The average rate of return of DeFi products is much higher than that of traditional currency markets

The average rate of return of DeFi products is much higher than that of traditional currency markets. Will this attract institutional investors?

Original title: "DeFi currency market will eventually attract institutional investors: a miracle or a nightmare? 》

Bitcoin's bull market since last year has even softened some of the most skeptical of it. From economists to hedge fund managers, this field is opening up to technology, and the center of this movement is decentralized finance (DeFi). Although the total market value of cryptocurrencies has reached 2 trillion US dollars, which is comparable to Apple's, it is DeFi's promise-a small corner of the blockchain industry today-that has attracted the attention of institutional investors.

As Bitcoin's bullish trend continues, interest-bearing crypto products have become all the rage. Some services provide up to 8% return on Bitcoin investment. For those investors who are already looking forward to appreciation, this is very useful for maintaining cash flow without selling any assets.

The three main factors that maintain institutional investors’ interest in Bitcoin are currently historically low interest rates, inflation rates, and geopolitical instability. Since interest rates are expected to be close to zero in the foreseeable future, investors are preparing to transfer funds to other places to obtain wealth.

The 2% inflation target set by the US Federal Reserve has aroused investors' concerns about the devaluation of the renminbi. As tensions between China and the United States are on the verge of instability, the risk of dollar-denominated portfolios is increasing.

Currency Market

The secure purchase, storage and use of cryptocurrency is still a fairly complex test-far more complex than setting up a bank account. However, according to Larry Fink, CEO of BlackRock, a global investment management fund that manages nearly $9 trillion in assets, Bitcoin may evolve into a global market asset and set new highs in the next few years. .

In the traditional financial system, the money market is part of the economy that issues short-term funds. They usually handle loans for a period of no more than one year, and provide services such as lending, buying and selling, and wholesale transactions are carried out over the counter. The money market consists of short-term, highly liquid assets and is part of the broader financial market system.

Traditionally, the currency market is very complicated, and expensive management fees and hidden fees have prompted most investors to hire fund managers. However, their existence is essential to the operation of modern financial economy. They encourage people to borrow money in the short term and allocate capital to productive uses. This improves the efficiency of the overall market while helping financial institutions achieve their goals. Basically, anyone who has spare money on hand can earn interest from deposits.

The money market is composed of different types of securities, such as short-term Treasury bills, certificates of deposit, repurchase agreements, and mutual funds. These funds usually consist of stocks priced at $1.

On the other hand, the capital market is dedicated to the trading of long-term debt and stock instruments, and includes the entire stock and bond market. Using a computer, anyone can buy or sell assets in just a few seconds, but companies that issue stocks do this to raise funds for longer-term operations. These stocks fluctuate, and unlike money market products, they have no expiry date.

Since money market investments are almost risk-free, they usually bring meager interest rates. This means that compared to risky assets such as stocks and bonds, they will not generate huge returns or show substantial growth.

DeFi Vs. World?

In order to hedge currency risks, institutions have begun to use Bitcoin, and retail investors have followed suit. Since 2018, more than 60% of Bitcoin's circulating supply has not changed, and it is expected that the price of Bitcoin in the next 24 months will be much higher than $100,000.

If the current trend continues, investors will continue to hoard Bitcoin. However, although most of the world's first supply of Bitcoin is still in storage, the DeFi industry is constantly developing alternative platforms for interest-bearing payments through smart contracts, which improves transparency by allowing investors to view and track funds on the chain .

The average rate of return of DeFi products is also much higher than that of traditional currency markets, and some platforms even provide double-digit annual rates of return on deposits. From asset management to smart contract auditing, the DeFi field is creating a decentralized infrastructure for a scalable currency market.

Stani Kulechov, co-founder of the Aave DeFi agreement, said that during the bull market, interest rates are higher because funds are used to leverage more capital and margin costs push up yields. New innovations in DeFi are consuming more stablecoins, which further increases revenue. Unless there is a new injection of capital, these interest rates may remain for a period of time.

The Ethereum network currently hosts most of the DeFi applications, which has prohibited tokens that are not available on the network from participating in decentralized finance. Take Bitcoin as an example. Although it is the largest cryptocurrency by market capitalization, it has only recently entered the DeFi platform.

Most loans in DeFi are over-collateralized, which means that the money in the pool is always more than the money lent. If the value of the issued token drops, the funds in the pool will be liquidated for compensation.

Anton Bukov, the co-founder of 1inch, a decentralized transaction aggregator, said that the blockchain is the first fair executor in human history-very limited, but ultimately fair-it may provide new services and new services in the future. Interaction. He said: “Developers are doing their best to resolve potential dishonesty in existing capital flows and create new capital flows by replacing middlemen.”

By creating an automated asset lending platform, decentralized finance eliminates the need for intermediaries, custodians, or high infrastructure costs in the money market.


Honest work

Among the many trends caused by DeFi in the past few years, liquid mining has attracted a lot of attention. Liquidity mining means that the network uses tokens to reward liquidity providers, and these tokens can be further invested in other platforms to generate more liquidity tokens.

Simply put, liquidity providers are one of the most alert traders. They constantly change their strategies to maximize their output and track interest rates on all platforms to ensure they get the sweetest trades. The potential rate of return may become very high, but it is unclear whether liquid mining is a fashion or an emerging phenomenon. Kulechov added:

"Liquid mining is just a way to distribute governance power to users and stakeholders. What really matters is whether the product itself is suitable for the agreement market. In liquid mining, most of the successful governance power distribution is here. Find the agreement market/suitable agreement before such projects."

Liquidity mining has an incredible positive feedback loop, and participation increases the value of its governance tokens and further promotes growth. Kava CEO Brian Kerr said that although this feedback loop can produce very positive results in a bull market, it can have the exact opposite effect in a down market:

"To effectively manage the bear market, it will depend on the governance team of each project to reduce returns before a full death spiral occurs. Whether the market is a bull or a bear, liquid mining will be the backbone of blockchain projects in the next few years. "

The currency market is the backbone of the global financial system, but most of its transactions occur between banks and other companies and other financial institutions in the time deposit market. However, some of these transactions did enter the hands of consumers through money market mutual funds and other investment vehicles.

Decentralization is the next frontier of finance, and as outstanding investors continue to participate in the DeFi field, a decentralized economy seems inevitable. Today, participating in this rapidly evolving environment may be a risky gamble, but what the decentralized financial platform has learned now will become the basis for future robust DeFi applications. Bukov believes that the high interest rates on DeFi platforms are "absolutely sustainable." He added:

"The higher the profit, the greater the risk. So the risk-return model for all these opportunities is always close to equilibrium. Normalizing risk will reduce profit because more participants will participate in sharing returns."

From smart contract failure to unauthorized withdrawal of community funds, the DeFi field is both a miracle and a nightmare. DeFi-based liquid mining platforms are still in the early stages. Although sometimes these numbers are too tempting, it is crucial to do your own research before investing in any platform or asset.

As a blockchain news information platform, Cointelegraph Chinese provides information only representing the author's personal views, and has nothing to do with the position of the Cointelegraph Chinese platform, and does not constitute any investment and financial advice. If you need to reprint, please contact the relevant staff of Cointelegraph in Chinese.

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