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Institutions, Liquid Staking and RWAs Will Characterise the Next DeFi Summerby@dannychong
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Institutions, Liquid Staking and RWAs Will Characterise the Next DeFi Summer

by TranchessApril 12th, 2024
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The approval of a Spot Ethereum ETF is expected to spur what could be the most significant DeFi Summer yet. This upcoming season will be characterised by a surge in institutional investment across liquid staking and tokenisation of Real World Assets. These developments are reshaping the DeFi investment landscape, with financial industry powerhouses like Goldman Sachs and JP Morgan leading the way.
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With Bitcoin’s ETF approval and institutional participation set to reach record levels, particularly in liquid staking and Real World Assets (RWAs), the DeFi landscape is on the edge of a transformative shift towards a new era of financial innovation. The eventual approval of a Spot Ethereum ETF is expected to spur what could be the most significant DeFi Summer yet. This upcoming season will be different from the last, characterized by a surge in institutional investment across liquid staking (via Spot Ethereum ETFs), tokenization of RWAs, and sophisticated financial products. These developments are reshaping the DeFi investment landscape, with financial industry powerhouses like Goldman Sachs and JP Morgan leading the way.


The approval of a Spot Ethereum ETF will attract liquidity into the liquid staking sector and the DeFi ecosystem

Ethereum’s edge over Bitcoin is its staking feature, enabling investors to earn yield. While a Spot Bitcoin ETF primarily offers a more accessible means for institutions to hold Bitcoin, an ETH ETF would extend this accessibility to liquid staking. This is expected to open new revenue streams for issuers and provide retail investors with opportunities to participate in staking without directly owing ETH, thereby easing entry into the crypto market and appealing to a broader range of investors.


The liquid staking sector has already garnered attention from institutions, recognizing its advantages over traditional yield-earning methods like bonds. In liquid staking, investors can maintain liquidity through Liquid Staking Tokens (LSTs) even as their assets are staked and “locked up”. Historical trends suggest that institutional engagement in liquid staking will likely increase following the approval of a Spot Ethereum ETF. For example, following the Shanghai Upgrade, the largest staking platform for institutional investors recorded triple the number of deposits from the previous month, as it enabled the withdrawal of staked ETH for the first time. The approval of an ETH ETF is expected to amplify this interest, offering institutions a more straightforward entry point into Ethereum without the complexities of crypto exposure.


Beyond liquid staking, an ETH ETF would benefit the entire DeFi ecosystem. Ethereum’s role as the backbone of DeFi means that increased institutional investment in its consensus layer, facilitated by staked ETH ETFs, could lead to broader interest in other DeFi sectors. Institutions, always in pursuit of new revenue opportunities, may be inspired by their successes in liquid staking to explore other areas like synthetic assets, and derivatives.


The Tokenization of RWAs will attract the greatest levels of liquidity

RWAs are already acting as a crucial link between traditional finance and the transformative blockchain sector. Witnessing an unprecedented rise, RWAs have grown from $100 million to $1 billion within just a year and are now in the position to become the eighth-largest sector in DeFi, surpassing even derivatives. This growth trajectory is attracting significant institutional interest, with notable examples including BlackRock offering tokenized shares, Goldman Sachs issuing €100M in digital bonds, and the US T-bills market reaching a valuation of US$617M.


Despite their potential, DeFi yields often fall short in competing with the security of Treasury bills in the current environment, making investor attraction challenging. However, tokenization is emerging as a more effective method for unlocking liquidity compared to traditional forms of fractionalization. The integration of traditional assets with Web3 technology is a compelling real-world application of blockchain that cannot be ignored. As the market gears up for the next bull run, the adoption of tokenization is expected to gain momentum, particularly among institutional investors.


Similar to the impact of liquid staking, the practical benefits of tokenization of RWAs are likely to spur increased institutional interest across DeFi sectors. As the financial landscape gears up for a significant expansion, monitoring the protocols and infrastructure that facilitate this transition becomes crucial, and in this scenario, RWAs are set to play a central role.


Tokenization will allow more sophisticated products to come to fruition

The ongoing evolution of tokenization is set to transform the realm of staking, broadening its reach to encompass traditional financial instruments like T-bills and bonds. This convergence of Web3 technology with traditional finance is set to simplify institutional entry, thereby drawing in more liquidity. In a financial landscape where interest rates are on a downward trajectory and liquidity is shifting towards more speculative markets, digital assets stand to experience substantial growth. This shift is leading investors to recognize the potential to access a comprehensive range of opportunities in a single location. For instance, tokenized treasury bonds offer monetary premiums while also allowing participation in liquidity pools and engagement in lending markets, providing exposure to high-yield opportunities, within the decentralized finance space, with assets like $ETH being prime examples.


As the crypto industry and its offerings continue to develop, so does the sophistication of its user base. Today’s users, with their increasingly complex financial needs, are driving the market towards more mature offerings. There is a growing demand for sophisticated structured products built on yield-bearing assets, offering greater liquidity and more diverse investment options.


Conclusion

The approval of the Spot Bitcoin ETF was momentous. However, it serves primarily as a precursor to the approval of a Spot Ethereum ETF which is set to be the true catalyst for the coming DeFi Summer. With institutional backing, the TVL of the liquid staking sector is anticipated to increase. Institutions that are eager to capitalize on Ethereum’s yield-generating potential are expected to play a more active role in Ethereum’s consensus layer, thus deepening their involvement across the DeFi ecosystem.


At the same time, the tokenization of RWAs is emerging as a dominant sector within DeFi. Already gaining momentum, institutions are recognising the advantages of tokenization over traditional fractionalization methods, particularly in its capacity to enable the creation of sophisticated financial products. The Bitcoin ETF approval has provided the necessary validation for this blockchain application, propelling it to the next level. This integration of Web3 technology with traditional financial instruments, such as T-Bills and bonds, is set to draw more institutional players into the DeFi space, further boosting liquidity and innovation.


As we stand on the brink of these groundbreaking developments, the DeFi landscape is not only poised for growth but for a complete transformation, signaling a new era of financial innovation and opportunity.