· 2 min read

High Yields Draw Institutions to DeFi, But Hurdles Remain

Source: iStock/technotr

The “mind-boggling” yields that are available in decentralized finance (DeFi) protocols are simply too tempting to resist for institutions, according to panelists at a recent discussion about institutional adoption of DeFi.

In the discussion, titled “Institutional DeFi: The Herd is Coming… Again?,” held at Messari’s Mainnet 2021 event on Tuesday, panelists from across the industry agreed that although a lot of hurdles remain for institutions to embrace DeFi, the potential for yield is drawing interest.

According to Andrew Keys, Managing Partner of the crypto-focused investment firm DARMA Capital, it is the fact that investors can earn yields on, for instance, their ethereum (ETH) of 5% and then get an additional potential 10x upside in the price that is “mind-boggling” for them.

He added that this is especially true in “the interest rate-starved environment” that is seen in traditional capital markets today, where earning a yield at all is becoming increasingly difficult.

Voicing a similar opinion, general counsel at lending and borrowing platform Aave (AAVE), Rebecca Rettig, said that this is the exact reason why traditional financial institutions want to learn about DeFi, “because they’re thinking ‘how is it possible to get that much yield?’”

But despite the high potential for yields in DeFi protocols, a number of hurdles still remain in the form of custodianship, anti-money laundering, and know-your-customer (AML & KYC) regulations, latency, and gas fees, according to Keys.

He added that because of these hurdles, the largest institutions, such as investment banks, still have to keep DeFi at an arm’s length for now:

JPMorgan et.al. is not touching it for now, because of KYC & AML, Keys said, adding “but that’s fine, because we’ve got family offices, crypto native funds, and others” that can participate.

As a consequence of the regulatory hurdles, in particular, Lisa Cuesta, head of business development at the Ethereum layer-2 company Aztec, made the case that it is the more traditional proof-of-stake coins that will first reap the benefits of increased institutional interest in yield generation from the crypto space.

Bitcoin was the gateway for institutions to get their toe into crypto, and ETH 2.0 is going to be the gateway to get into staking,” she said. 

However, she also acknowledged that the space is still “a little bit far off from that, but as you familiarize yourself with Ethereum, it becomes more well-known, and staking becomes an option for institutions that will open up their minds to other proof-of-stake networks are out there.”

Over time, this process is bound to “open up the floodgates both from a capital allocation perspective and from an entrepreneurship perspective,” Cuesta added.


Learn more:

- 'Dark Phase' Ahead on DeFi Regulatory Front, yearn.finance Creator Warns
- US Watchdogs Send More Warning Signs to Altcoins & DeFi, But Coinbase Has a Plan

- DeFi Has Had a Strong 2021, Driven By New Trends & Paradigms
- 'Fiat-Like' Proof-of-Stake Chains Favor Centralization & Rich Players

- Regulators are Coming for the DeFi Goose and Its Golden Eggs
- Bitcoin and Ethereum Can Coexist With DeFi Bridging the Two