While the world has been paying attention to Bitcoin, memo tokens, and NFTs, another crypto player has quietly been making some very big moves.
The decentralized financial (DeFi) market has swelled over the last year, growing from $12 billion in August 2020 to over $89 billion today. DeFi exchanges have added over 2 million new users since January, a whopping 177% increase.
But what is driving this rapid expansion in DeFi, and where will it go from here?
The appeal of DeFi is simple; a decentralized financial system where users, rather than banks and brokers, freely engage in digital asset trading and financial transactions through the use of so-called smart contacts, self-executing and immutable agreements living on a blockchain.
This new financial architecture is rapidly gaining favour from both users and investors. In little over two years, DeFi protocols like Uniswap (UNI) and Chainlink (LINK) have blossomed from DeFi startup to holding multi-billion market caps.
Given its rapid growth and increasing mainstream adaptation, some institutional investors and DeFi supporters believe that the technology could begin to enjoy broad market acceptance in as little as five years – and this could be very disruptive to traditional finance institutions.
Mathew McDermott, head of Digital Assets at Goldman Sachs, recently stated:
“In the next five to 10 years, you could see a financial system where all assets and liabilities are native to a blockchain, with all transactions natively happening on-chain… So, what you’re doing today in the physical world, you just do digitally, creating huge efficiencies. And that can be debt issuances, securitization, loan origination; essentially, you’ll have a digital financial markets ecosystem, the options are pretty vast.”
It doesn’t have to be all bad news for those making a living in the financial services. The shift to blockchain-based DeFi markets has the potential to create a safer, faster, more reliable system that everyone can benefit from, but those who want to stay in the game will need to adapt.
It’s no longer just fringe investors and Millennials pouring money onto the DeFi market; the sector has also attracted the attention of some big-name institutional asset managers.
BlackRock is by far the world’s largest investment manager, with over $9 trillion in assets under management. And as of their most recent Q2 SEC filings, they have close to $400 million invested in Bitcoin mining companies, with a 6.71% stake in Marathon Digital Holdings and 6.61% in Riot Blockchain.
Not to be outdone, rival financial services giant Fidelity Investments recently acquired a 7.4% stake in Marathon, paying around $20 million for the shares.
The two firms join the Vanguard Group as large investment firms venturing into the crypto space to take advantage of unbeatable returns. And it’s not surprising. When users on platforms like Venus can rake in double digits yields lending out their crypto, the paltry mid-single-digit returns currently offered by many investment firms pales in comparison.
However, when it comes to investing in DeFi, the reward of greater returns comes at the expense of significantly more risk. Unlike conventional, regulated financial institutions, there is no investor protection in the DeFi space – its core principles have been against the very rules that help ensure investor security. If there are vulnerabilities in the software or flaws in the code, DeFi apps are left open to disruptions or hacks, and its users are left holding the bag.
Case and point, DeFi exchange Poly Network, which saw $610 million in crypto disappear last month.
But that’s where traditional financial institutions can make a difference, bringing security and investor confidence into the DeFi space. Firms like BlackRock have the experience to manage liquidity, volatility, and risk, and the resources to help stop hackers. While risks in this emerging sector may still turn away the average investor, support from large institutional investors like BlackRock could go a long way in making DeFi more palpable to the masses.
DeFi-curious but afraid to take the plunge?
There are several ways for investors to participate in the DeFi market. Some invest directly, trading DeFi assets hoping to make a profit. Others prefer passive income opportunities, choosing to stake their crypto assets on a dementalized exchange (DEX) earning yield in exchange for providing liquidity.
Another option, investing in companies who participate in the DeFi sector rather than directly holding any tokens. And one such company we like right now is DeFi Technologies Inc. (NEO: DEFI).
The Canadian company focuses on building shareholder value through building and managing assets in the DeFi sector. Over the past several months, they have made some winning strategic choices that helped deliver impressive financial performance over the last eight months.
Q2 ended with DeFi Technologies Inc. achieving an impressive US$107 million in assets under management through wholly-owned subsidiary Valour Inc. Valour is an exchange-traded product (ETP) company and is responsible DeFi Technologies portfolio of products of exchange-traded notes (ENTs). Diversifying their product mix, the company added Polkadot and Cardano ENTs in Q2 with plans to launch other innovative ENTs very soon.
Continuing with their exceptional growth, On August 19, 2021, DeFi Technologies released an update, announcing that Valour assets under management had ballooned to over US$143 million, marking a jaw-dropping increase of over 1,400% since January.
The following week, DeFi Technologies announced it had joined the DeFi Alliance, shortly after exchange platform Coinbase did the same. The DeFi Alliance is a self-described “finance accelerator” mentoring and supporting DeFi startups with the goal of helping the DeFi sector hit a billion users by 2025.
Other notable members of the 150+ company alliance include Coinbase, Jump Capital, and Chainlink.
Disclaimer: The company described in this article is a customer of NAI Interactive Ltd. This material is for informational purposes only and is not intended as a recommendation or offer or solicitation for the purchase or sale of any securities or financial instruments, or for transactions involving any financial instrument or trading strategy.
