“Participation. That's what's gonna save the human race.” — Pete Seeger
Decentralized Finance, more commonly known as DeFi, is fundamentally changing the entire financial system. The primary financial needs, namely lending, borrowing, swapping, hedging, and asset management, are being rebuilt and re-architected from first principles—with more transparency and interoperability. Adoption cycles within DeFi have been led by the so-called DeFi Degens, the innovators who have built the technology, and the communities who continue to push and lead innovation within this space. Similar to the start of the internet, DeFi can, and will, change the world. These breakthrough innovations often lead to stellar investment opportunities, therefore, it’s not surprising institutional investors have followed suit.
The institutional investor landscape is vast, spanning from small crypto funds to financial institutions and sovereign wealth funds. Mapping the needs of such a vast array of investors is a difficult task, given the countless variables at play—From fund sizes, investment mandates, jurisdictions, operational infrastructure, risk management, and of course compliance, and regulation. Yet, 5 broad themes apply to many if not most of the institutional investors that want to participate in DeFi. Let’s step through them.
DeFi access can be achieved through two main execution venues. The first is indirect via the limited number of centralized crypto exchanges, offering access to (often, a limited number of) tokens from some well known DeFi Primitive. Yet, to access DeFi directly, which means access to the tens of thousands of DeFi tokens and DeFi protocols that exist today, institutions require a Web3 wallet. Today, there are many wallets available in the market. However, the vast majority of primitives build first and foremost to connect with MetaMask.
With over 10 million monthly active users, MetaMask is by far the most used and trusted wallet in this space.
Access goes hand in hand with risk management. Institutions must access DeFi in a way that aligns with safety, security, and operational requirements. This entails the institutional requirement of storing private keys, most often held on Hardware Security Modules (HSMs) or Multi-Party Computation (MPCs) custody tech and qualified custodians. Most wallets today offer single key storage. This is problematic for institutions, because it means any member of an investment firm that has access to the private keys has the power to move assets anywhere across networks—a clear security risk. A fundamental institutional need therefore is not just a wallet, but custody, multi-signature, or MPC to ensure a secure signing process.
Today, there are two wallets in the market that connect to custodians. MetaMask Institutional is one.
Often institutions execute their trades from the walled garden of their custodian accounts, trading on centralized exchanges to move assets. Two years ago all trading by crypto funds occured through centralized exchanges! Yet, with the rise of DeFi, direct access has increased, often offering a more efficient route into the asset class—but this brings challenges. As institutions leave their walled custodian gardens, it becomes incredibly difficult to track their assets, yields, attribution of Annual Percentage Yields (APY), and risk management around their positions.
Today, many fantastic DeFi projects exist to monitor these positions. However, none have been built to cater to the institutional market—until MetaMask Institutional.
A new financial world gives rise to new conventions—from airdrops to governance tokens. For example, yield farming actively across DeFi entails building complex trading strategies that include staking reward tokens across multiple primitives. These positions generate capital gains, additional governance tokens, and APYs. Price and total return performance require accurate reporting by fund administrators to fund investors. Given how new and vastly expanding this ecosystem is, fund administrators are still coming to terms with the jargon, conventions, technical details and reporting. Institutional investors need reporting tools that provide detailed transaction data for their fund administrators and investors.
Something we are actively working on.
A core feature of DeFi is decentralized pools made of pseudonymous counterparties. This feature can become a hindrance for large parts of the institutional investor space. Unknown counterparties expose the risks of interacting with sanctioned countries and nefarious counterparts—risks that can lead to fines and fund closures by regulators. Today, many tools exist in the market to track ‘Know Your Transaction’ (KYT) risks, identifying the flow of funds risk. Yet, the depth and breadth required to step into DeFi pools require analysis of all transfers within a transaction and not just the transactions themselves. This means it’s important that any tools evaluated in the market need to provide risk management within DeFi itself.
MetaMask Institutional’s compliance features include groundbreaking compliance on DeFi pools with unmatched depth and breadth on pre and post-trade KYT mechanisms.
Featured Insight Report
DeFi for Institutions
We cover this and more in our “DeFi for Institutions” report:
The surge in institutional adoption of blockchain and digital assets
The numerous opportunities emerging in the DeFi space
Different ways institutions can get started accessing, investing, and participating in DeFi
DeFi solutions by Consensys
DeFi is changing the world—particularly the financial services and institutional investment landscape. More and more investors seek access to this ecosystem and asset class.
In response to this demand, we created MetaMask Institutional, an institution-compliant extension of the world’s most trusted DeFi wallet, MetaMask. MetaMask serves over 10M monthly active users and is integrated with almost every DeFi dapp, giving you direct access to tens of thousands of venues for trading, staking, lending, borrowing, derivatives, asset management and more.
Only MetaMask Institutional provides unrivaled access to DeFi without compromising on institution-required security, operational efficiency, or compliance requirements.