Institutional investors are focusing on decentralized finance
31. Juli 2020
The decentralized finance sector has grown steadily and has begun to see the fruits of its work. But while there is much hype around DeFi projects and applications, particularly during Bitcoin’s unusual lack of volatility (BTC), there is still a long way to go.
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The technology is still in its early stages, although issues of usability, scalability, interoperability and lack of regulatory clarity continue to plague the space, DeFi’s promise is undeniable and its value is impossible to ignore.
DeFi’s unstoppable growth in 2020
So far, 2020 hasn’t been the best of years for many, but DeFi has certainly made its mark by expanding exponentially. A key milestone was passed in February when the cumulative value of tokens blocked in DeFi applications reached more than USD 1 billion. Despite a decline from a massive sale in March that spread to all markets, that number had already recovered by June. Today, it is USD 2.52 billion.
Among some of the main protocols to drive this growth is Oracle’s decentralized network, Chainlink, whose token has exploded by more than 1,000% this year. Loan protocols have also had a lot of traction, with Compound accounting for 28% of the total blocked value and MakerDAO following not far behind. The new phenomenon of „yield farming“ has offered investors and traders in crypto currencies opportunities for profit.
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Yield farming, also known as liquidity mining, is an important incentive mechanism that DeFi protocols use to attract liquidity. They do this by issuing governance tokens, such as the Compound currency, COMP, which grant governance rights to the holders of these tokens who provide much-needed liquidity to the network.
All of this action has placed DeFi tokens among the best performing cryptographic assets this year. In addition to the amazing growth of COMP after entering the market and the unstoppable increase of Chainlink’s LINK, in the last 90 days, other DeFi tokens such as Aave (LEND) and Bancor (BNT) have seen gains of over 300%.
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No smart money can ignore such stellar growth in the DeFi space, which is still largely dominated by retail investors. However, it has been gaining some traction among institutional investors, even though the infrastructure is not yet ready. Let’s take a look at some examples.
The rise of institutional interest in DeFi
According to a recent survey by Fidelity Asset Management, 80% of the institutions surveyed now find investment in digital assets attractive. That’s a considerable number and a huge change from just a couple of years ago, when many were running Bitcoin and other cryptosystems as scams.
However, beyond investing in known digital assets, some key traditional investment firms have redirected their interest to DeFi to help the development of the space. The Chicago DeFi Alliance, for example, comprises some of the leading commercial, brokerage and investment firms. This initiative was created to support promising DeFi startups with finance, resources, market making and other services.
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We are talking about giant players like TD Ameritrade, Ark and CMT Digital. All the companies involved have been pushing for both space development and regulation. But while regulation remains decidedly unclear in this decentralized, multi-jurisdictional space, investors have been greatly encouraged by the action of the U.S. Securities and Exchange Commission regarding Arca’s shares on the New York Stock Exchange this month.
A Bitcoin-ETF may still be a hot potato, but this July, the SEC approved an Ethereum-based fund. After nearly 20 months of lobbying for the decision, Arca Labs began selling shares in its Arca U.S. Treasury Fund on July 6 after receiving an official „Notice of Effectiveness“.