On Whales and Blue Foxes: The Institutional Transformation of DeFi
Decentralized finance (DeFi) is a new frontier of cryptoassets that has already attracted the more adventurous institutional investors. On the back of Qredo's recent partnership announcement with MetaMask Institutional, COO Josh Goodbody explores the technological and regulatory factors that will drive even wider institutional participation in this evolving domain.
I smiled when I read recently that institutional interest in crypto is now being described as an “established trend.”
It was in 2017 that we saw the first green shoots of crypto interest from institutions and corporates. Indeed, this was one of the reasons I left traditional finance to join Huobi Global and build their Global Institutional Business.
Year on year since, we’ve seen an increasing volume and calibre of institutional ‘whales’ entering the space.
This spans crypto native hedge funds through to new institutions like Grayscale that successfully re-package crypto into funds for retail investors. Family offices and the private bank divisions of large asset managers have also been increasingly active for their high net worth (HNW) clients.
On the corporate side, Michael Saylor’s MicroStrategy is a prominent example of the usually under-the-radar treasury investor. According to Caitling Long in a recent episode of the Unchained podcast, a good number of much quieter treasury teams from well-known multinationals have also been using bitcoin to hedge foreign exchange risk.
It’s been a volatile ride, but the macroeconomic climate, overheated equity markets and increasing inflation have reinforced the view that crypto is now an established asset class.
It seems the regulators have come to the same conclusion. There is a lot of uncertainty about the scope of future crypto law-making, but institutional investors will have been reassured by the new level of focus and promise of future clarity.
DeFi: What blockchain did next ⚡
DeFi represents a new frontier in cryptoassets, and a growing number of institutions are clambering to get exposure to it.
DeFi’s growing network of protocols is now worth over $90 billion USD and has become one of crypto’s hottest stories.
This new generation of decentralized platforms running smart contracts autonomously with no central body promises a paradigm shift in the supplier-consumer relationship -- and a well-overdue disintermediation of traditional finance practices.
Without doubt, DeFi has been very risky; as the money locked up in DeFi has accelerated, so too has the money stolen in related hacks.
But the returns available through its lending and borrowing protocols have been eye-wateringly attractive compared to those available in traditional finance, with annualized returns anywhere between 25% to 1,000%.
All aboard the DeFi train 📈
According to blockchain intelligence firm Chainalysis, big money institutional investors already account for a disproportionate share of DeFi transactions when compared to cryptocurrency as a whole.
In its soon-to-be-released Global DeFi Adoption Index, Chainalysis reports that “Large institutional transactions, meaning those above $10 million in USD, accounted for over 60% of DeFi transactions in Q2 2021, compared to under 50% for all cryptocurrency transactions.”
There is some interesting regional variation here, with European institutions emerging as the frontrunner in DeFi investment.
Europe has a strong financial sector, with a particular concentration of hedge funds and proprietary trading houses. Already known for their appetite for high risk, these organizations have also benefited from the open banking environment of the UK and EU in which crypto trading can more easily thrive.
We’ve also seen venture capitalists and banks from around the world exploring the space. A good example of the latter is Siam Commercial Bank’s new SCB 10X subsidiary.
DeFi is forcing a wholesale rearchitecting of traditional financial products. For the banks that sell them today, such investment in DeFi is a way to make money but also to get an arm around the DeFi disruption to existing practice and revenue streams that is coming their way.
All eyes on the regulator 👀
As an ex-lawyer, one thing is obvious to me: The DeFi adoption by institutions so far -- and that which we’ll see in the future -- is fully predicated on the presence of clearer laws and regulation around DeFi.
Qredo was built with the belief that crypto will face greater regulation and that there is a need for digital asset infrastructure that can flex accordingly. Indeed, Qredo’s market-leading crypto governance and compliance features were designed specifically to help organizations manage this sort of compliance challenge.
The seeds of that future DeFi regulation have already been planted.
SEC Chairman Gary Gensler understands more than most about blockchain (see his excellent MIT Blockchain and Money course from 2018), but it’s clear he is embracing his investor protection responsibilities with vigor.
In a recent Bloomberg interview, Gensler stated that DeFi is one of seven key SEC initiatives looking at crypto. He has voiced concern about DeFi activity such as peer-to-peer lending, observing that SEC oversight may be necessary where projects are marketing specific interest-rates.
Our partnership with MetaMask's Blue Fox 🚀
In this evolving context, technological infrastructure has emerged as a critical building block in attracting more institutional participants to DeFi.
In its recent DeFi for Institutions report, Consensys (parent company to MetaMask Institutional / MMI) identifies that, while DeFi has enjoyed strong early adoption by small and mid-cap crypto funds (with AUMs of less than $1bn), we will only see more traditional hedge funds and larger, regulated institutions entering the market when they can access the required DeFi infrastructure.
Qredo was designed specifically to meet the needs of institutional investors and will now support MMI in providing organizations of every size with a secure, compliant and operationally efficient route into DeFi.
Qredo's features for institutions include:
- Instant, low-cost DeFi access to the widest variety of Dapps across multiple chains
- A secure way to directly deploy capital into DeFi from a MPC-secured Qredo Wallet
- Institutional-grade reporting and audit for internal oversight and regulatory monitoring.
The days of having to use a clunky patchwork of products are over. MetaMask Institutional and Qredo are setting the gold standard for institutional DeFi access.