DeFi

Navigating the Institutional Trilemma of DeFi

Published

6 months ago

24 July, 2024

Navigating the Institutional Trilemma of DeFi

Engaging in DeFi at scale presents unique challenges, summarized by the “DeFi institutional trilemma” model: risk, reward, and capacity.

The DeFi industry promises to address many of TradFi’s inefficiencies, providing a wide range of opportunities for both retail and institutional investors.

With the recent focus on crypto ETFs, institutional interest in cryptocurrencies has increased, positioning DeFi as a prime opportunity for many organizations.

However, engaging in DeFi at scale presents unique challenges, summarized by what we call the “The Institutional Trilemma of DeFi“Model — Risk, Reward and Ability.

Understanding the Institutional Trilemma of DeFi

Successfully navigating DeFi at scale requires a nuanced understanding of three critical dimensions: risk, reward and abilityThese factors are interdependent and must be carefully balanced to optimize investment strategies and ensure sustainable growth.

Risk: In DeFi, the risks are multiple and often more complex than in TradFi. Technical risks arise from vulnerabilities in smart contracts and protocol designs, while economic risks arise from market dynamics and protocol mechanics. Historical data reveals that more than $58 billion was lost due to various incidents, highlighting the need for a thorough risk assessment.
Reward: Rewards in DeFi are generally simpler to quantify. They range from staking and liquidity rewards to lending rates and liquidity mining. For example, providing liquidity to lending protocols like Aave can generate returns that are influenced by market conditions and borrower demand.
Ability: DeFi capacity is a unique factor that determines how much capital can be deployed without significantly decreasing returns or increasing risk. Unlike traditional assets like Treasuries, DeFi strategies have limited capacity due to liquidity and protocol limitations. This factor is crucial to running profitable DeFi strategies at scale.

Yield Generation in DeFi

DeFi offers many ways to generate yield on assets, making it an attractive avenue for investors looking to maximize their returns. At a basic level, we can identify the following key strategies for yield generation in DeFi:

Staking: Involves locking tokens into a network to secure it and earn rewards.
Liquidity provision: Provide liquidity to pools on decentralized exchanges (DEX) to earn trading fees.
Liquidity extraction: Receiving protocol governance tokens as a reward for providing liquidity.
Ready:Earn interest by lending assets on platforms like Compound.
Air drops: Distribute tokens to early adopters or liquidity providers to decentralize governance.

Additionally, leverage can be used in many of these yield mechanisms, such as staking and lending, to maximize returns. While this increases returns, it also increases the complexity of a strategy, and therefore its risks.

Risk Assessment in DeFi

The complexity of DeFi introduces a variety of risks, which can be classified into two main categories: economic risk and technical risk.

Technical risks include smart contract vulnerabilities, such as reentry attacks and key mismanagement. Economic risks involve factors such as liquidations, impermanent losses, and de-pegging events. The collapses of Terra and Iron Finance are prime examples of economic risks that resulted in significant losses.

To mitigate these risks, investors should:

Ensure that protocols are regularly audited by reputable companies.
Diversify your investments across multiple protocols to reduce exposure to a single point of failure.
Stay informed about the latest developments and potential vulnerabilities within the DeFi ecosystem.
Track unique economic risk factors for each protocol in which they are active.

Capacity Management in DeFi Protocols

Capacity management is essential to maintaining optimal returns and minimizing risk. It is something that institutional investors simply cannot ignore. For example, in liquidity pools, increasing the amount of capital can lead to lower returns because increasing capital linearly decreases incentives. Understanding capacity dynamics helps investors determine how much capital to deploy without significantly reducing returns.

Performance profile of an AMM strategy

Factors affecting capacity include:

Returns decrease as more capital is added to a pool.
Protocol-level mechanisms, such as exit fees and AMM slippage.
Liquidity constraints in credit markets, which may impact the availability of assets for borrowing and lending.

To put this into perspective, let’s consider a practical example of declining yield.

Imagine a stablecoin pool with $500,000 in liquidity, offering a 10% annual return through incentives. If you were to deposit an additional $500,000 into the pool, the return would decrease to 5%, assuming all other factors remain constant.

At this point, earning a 5% return on stablecoins becomes less attractive, especially when compared to the risk-free rate offered by Treasuries. Therefore, the effective capacity of this strategy would be less than $500,000, as additional deposits would result in diminishing returns.

The Future of Yield in DeFi

The DeFi space is evolving at an incredible speed and we have seen many new yield opportunities emerge in various areas of DeFi. One of the latest and most promising of these is the integration of DeFi and TradFi via tokenized real assets (RWA). For example, treasuries and real estate are entering the DeFi space, providing new opportunities for yield generation and risk diversification.

Institutional players like BlackRock and PayPal are also exploring DeFi. BlackRock’s BUIDL fund and PayPal’s PYUSD stablecoin demonstrate how traditional financial giants are leveraging blockchain technology to deliver innovative financial products.

Strategic considerations

While the DeFi space offers many exciting opportunities for institutional investors, strategies can be multidimensional and complex, while concepts such as capacity require very specific knowledge. Nevertheless, by understanding and addressing the dimensions mentioned in this article, institutional investors can effectively engage in DeFi, harnessing its potential while managing the inherent risks.

