Institutional Investors Eyeing Return to DeFi: Survey
Adoption of DeFi Poised to Rise in Wake of CeFi Failures, Study Finds
By: Samuel Haig •Dive
For all the fire and brimstone of 2022, well-heeled investors are still looking to make a killing in crypto. Only they are now focusing on DeFi.
That’s the takeaway from a survey of 50 U.S.-based institutional investors with more than $5M conducted by Avantgarde, the team behind the Enzyme asset management protocol.
Almost three-quarters of the respondents plan on increasing their adoption of DeFi protocols in response to the wave of CeFi insolvencies in 2022.
And eight out of 10 of the institutions said they are “more likely” to use DeFi platforms than they were 12 months ago following the collapse of FTX, Celsius, Three Arrows Capital, and other centralized entities.
“A major sector in lending which was catered by CeFi players in 2022 will continue to be increasingly replaced by DeFi,” Hamzah Khan, Head of DeFi at Polygon, told The Defiant.
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Khan said projects in the credit market space are seeing a lot of interest from hedge funds and fintech companies. The investors want to borrow USDC, ETH, and BTC. “All this will happen on-chain in a transparent fashion,” Khan said.
Steven Goldfeder, the co-founder and CEO of Offchain Labs, the team behind Arbitrum, agrees that self-custody will drive significant TVL growth for DeFi in 2023.
“There was a lot of talk in the fallout post-FTX on how much was generally withdrawn from CEX into self-custody,” he said. “Eventually, that will flow into TVL within DeFi protocols.”
As for CeFi platforms, half the respondents said they better demonstrate transparent operations such as proof of reserves to bolster confidence.
Mona El Isa, the founder and CEO of Avantgarde said the survey revealed “a genuine desire and commitment to allocate capital to the space in the near future.”
“The rails that traditional finance (TradFi) currently runs on are slow, complex and, in many cases, archaic,” Isa said. “We truly believe that the value proposition of DeFi and the blockchain… will make the heritage financial model obsolete.”
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DeFi was among the crypto sectors hardest hit by the 2022 bear trend, despite the failure of large CeFi firms appearing to bolster the value proposition of permissionless protocols.
The combined total value locked in DeFi protocol began 2023 at a 22-month low of $39B, according to DeFi Llama. The figure marked a 78% decline since the sector peaked in December 2021.
The collapse of Terra and its UST stablecoin drove a brutal downtrend for DeFi, with $90B evaporating from its combined TVL between May and July. But DeFi’s TVL is up 20% since the year began. Khan attributed much of DeFi’s rebound in TVL to the growth of liquid staking derivatives as Ethereum’s devs prepare to activate Staked ETH withdrawals in the coming months. He also predicted that real-world asset integrations and web3 gaming could also drive significant growth for DeFi over the next two years.
“Web3 gaming is going to be maturing in the next year or two, with the first AAA titles hitting the market,” Khan said. “It’s too early to say just how this field will evolve, but decentralized gaming is an area with massive upside potential.”
Goldfeder agreed that web3 gaming could gain momentum in 2023. He also pointed to derivatives as a major growth sector for DeFi as users migrate from centralized to decentralized platforms.