- Institutions are piling into DeFi.
- A new report shows how it is changing the $112 billion industry.
Institutional investors and crypto-native asset managers account for a growing share of decentralised finance users, and are increasingly shaping how onchain ecosystems develop.
That’s according to crypto data firms vaults.fyi and Artemis.xyz. On Wednesday, they offered that analysis in a new report and unpacked key trends driving the returns investors can earn through DeFi protocols.
“A more mature, resilient, and institutionally-aligned ecosystem is emerging, signalling a clear shift in the nature of onchain returns,” the report said.
“Engagement is driven less by the pursuit of the absolute highest APYs and more by the unique advantages of composable, transparent financial infrastructure, now bolstered by improving risk management tooling.”
APY, or annual percentage yield, stands for the total yield of an investment over the course of a year.
An industry in flux
The report marks a clear shift from when DeFi first gained momentum in 2020. Back then, the industry’s userbase mainly consisted of scrappy, risk-taking retail investors.
Now, with firms like $11 trillion asset manager BlackRock having legitimised crypto, more institutions and sophisticated players are piling in to take advantage of the instant settlement times and permissionless transactions that the sector offers.
“As DeFi infrastructure matures, institutional sentiment is moving towards seeing DeFi as a complementary, configurable financial layer – not merely a disruptive, ungoverned space,” vaults.fyi and Artemis.xyz wrote.
The growing influence of institutions is one of several factors that the report identified as impacting DeFi yields.
Others include maturing infrastructure that allows for more complex yield strategies, and the introduction of tokenised versions of fixed income bonds, like US Treasuries, which play a key role in traditional asset management.
Institutional impact
More institutional adoption means protocols now cater their offerings to more sophisticated users.
One example of this trend is Pendle, a yield derivatives protocol that splits deposits into their principal and future yield constituent parts, letting users speculate on interest rates, hedge risk, or offload yield exposure.
Pendle soared in popularity in early 2024, and is now the eighth largest DeFi protocol with over $5 billion in deposits. Much of this growth comes from sophisticated investors engaging in complex yield strategies.
Another example of a DeFi protocol leaning into institutions is Sky and its USDS stablecoin.
Launched during the protocol’s rebrand from MakerDAO in August, USDS has several compliance features built into it that the protocol says should make it more appealing to institutional investors.
Crypto-native asset managers
The report also identified a new cohort of so-called crypto-native asset managers among the sophisticated players piling into DeFi.
Such firms, like Re7 Capital, Gauntlet, and Steakhouse Financial, are made up of investors who straddle both DeFi and the traditional financial world, and are in the vanguard of DeFi’s shift to catering to more sophisticated users.
“These managers are deeply embedded in the onchain ecosystem, quietly deploying capital across a diverse range of opportunities, including advanced stablecoin strategies,” vaults.fyi and Artemis.xyz wrote.
Since January, this group of asset managers have grown their onchain capital base from roughly $1 billion to over $4 billion, the report said.
In addition to investing, many of these firms also advise DeFi protocols, play an active role in DAO governance, and help manage risks.
For instance, Steakhouse Financial manages financial reporting and asset-liability management for DAI stablecoin issuer Sky, while Gauntlet recently launched a levered real-world asset strategy on Polygon in collaboration with Securitize and DeFi lender Morpho.
“They are positioning themselves to compete as the leading money managers of the next generation,” the report said.
Remaining accessible
Sam MacPherson, CEO and co-founder of Phoenix Labs, the company behind Sky subDAO Spark, has also noted the shift in DeFi offerings.
“Our primary user base is whales and institutions with capital and technical expertise,” he told DL News. “They’re attracted by yield opportunities and the ability to efficiently manage liquidity, hedge positions, and access leverage in a permissionless environment.”
However, MacPherson also stressed that DeFi developers shouldn’t forsake the users who stuck by them before the institutions arrived.
“DeFi needs to remain accessible to the broader community,” he said. “While whales are important, it’s also important not to forget that DeFi can and should be used to address financial inequality.”
Tim Craig is DL News’ Edinburgh-based DeFi correspondent. Reach out to him with tips attim@dlnews.com.