This article is based on IntoTheBlock’s latest research report on institutional DeFi. You can read the full report here here.

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DeFi

If You Missed BONK and PEPE This Year, This Viral New Crypto Might Be Your Salvation

Published

6 months ago

29 July, 2024

CoinFlix Staff

If You Missed BONK and PEPE This Year, This Viral New Crypto Might Be Your Salvation

Bonk and Pepe appear set to net new investors 10x to 100x returns over the next 12 months. However, cryptocurrencies in the DeFi play-to-earn gaming sector could offer even greater returns. As August approaches, Rollblock is emerging as a standout DeFi play-to-earn gem with the potential to 100x-1000x gains in the fourth quarter and beyond.

The project features an innovative revenue sharing model and exceptional accessibility, attracting players and investors. Additionally, Rollblock’s extensive game library of over 150 titles and enhanced sports betting are further driving excitement for the platform. Cryptocurrency analysts are expecting a sudden surge in demand. 800% a push for Rollblock from the beginning of September.

Bonk remains strong despite market fluctuations

While most well-known cryptocurrencies struggled throughout July, Bonk remained strong. As one of the highest-grossing meme cryptocurrencies of 2024, Bonk rose over 24% in July, while most cryptocurrencies experienced negative fluctuations.

Investors looking to add a relatively safe memecoin to their portfolio should consider Bonk. While Bonk is unlikely to generate explosive gains of 250x to 1,000x from here on out, Bonk could still theoretically provide returns in the 20x to 100x range.

Pepe should see a big rise in the next bull run

Alongside Bonk, Pepe has yet to go through a bull run. This means that there are still substantial gains to be made from Pepe over the next 12 months.

Pepe is down 4% in 30 days, but that shouldn’t worry Pepe investors in 2024. Experts believe Pepe’s best days are still ahead, with crypto analysts predicting a 10x to 50x surge in the next election cycle around November.

In the long term, Pepe could surpass the 100x mark for today’s investors. However, Pepe is a memecoin, and one should exercise caution when investing in purely speculative assets that have no utility.

Rollblock’s Unprecedented Hype Potential Could Push It Past 100x Valuation in Q4

Rollblock is a GambleFi Play-to-Earn token that integrates centralized and decentralized gambling on a single platform. By allowing players to earn rewards through active participation and gameplay, the platform creates a compelling incentive structure that appeals to both casual and competitive players.

With its cutting-edge blockchain technology, Rollblock offers top-notch security that keeps bets and transactions on the platform secure. The platform’s lack of KYC mandates appeals to both users who value anonymity and security.

Rollblock’s revenue sharing model, which allocates up to 30% of casino revenue to RBLK token holders, is a major draw for investors. The model involves burning half of the repurchased tokens and distributing the other half to stakers, increasing the token’s value and encouraging long-term investment.

The platform is also constantly evolving thanks to user feedback which has enabled updates such as the upcoming sports betting feature within the platform’s casino. This addition will complement Rollblock’s extensive game library of over 150 titles, ranging from traditional poker to innovative blockchain-based games.

RBLK is expected to emerge as one of the leading DeFi tokens in 2024. With a price of $0.0172 with impressive growth potential and over 140 million tokens sold recently, Rollblock is on track to enter the top 100 cryptocurrencies by Q4, making today a lucrative time to buy RBLK tokens.

Discover the exciting opportunities of the Rollblock (RBLK) presale today!

Website: https://presale.rollblock.io/

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DeFi

Cryptocurrency sector is experiencing ‘most misjudged moment’ since 2020, says venture capitalist Arthur Cheong

Published

6 months ago

29 July, 2024

CoinFlix Staff

Cryptocurrency sector is experiencing ‘most misjudged moment’ since 2020, says venture capitalist Arthur Cheong

Veteran cryptocurrency investor Arthur Cheong believes the digital asset sector offers long-term holders a golden opportunity.

Cheong, the founder of DeFiance Capital, tell His 171,700 followers on social media platform X indicate that he believes decentralized finance (DeFi) is hugely undervalued.

According to Cheong, DeFi projects are innovating at a rapid pace and leaving traditional financial (TradFi) companies in the dust.

“It’s been a long time since I’ve been this excited about the risk/reward and potential upside of DeFi. This is probably the most misjudged moment since the pre-DeFi summer of 2020, with extremely promising prospects.

I see opportunities not only in OG (original) DeFi, but also in some newer projects that are evolving rapidly and growing at a pace that fintech startups will do anything to match.

The veteran investor also believes that crypto is now here to stay following recent launch from the Ethereum spot market (ETH) exchange-traded funds (ETFs) last week.

“Overall, the floodgates are open and there is no turning back. TradFi asset managers will continue to launch new crypto products because, guess what: there is huge demand for them!”

I expect them to launch actively managed crypto ETFs [in the] coming years. ”

Earlier this month, Cheong laid that it might be a bad strategy for cryptocurrencies to seek mass adoption, believing that digital assets are designed to disrupt several key financial sectors.

“I think we should accept that cryptocurrencies may not be suited for mass adoption like Web2, but rather are optimized for some narrow but very high-impact use cases like stateless global money, cross-border payments, and decentralized finance.

Chasing mass adoption of normies may be chasing the wrong Grail from the start.

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