Wall Street’s Love-Hate Relationship With DeFi

‘This time it’s different’ is what many cryptocurrency hopefuls had to say about the 2021 bull run. With a strong belief that this time’s bull run isn’t just a retail trader-driven bubble, like the one that left a scathing scar for many crypto newbies in 2017, but instead an institutional investor entrance-driven one. Mathew McDormatt, Global Head of Digital Assets at Goldman Sachs, says in a recent Goldman Sachs report “What’s different today is the extent of institutional interest, coupled with very strong demand across the wealth management franchise.”

The expected reduction in volatility that comes with institutional money is far from the reach of the cryptocurrency market. The May 2021 drop by more than 40% of the cryptocurrency market left crypto enthusiasts in somewhat of a conundrum about whose team institutional investors are really playing on?

But What About ‘DeFi’?

DeFi, a shorthand to ‘Decentralized Finance’, is basically a financial movement where decentralized networks and blockchains are used to transform traditional financial products into trustless and transparent protocols that work without intermediaries. In simpler terms, it is open to everyone and does not ask its users to place trust in it. This ‘trustless’ functionality of DeFi is its main aspect. Your money and deposits are completely free from bankers and you don’t have to second guess the security of the money you have locked into DeFi thanks to smart contracts on the blockchain. It allows everyone to take the charge of their assets and investments, and have a direct say in its management. You can really flip off having to go to banks and dealing with their pretentious staff now!

Along with cryptocurrencies reaching all-time highs this year, DeFi has exploded to show a whole new alternative world for finance with an exclusive place for cryptocurrencies in it. This aim and direction have given many, including our friendly neighbourhood institutional investors, financial reasons to hold on to cryptocurrencies beyond mere speculation.

The Temptress

At a time when covid smashed the global economy leaving banks and other financial institutions vulnerable, DeFi instead grew from a market of $700 million to $15 Billion in a year. In the first few months of 2021, the TVL or ‘Total Value Locked’ in the DeFi space more than doubled to $40 Billion only to double up again to a staggering $80.5 Billion by the end of July 2021. The TVL is the total dollar value of all the tokens locked in smart contracts on individual DeFi project platforms.

The rapid money pump into DeFi protocols has been strongly incentivized by high yields, fancy crypto tokens, and collectables creating a high yield — high-risk market. The peaking interest in DeFi has made tremendous amounts of money for DeFi protocols through their platform fees. Some DeFi protocols have been raking in a mind-boggling $1 million revenue daily!

Snapshot from August 2021

When Wall Street Wants A Piece

Only a few years ago Wall Street voraciously shunned Bitcoin and its successor cryptos as ‘worthless money’ and Ponzi schemes. The past year in crypto has led the biggest and oldest of institutional investors to open to the idea of a decentralized world, more so with the exorbitant amount of money pouring into crypto and DeFi.

Institutions such as Goldman Sachs, Bank of America, and BNY Mellon amongst many other banks and hedge funds have and are capitulating solely on the price action of cryptocurrencies and the surge in long-term demand. Entering through setting up ETFs and private wealth management for digital assets, these institutions clearly cannot ignore the crypto space any longer. Michael Sonnenshein, CEO of the world’s largest digital asset manager, Grayscale Investments, agrees that “institutional investors now generally appreciate that digital assets are here to stay, with investors increasingly attracted to the finite quality of assets like bitcoin.”

The DeFi arena is a separate ball game where most institutions are either ill-equipped to set up DeFi protocols or face a conflict of interest with their Traditional Finance operations. DeFi fundamentally removes the intermediary that Wall Street Banks position themselves as, be it in payments, lending and borrowing, or asset management. Mike Novogratz, a former hedge fund chief who now runs crypto investment and financial services firm Galaxy Digital, said in an interview “The money transfer business is a very high margin one for legacy financial institutions and it’s under threat from new payment systems that are faster, more transparent, and cheaper.”

The dynamic DeFi space seems to be ahead of traditional finance as institutional investors are still at the ‘looking towards crypto’ phase of the journey while new DeFi protocols are emerging faster than ever. As Wall Street begins to hesitantly accept crypto, they must also swallow their fate as either competitors to DeFi or contributors to it with a grain of salt.

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