The cryptocurrency market is going mainstream with hundreds of blockchain networks across L1s, L2s, NFTs, gaming, and metaverses. DeFi is building the financial ecosystem around incentives & monetization that power these networks. Over the coming years, DeFi is expected to grow even faster with these latest developments and will capture more than 50% of CMC shares in the short-to-mid term.
DeFi protocols require liquidity to operate efficiently and most are designed to enable investors of any size to participate in liquidity provisioning to the protocol. The investors aka LPs get a share of the protocol fee and reward in exchange for providing liquidity. With more protocols and applications powered by DeFi, LP investment opportunities are growing larger.
Investors & market-makers across different segments are now participating in this fast-growing industry. Funds deployed in custody-based exchanges & service providers are now shifting into DeFi. The addressable opportunity for investment strategies in DeFi is easily a multi-trillion dollar in the coming years.
Despite strong demand, DeFi adoption has been limited, especially among institutions & sophisticated investors, mainly due to the following reasons:
Poor risk customizability: Risk customization in DeFi is very limited. This makes it difficult for sophisticated investors to participate in DeFi LPs. Also, risk customization of LP pools is non-existent today. Unavailability of it leads to all liquidity providers of different risk profiles competing from the same source.
Require multi-asset deposits: A large portion of DeFi liquidity is in DEXs which require multi-asset staking. DEXs are significantly important as they have been proven to be a sustainable source of yield. However, multi-asset staking is confusing and exposes users to new risks such as Impermanent Loss.
Provide variable rewards only: The core building blocks of DeFi, such as Automated Market Makers (AMMs), Staking Pools (Proof-of-Stake blockchains), and collateralized debt vaults, all reward depositors in a variable manner to incentivize decentralization. There is a lack of fixed-yield products in DeFi which is important to attract conservative investors in the space.