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Crypto Outlook: Institutional Funds Following High-Growth DeFi Opportunities

With a total value locked of US$80 billion - 16x what it was 24 months ago, DeFi is now on the radar of the world’s leading financial institutions, funds, and family offices.

Matrixport’s Head of Sales and Business Development Cynthia Wu recently discussed industry developments and institutional participation in DEFi at two panels — “Institutional Lending and Yield Generation in Digital Assets and The DeFi Opportunity for Institutions'' . Here’s a recap of some key takeaways.

Drivers for Institutional Uptake

Institutional players perceive the market as nascent with funds flowing gradually into the crypto market — investors starting in BTC, subsequently moving into ETH, and DeFi, which is the biggest application on the Ethereum network. The “DeFi Summer of 2020” was a key turning point for institutional liquidity overall. Matrixport has seen exponential growth in institutional demand, especially for its DeFi lending products.

According to Chainalysis, corporates, hedge funds and family offices accounted for the majority of DeFi transactions in the second quarter of 2021. Corporate and family offices can take up to 12 months to onboard and fully appreciate the ecosystem. Once comfortable, big-money investors are more than happy to scale their fund allocations after experiencing the kind of yields rarely seen in the traditional finance markets.

Risk appetite is higher in Asia

For family officers and corporates, the risk appetite is slightly higher in Asia. Traditional banking institutions in Asia are experiencing a slower materialisation than North American counterparts. Currently, the only bank with a digital exchange is Singapore’s DBS Bank, which provides tokenisation, trading, and custodian services for digital assets.

With more prominent liquidity providers such as banks entering the market at a slower pace, the next phase of growth in the DeFi market will be driven by digital asset management services providers such as Matrixport, who are playing the role of institutional liquidity with aggregated retail investments. Yet, the ultimate goal of the industry is to invite more institutional players and drive liquidity to the field, fully realising the potential of DeFi as the future of financial applications.

Institutions wants a DeFi investment experience that is familiar

Beyond the learning curve that comes with every technological breakthrough, a key hurdle in institutional participation lies in the expectation to have the same investment experiences in crypto, akin to what they experience with traditional financial market instruments. These would-be DeFi institutional investors require asset management services that can fit into their current workflows, including audit trail, transparency on collaterals, and risk management. Unlike retail investors, these fund managers are subject to stringent compliance requirements from regulators and clients alike.

For institutional DeFi investing to fully spread its wings, investors need service providers that safeguard digital assets in a secured and transparent manner. In order to address these needs, qualified DeFi custodians such as Matrixport’s Cactus Custody which already has US$10 billion in assets under custody, have a role to play. Cactus Custody offers institutional-grade due diligence, sophistication and security to empower the long-term growth of its institutional clients.

Looking Ahead

Making DeFi more accessible and trustworthy in the eyes of institutional investors and regulators will be the main challenge for market participants in the next 24 months.

With yield generation being the strongest value proposition of DeFi, regulatory pressure on DeFi players is likely to stay. Heightened scrutiny from lawmakers with respect to capital outflow and investor protection will lead to more targeted policies and actions on DeFi players, such as the recent The U.S. Securities and Exchange Commission’s investigation into Uniswap. While Asian lawmakers might follow a similar direction, configuring DeFi policies in a friendly and sustainable fashion will be the key step to promote the sector’s full potential.

As the ecosystem continues to mature, it is crucial that institutional investors understand where DeFi fits within their broader portfolios, and utilise robust asset management firms and custodians to support their investment goals in a safe and transparent environment. Likewise, the industry must bridge the institutional demand with the untapped potential of DeFi by offering sophisticated, yet intuitive investment products.

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