclical chain of rewards that can add up quickly. For example, Australia’s top performing investment fund, Apollo Capital, generated nearly 700% YTD in April 2021 by staking on behalf of its liquidity providers.

The DeFi market is becoming flatter, allowing users to farm for yield in disparate DeFi ecosystems. So-called “bridge” products, such as Yieldy’s Algorand-Ethereum Bridge, allow users to easily transfer their assets to other ecosystems to leverage and compose their digital assets into various DeFi product offerings.

When it comes to return potential, staking companies such as Yiedly’s YLDY-ALGO pool allow users to earn up to an Annual Percentage Rate (APR) of 100% on their assets. This differs considerably from traditional loans and borrowings, which are at best between 1% and 5%. In addition, by accumulating yields through yield farming, it is even possible to lock in an APR of between 500% and 100%.

The tides of institutional involvement are turning

The continued growth of the DeFi industry has not gone unnoticed by many well-known players. In fact, by a survey of 100 hedge funds CFOs globally, an overwhelming majority of today’s top fund managers believe that by 2026 at least 7.2% of their holdings will be in cryptocurrencies – a whopping amount of $ 312 billion.

Unsurprisingly, a recent study by PwC revealed that 31% of crypto-based hedge funds have already started using DEXs (like Uniswap, 1inch, and SushiSwap) as well as DeFi-specific tokens to help maximize their clients’ earning potential.

For 57% of hedge fund managers, the main reason for adding digital assets to their portfolios was “general diversification”. 29% cited “exposure to a new ecosystem of value creation” as the main reason to get involved and 14% suggested it was a good hedge against inflation. The large amount of liquidity in the market coupled with negative real interest rates means that for many investors it is beneficial not to hold liquidity in an environment where there is no interest rate but potentially high inflation rates.

Another source of appeal for institutional investors to use things like yield farming, staking is that unlike before, there are now many holistic and end-to-end institutional trading solutions that can help facilitate these. activities in a transparent but regulated manner.

Additionally, while there has been some hesitation on the part of traditional players in the past – mainly due to a lack of clear regulations – this problem has been largely alleviated over the past year. There are now many institutional custody platforms that implement strict KYC / AML practices (as well as the use of other confidence-inspiring measures such as third-party audits).

As such, it stands to reason that as we move into an increasingly decentralized and digital future, investors around the world will begin to put increasing pressure on their fund managers to expose themselves. the best performing asset class over the past 12 months.

Previously, some people have argued that Ethereum, the ecosystem that currently houses a large number of all existing DeFi platforms, may in fact prevent the growth of this booming industry due to various high transaction fees and problems related to low network speed. Historically, institutional investors have also been very concerned about the environmental impact of crypto. However, this review is not entirely true as there are now many more efficient and environmentally friendly alternative cryptos that users can take advantage of.

Yieldy, for example, allows institutional investors to participate in various DeFi activities using the Algorand network for a secure, fast, scalable, low-cost, and sustainable base of operations, essentially allowing them to mitigate issues almost entirely. aforementioned. Additionally, with interoperability becoming a focal point of DeFi’s usability, institutional investors no longer have to worry about breeding ecosystems and instead focus on generating the best return.

About the Author
Sebastian Quinn, co-founder of Yield, and a veteran of blockchain development and emerging technologies.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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