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Introducing Into the Block and How to Get Involved in DeFi?
Into the Block started as a general analytics platform at the end of 2019, and I joined as the first member of the research team. We focused on the business development of early-stage DeFi ecosystems, recognizing their potential as a new financial infrastructure distinct from traditional finance. Our CEO, Susan Rodriguez, with her background in the financial industry, saw the opportunity in DeFi innovation protocols like Compound V2, Maker, and Synthetix, among about 20 other protocols in their nascent stages before the DeFi summer of 2020.
As DeFi gained attention, we observed the inherent risks within these emerging financial strategies, prompting us to develop products aimed at mitigating these risks for institutional access. Despite the challenges of 2022 affecting many in the DeFi space, we saw a fundamental need for focus on risk management to restore market confidence. This realization led us to develop our third product — the Risk Radar, a platform designed to transparently track internal risk metrics of DeFi protocols, addressing the critical need for enhanced risk assessment and management within the DeFi ecosystem.
What Types of Institutions Are Participating in the DeFi Market?
I am very bullish on DeFi. While the performance of DeFi tokens may not be optimal, I believe their underlying infrastructure has a competitive edge and greater potential compared to the current fintech infrastructure. Existing fintech, while appearing vastly different, essentially is just a UI layer on top of banking applications, unlocking no innovations from scratch like DeFi does. DeFi allows for permissionless transactions, with transaction fees significantly lower in some cases than those charged by traditional systems. I believe over time, this is a long process we've known from the beginning, but within 10 to 20 years, DeFi will surpass traditional financial systems, or at least the fintech companies we know today.
How Will Institutional Participation Shape the Future of DeFi?
Institutional participation is crucial in shaping the future of decentralized finance (DeFi). We are beginning to see family offices and prominent figures from traditional finance explore DeFi and its various strategies despite initial hesitancy due to market turbulence like the Terra event. The growing interest from more traditional sectors over the past two quarters signals readiness for broader institutional involvement in DeFi.
Over the coming years, DeFi infrastructure is expected to evolve, maintaining its current foundations while integrating significant advancements. One anticipated key development is identity verification solutions, which could innovate DeFi by enabling uncollateralized loans. Currently, DeFi operates on over-collateralization, but introducing reliable identity verification could allow for credit-based collateral, mirroring traditional financial mechanisms like mortgage loans with minimal down payments.
Identity solutions within DeFi could stem from various innovations, from biometric verification like Worldcoin's iris scans to complex address-tracing systems for assessing creditworthiness. Achieving this would expedite the process of on-chain credit scoring, offering numerous advantages such as simplified currency transactions and programmable payments. For example, collateralized loan payments could be automated directly from someone's income in real-time on the blockchain, reducing the risk for lenders and potentially providing better borrowing rates for individuals and businesses.
As identity verification and financial activities transition to the blockchain, we can expect a shift towards more efficient and fairer capital lending rates. Initially, the allure of high leverage and yield opportunities may attract users to DeFi. However, over time, the emergence of more natural use cases could foster a more integrated and organic ecosystem within DeFi, a process driven by institutional participation and technological advancements.
How Do Institutions Deploy on New L1 and L2s?
Institutions' deployment on new Layer 1 (L1) and Layer 2 (L2) platforms varies, largely depending on their risk tolerance. Funds seeking high-risk ventures might explore new branches or chains offering high incentives, contrasting with more conservative institutions opting for lower but stable rates, typically above treasury bond yields but below 10%. These institutions typically deploy on mainnets using thoroughly tested protocols to achieve above-market returns, preferring capital preservation over aggressive growth.
For platforms like Eigenlayer, even with high total locked value (TVL), many institutions choose to wait until these platforms mature further before investing, adopting a cautious stance. This caution stems from a desire to safeguard wealth and responsibly manage risks, unlike the more speculative strategies adopted by individual investors.
A notable trend among institutions is leveraging increased Bitcoin holdings while mitigating risks. Strategies with automated liquidation protections, such as rebalancing based on predefined guidelines, are becoming increasingly popular. As market conditions improve, these institutions seek to more actively utilize their large capital, preferring to deploy their assets rather than letting them sit idle, highlighting a strategic approach to risk management and capital utilization in the evolving landscape of new blockchain platforms.
In the current DeFi environment, what scale are institutions allocating?
In today's DeFi landscape, institutions already involved tend to allocate at least 10% of their investment portfolios to cryptocurrencies. New institutions just starting with cryptocurrency investments may allocate around 1% to 2%, typically holding only Bitcoin due to its volatility. We primarily collaborate with crypto-native institutions or those transitioning towards a more crypto-oriented approach, which better understand the risks in DeFi. Especially for institutions new |
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Post time 14-3-2024 21:49:46
