As yields start to rise, institutions may finally get involved in DeFi in 2024.
A new report from Fidelity claims that institutions may finally get involved in DeFi in 2024 as yields start to rise.
The report covers the asset manager’s outlook for the crypto industry in 2024, focusing on several key areas of development, including Bitcoin mining, stablecoins and DeFi. “If DeFi yields once again become more attractive than TradFi yields and a more developed infrastructure emerges, there could be renewed interest by 2024,” the report said.
Large investors once had trouble making money in DeFi, andRWA became the savior
The prediction comes as the yields DeFi investors earn by lending stablecoins exceed U.S. Treasury yields. Previously, Fidelity also predicted that institutional investors would begin to meaningfully participate in DeFi in 2023, but this prediction did not come true.
The fundamental reason is that large investors cannot make money in Defi.
Although decentralization and security are certainly important to DeFi, both traditional finance and decentralized finance are inseparable from one core point, which is to be able to make money, especially to enable rich people to make money. This is crucial for whales and institutions with tens of millions of dollars in on-chain assets. Letting these people make money is the most practical problem facing DeFi.
Since the LUNA crash, liquidity problems have begun to spread throughout the entire crypto market. Sanjian Capital, which subsequently collapsed, was also unable to generate target returns due to reduced market activity, leading to the withdrawal of capital from large clients and its eventual collapse. According to some former internal employees of 3AC, they revealed to BlockBeats that by the end of the company’s operation, the large-scale assets managed by the team could hardly find any scenarios that could generate expected returns. The FTX thunderstorm at the end of the year made the market even worse.
According to FRED data, as of August last year, the yields on US one-year, two-year and ten-year Treasury bonds were 5.37%, 4.88% and 3.97% respectively. Yield curve aside, yields have been rising steadily since the end of 2021, both on short-term and long-term Treasury bonds. Compared with mainstream DeFi protocols such as Curve and Aave, even the current yield of ten-year Treasury bonds is significantly higher than its average yield.
In contrast, DeFi’s income level is gradually declining. According to DeFi Llama data, between the beginning of 2022 and July 2023, the median DeFi return has dropped from 6% to 2%, which is almost unprofitable for large investors.
In this regard, Fidelity’s latest report stated that last year “under the general risk aversion environment, institutions believed that the mid-single-digit returns provided by DeFi yields were too low for the related risks.” And the Federal Reserve’s decision to raise interest rates in 2023 provides institutions with better, or at least considered safer, options, which further exacerbates the liquidity crunch in cryptocurrencies.
When sufficient returns cannot be generated on the chain, bringing real-world returns into DeFi is a feasible solution, namely RWA (Real World Assets). In June last year, after the market entered a deep bear, Compound and MakerDAO , two established DeFi tokens, began to rise on the back of the RWA narrative and set new highs for the year.
Previously, the "Endgame" proposal article published by the founder of MakerDAO after the Tornado Cash controversy triggered a round of discussions about RWA. There are rumors in the market later that MakerDAO’s income has increased significantly in the past few months by using treasury funds to purchase U.S. Treasury bonds. The founder of Compound also announced his new company Superstate at the end of June, which is responsible for bringing assets such as bonds to the chain to provide potential customers with returns comparable to those in the real world. Under the wave of compliance in Hong Kong, the popularity of RWA has reached a new high.
On the premise that the yield on government bonds exceeds the yield on DeFi, cryptocurrency investors’ demand for tokenized government bonds continues to grow. People not only hope to obtain better on-chain returns through this narrative, but also hope to rely on it to attract more Traditional funds have entered the market, creating a new round of crypto cycle.
Among them, one of the key parts of MakerDAO's construction of a decentralized stable currency is to use RWA as collateral. As one of the most important issues of MakerDAO, RWA is constantly discussed and verified by the community and is regarded as an important solution.
DeFi yields rise and overtake government bonds
According to a report by DLNews, DeFi lending protocols like Aave are the largest of their kind, with over $8.3 billion in deposits, providing investors with an easy way to leverage their crypto assets. But to do this, other investors must deposit stablecoins for them to borrow against. In recent months, the yield Aave users can earn by lending stablecoins has exceeded the interest rate on the 10-year U.S. Treasury note.
According to FRED data, the U.S. 10-year interest rate is currently about 4.25%. Investors can earn up to 14% on USDT , the largest U.S. dollar-pegged stablecoin in DeFi. USDT has over $97 billion in circulation, which is an increase from around 5% in August.
Other stablecoins also offer higher yields. Dai is the third-largest stablecoin, with a circulating supply of approximately $4.8 billion. Aave depositors earn approximately 8.5%, while Circle’s USDC , the second-largest stablecoin, earns just under 5%. DeFi investors often view DeFi stablecoin lending rates offered through lending protocols such as Aave as the industry’s own risk-free rates. This is because it represents the baseline return against which all other DeFi positions are evaluated.
The interest rates offered to lenders on Aave are determined by the protocol’s algorithms, with yields increasing as the asset becomes more popular with borrowers. If U.S. Treasury yields fall, such high yields may attract institutions into DeFi. As long as risk appetite persists, the attractive returns that DeFi investors can earn from lending on stablecoins are unlikely to wane in the near future.
Although throughout 2023, USD-pegged stablecoins took a hit as DeFi investors turned to U.S. Treasuries to earn higher yields. However, if the Fed cuts interest rates by 0.75% by the end of 2024 as predicted, institutions may start looking for more profitable ways to make more money, namely investing in DeFi.
Can the RWA story continue to be told?
RWA is put on the chain to bring the value created by real-world assets into the crypto world, thereby catering to the preferences of users and investors in the crypto world. The reason why these two worlds exist independently, apart from blockchain technology, is essentially the difference between strong supervision. This essential difference creates the crazy wealth effect in the crypto world, and the wealth effect is the reason why most people are sucked into the crypto world. Traditional assets are actually contrary to the crypto world due to their asset attributes and compliance attributes.
However, it is not easy to put RWA on the chain. It will involve new product architecture design challenges, financial, legal compliance and technical risks, as well as unknown unknowns.
The reason why RWA can trigger a wave of attention is precisely because under the baptism of the bear market, some whale who made money began to long for stable fixed income in the real world. Judging from the current development of RWA, its exposure is basically limited to treasury bonds, especially US treasury bonds. On the one hand, this reduces DeFi's ability to resist regulation. On the other hand, it also means that once the Federal Reserve reverses course, the RWA protocol that relies on U.S. debt will fail again and enter an irreversible trend of declining returns. In the eyes of many, the Fed is not far away from a reversal.
