Published Feb 28, 2022
By Qredo Team
DeFi and Web3 for Wall Street: 5 Opportunities for Institutional Traders
Smart contracts have sparked a dynamo of innovation, allowing coders to reimagine everything from lending to trading — all based on open source permissionless protocols that can be stacked together like lego bricks
Although individuals were the first to capitalize on the sky-high yields and unique trading opportunities of this market, institutions are increasingly driving adoption. Large transactions of more than $10 million accounted for over 60% of all DeFi activity in Q2 2021, according to Chainalysis, rising from 10% in Q3 2020.
To show what's possible, here are five different opportunities in DeFi and Web3 that institutional investors could tap into through the Qredo and MetaMask Institutional integration.
1. Trading
Bitcoin is often the first entry point into the crypto market, for individuals and institutions alike. From there, more adventurous investors may begin a journey down the risk curve in search of small-cap assets to juice returns.
Many of these smaller tokens are only available on decentralized exchanges. Uniswap, SushiSwap, and other permissionless DEXs allow anyone to list assets, making them the first pitstop for new token projects.
Furthermore, trading volumes on decentralized exchanges now rival the biggest centralized platforms. And, as many DEXs are now running on Layer 2 protocols, they are often the most cost effective and capital efficient way to trade.
2. Lending
Most DeFi lending protocols are equivalent to pawnshops, allowing anyone to borrow (by putting up their crypto assets as collateral), or earn yield (by lending).
These yields can be much higher than in TradFi, driven by hot demand for leverage, the absence of middlemen, and innovative tokenomic schemes for bootstrapping liquidity.
For institutions subject to stringent compliance requirements, protocols such as Compound and Aave offer permissioned lending pools that only permit entry to vetted participants.
Lending rates
| Compound | Aave | Fulcrum | |
|---|---|---|---|
| DAI | 2.48% | 2.41% | 4.82% |
| USDC | 1.89% | 2.03% | 2.74% |
| ETH | 0.10% | 0.15% | |
| BTC | |||
| WBTC | 0.07% | 0.01% | 1.69% |
| USDT | 1.87% | 1.92% | 3.1% |
3. Staking
In addition to lending, DeFi offers another way to put idle crypto to work through staking and yield farming.
Staking, which simply means committing assets to support a Proof of Stake blockchain, usually involves locking up holdings to obtain rewards. The most popular protocols for staking include Ethereum 2.0 which offers around 5% returns, and Solana with roughly 6%.
Yield farming adds more layers of complication to staking. This typically involves shuffling assets between multiple protocols in search of the highest yields, and was made popular in the DeFi summer of 2020, when traders avidly harvested coins named after sushi, pancakes and yams on food-themed protocols.
4. Arbitrage
The fragmented and inefficient DeFi markets are fertile ground for market-neutral strategies such as arbitrage.
One such method relies on decentralized exchanges such as Uniswap and Balancer, which replace traditional order books with smart contracts that create a liquidity pool anyone can trade against. These protocols — known as automated market makers — rely on arbitrageurs to keep prices in line with the market, providing profitable opportunities for bots to snipe assets at lower prices, and sell them elsewhere.
Tools such as flash loans — which bundle the loan and repayment transactions into the same block on the network —take DeFi arbitrage to the next level. They give traders the ability to borrow funds without pledging collateral, making it possible to conduct complex arbitrage without even putting capital on the line.
5. NFTs
Non-fungible tokens are disrupting digital artwork to the tune of more than $23 billion in trading volume in 2021.
This staggering amount reflects rapid adoption, boosted significantly by the entry of big brands such as Nike and Gucci that are staking a claim to intellectual property in the metaverse through NFTs.
Even if the big brands were to abandon this new form of token tomorrow, the vast array of potential use cases — from provenance, to intellectual property and digital identity — are likely to ensure that NFTs are here to stay.
For institutions, they offer not only a new way to engage with audiences, but opportunities to participate in DeFi via innovative protocols for lending, collateralizing, and fractionalization.
Qredo and MetaMask Institutional: The Secure Gateway to DeFi
DeFi opens a new and potentially lucrative financial arena for institutions that can manage the risks and operational requirements.
Qredo has integrated with MetaMask Institutional to offer organizations a secure way to trade, swap, borrow, lend, and earn yield on decentralized protocols in DeFi.
To get started, talk to one of our specialists today.