As the decentralized concept of cryptocurrency trading gains traction in regulatory-driven crypto trading — and draws more regulatory scrutiny, new players are creating products to meet rising demand.
In the past, Galaxy Digital launched DeFi Index Fund, their newest blockchain-backed financial instrument. The passive instrument tracks the performance of Bloomberg's Galaxy DeFi Index and is part of an estimated $80 billion industry, poised for explosive growth in the next few years.
Ben Samaroo, the CEO of a DeFi platform called WonderFi, explained to Yahoo Finance recently that the sector has a faster, cheaper way to finance. He added that DeFi allows users to borrow money instantly without bank approval or earn higher interest on assets (the - average).
Galaxy Digital's new fund is an attempt to offer clients a more transparent and less risky way to gain exposure to DeFi. The Fund was seeded by NZ Funds, a $2 billion institution that manages retirement savings accounts for New Zealanders.
NZ Funds is not a newcomer to investing in crypto space. Earlier this year, the retirement savings institution seeded Ethereum exchange fund by Galaxy Digital. Before that it took part in a $50 million private investment in Galaxy Digital Holdings' public equity.
The index is composed of 9 DeFi protocols in portions of 40 to 1 percent exposure. The protocols are considered for addition and removal on a monthly basis.
While index funds aren't intended to be actively managed, the removal of DeFi protocols will rely on Bloomberg's principles for measuring an index such as data integrity, diversification, representation and continuity.
DeFi is a family of crypto-currencies and underlying protocols which together form a complex financial system that relies heavily on Ethereum blockchain. Like much of the crypto world, DeFi's key selling point is stripping out middle man in trading, which cuts costs and red tape.
Using self-executing digital contracts, developers can build applications on top of Ethereum and other blockchains. They are then used to devise new ways to borrow, lend and exchange assets in a faster and cheaper way than traditional finance.
While these projects lacked traditional intermediaries in the financial sector via peer-to-peer networks, not all deFi protocols are good enough to bypass regulation. Investment Research Chair Gary Gensler said it in an interview with the Wall Street Journal this week, in which he suggested the securities and exchange commission would be taking closer look at the sector.
Meanwhile, a large number of big money players are now gawking at cryptocurrency and blockchain-based protocols to try to understand whether crypto is supposed to fit in their portfolios. And for many traditional investors, raising your stake requires some degree of value.
Nick Juhle, director of research at the Morgan Stanley wealth management firm Greenleaf Trust, faces this problem. Greenleaf has a total of $17 billion in assets under advisement and is now offering high-level wealth management to approximately 1000 high net worth individuals.
Since 2017, Juhle has received calls from clients every time the Bitcoin price rises, asking why a firm hasn't parked any money in cryptos. Yet Juhle still won't budge, because his team doesn't have a way to value it based on traditional valuation frameworks like cash flow and earnings results.
Bitcoin being an example of the challenge with crypto currency is that it doesn't really have intrinsic value. You can value it but you can't price it. That's always the issue we run into, says Juhle. At this point, checking Juhle on the best DeFi protocols runs into the same issue for DeFi.
However, there is no unifying collective valuation framework for DeFi, says Steve Kurz, Galaxy Digital's Head of Asset Management. It's a clear barrier for institutional and retail investors with no crypto exposure, even though they are willing to accept the higher volatility synonymous with crypto
Currently, the Galaxy Digital team uses 'different strands' of metrics such as the total value locked in protocols and other network usage statistics to measure potential returns similar to how early stage venture capital measures valuation. Given time, the DeFi IndexDeFi Index could provide one more strand of measurement.
'We are marching toward an institutional valuation framework that's not quite ready for collective primetime, but there's enough to say as a venture capital bet, absolutely DeFi can make sense in a portfolio, Kurz told Yahoo Finance in an interview.
Juhle prefers the idea of an index fund which invests in the DeFi theme broadly, as opposed to betting on a specific protocol. He also remains wary of the DeFi IndexDeFi Index's current correlation with Bitcoin and Ethereum.
Maybe the market will change over time as it matures, Juhle suggested.
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