DeFi money markets are finally attracting institutional investors

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Bitcoin’s bull run last year has caused even some of its biggest skeptics to soften their stance. From economists to hedge fund managers, the world is opening up to technology, and at the center of this movement is decentralized finance, or DeFi. While the market capitalization of all cryptocurrencies has reached $ 2 trillion, worth the equivalent of Apple, it is the promise of DeFi, a small corner of the current blockchain industry, that is drawing investors’ attention. institutional.

As the uptrend for Bitcoin (BTC) persists, interest-bearing crypto products have become all the rage. Some services offer up to 8% return on Bitcoin holdings. For investors already expecting an increase in value, this can be incredibly helpful in maintaining cash flow without selling any assets.

The three main factors solidifying institutional interest in Bitcoin are the current historically low interest rates, the rate of inflation, and geopolitical instability. With interest rates close to zero forecast for the foreseeable future, investors are preparing to move their funds to alternative locations to secure wealth.

The US Federal Reserve’s 2% inflation target has raised concerns among investors who fear a devaluation, and with tensions between the US and China at a precarious limit, US dollar-denominated portfolios are turning every day. riskier.

A money market

Buying, storing and using cryptocurrencies safely is still quite a complex test, much more complicated than opening a bank account. However, according to Larry Fink, CEO of BlackRock, a global investment management fund with nearly $ 9 trillion in assets under management, Bitcoin could evolve into a global market asset and hit new highs in the coming years.

In the traditional financial system, money markets are parts of the economy that issue short-term funds. They typically deal with loans for periods of one year or less, offering services such as loans and loans, buying and selling, and wholesaling takes place over the counter. Money markets are made up of highly liquid short-term assets and are part of the broader financial market system.

Money markets are traditionally very complicated, with expensive overheads and hidden fees that push most investors to hire a fund manager. However, its existence is essential for the functioning of a modern financial economy. They incentivize people to lend money in the short term and allocate capital to productive uses. This improves overall market efficiency while helping financial institutions achieve their goals. Basically, anyone who has extra money available can earn interest on deposits.

Money markets are made up of different types of securities, such as short-term treasuries, certificates of deposits, repurchase agreements, and mutual funds, among others. These funds generally consist of stocks that cost $ 1.

On the other hand, capital markets are dedicated to trading long-term debt and equity instruments, targeting the entire equity and bond market. With a computer, anyone can buy or sell assets in seconds, but the companies that issue the shares do so to raise funds for longer-term operations. These stocks fluctuate and, unlike money market products, do not have an expiration date.

Since money market investments are virtually risk-free, they often carry meager interest rates as well. This means that they will not produce large returns or show substantial growth, compared to riskier assets like stocks and bonds.

DeFi against the world?

To hedge against currency risk, institutions have started using Bitcoin and retail investors are following suit. More than 60% of the circulating supply of Bitcoin has not moved since 2018, and BTC is forecast to exceed $ 100,000 in the next 24 months.

If the current trend continues, investors will continue to store BTC. However, while much of the supply of the world’s first cryptocurrency remains in storage, the DeFi industry constantly produces alternative platforms for interest-bearing payments via smart contracts, increasing transparency by allowing investors to view and track funds in chain.

The average return on DeFi products is also much higher than in traditional money markets, with some platforms even offering double-digit annual percentage returns on deposits. From asset management to smart contract auditing, the DeFi space is creating a decentralized infrastructure for scalable money markets.

According to Stani Kulechov, co-founder of the Aave DeFi protocol, rates are high during bull markets because funds are used to leverage more capital, and the cost of margin increases return. “New innovation in DeFi is consuming more stablecoins, further increasing performance. Unless there is a new injection of capital, these rates could hold for a while, ”he said.

The Ethereum network currently hosts the majority of DeFi applications, and this has prevented tokens that are not available on the network from participating in decentralized finance. Bitcoin, for example, despite being the largest cryptocurrency by market capitalization, has only recently reached DeFi platforms.

Related: DeFi Yield Crop, Explained

With Kava’s hard protocol, investors can produce farms using Bitcoin and other non-ERC-20 tokens like XRP and Binance Coin (BNB). Backed by some prominent names (Ripple, Arrington XRP Capital, and Digital Asset Capital Management, among others), the platforms allow users to stake their cryptocurrencies on a pool of assets, which is loaned to borrowers to generate interest.

The team also plans to add support for Ethereum-based tokens in the near future. The network upgrade to Kava 5.1, which was postponed until April 8 after failing to reach the required quorum, will also introduce Hard Protocol V2, which will bring powerful incentive schemes and enhancements to its governance model.

Most loans on DeFi are oversecured, which means that the group always has more money than it is lending. In the event that the value of the issued token falls, the group’s funds are settled to compensate.

According to Anton Bukov, co-founder of the decentralized exchange aggregator 1inch, blockchains are the first impartial executors in human history, very limited, but ultimately fair, and could offer new services and new streams of interactions in the future. . “Developers are doing their best to solve potential dishonesty issues of existing flows and invent new flows replacing intermediaries,” he said.

By creating an automated platform for borrowing and lending assets, decentralized finance enables money markets without intermediaries, custodians, or the high fees that stem from high infrastructure costs.

Honest work

Of the many trends that DeFi has set in motion in recent years, yield farming has attracted a lot of attention. Yield farming is when the network rewards liquidity providers with tokens that can be invested more in other platforms to generate more liquidity tokens.

Simple in concept, Yield Producers are some of the most vigilant traders out there, constantly changing their strategies to maximize their return and track rates across all platforms to make sure they’re getting the best deal. The potential rate of return may get obscenely high, but it’s still unclear whether yield farming is just a fad or a fad phenomenon. Kulechov added:

“Yield agriculture is simply a way of distributing governance power among users and stakeholders. What really matters is whether the product itself would meet the market / fit protocol. The most successful governance power distributions with yield agriculture have been done with protocols that have found a market / fit protocol prior to such programs. “

Yield farming has an incredibly positive feedback loop, with an increase in engagement increasing the value of your governance token, driving further growth. According to Kava CEO Brian Kerr, while this feedback loop can produce very positive results in bull markets, it can have completely opposite effects in bear markets:

“It will be up to the governing groups of the various projects to navigate bear markets effectively, reversing the rewards before a total death spiral occurs. Regardless of bull or bear markets, yield farming will be a mainstay in blockchain projects for years to come. “

Money markets are the pillars of our global financial system, but most of their transactions occur between financial institutions such as banks and other companies in the term deposit markets. However, some of these transactions reach consumers through money market mutual funds and other investment vehicles.

Decentralization is the next frontier for finance, and as prominent investors continue to participate in the DeFi space, a decentralized economy seems almost inevitable. Participating in the burgeoning environment may be a risky gamble today, but what decentralized financial platforms learn now will be the foundation for the robust DeFi applications of the future. According to Bukov, the higher interest rates on DeFi platforms are “absolutely sustainable.” Added:

“Higher profits usually carry higher risks. Therefore, the risk-reward model of all these opportunities is always almost balanced. Normalizing the risks would decrease the gains because more participants will join in to share the rewards. “

From smart contract failures to unauthorized withdrawal of community funds, the DeFi space is a place of miracles and nightmares. DeFi-based yield farming platforms are still in their early stages, and while the numbers can be too tempting at times, it’s crucial to do your own research before investing in any platform or asset.