Grayscale’s DeFi Fund Adds Legitimacy to an Experimental Industry
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Grayscale’s DeFi Fund Adds Legitimacy to an Experimental Industry

Institutional interest in DeFi is growing, and Grayscale is jumping in on the action.
Neither the author, Kai Morris, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

Grayscale Investments, a digital asset management firm, has just recently launched a DeFi fund and index, giving clients the ability to invest in groundbreaking DeFi protocols such as Uniswap, Aave, Synthetix, and others. Considering how new and experimental the DeFi field is, this fund is extremely revolutionary. This is one of the first signs that DeFi is being treated as a serious and legitimate investment opportunity. 

Understanding Grayscale’s Fund

Grayscale has grouped together with CoinDesk Indexes to build a DeFi fund, providing investors with the tools needed to engage in DeFi projects with ease. The aim is to capture what Grayscale and CoinDesk Indexes consider to be the most cutting-edge and revolutionary DeFi technologies and bring them together into one unified fund. 

The fund includes DeFi projects covering many different areas, however, it appears that decentralized exchanges (DEXs) and lending platforms make up the bulk of the index. In particular, Uniswap and Aave are the two highest weighted assets in the fund, at 49.95% and 10.25% respectively. With that being said, the fund does also explore other DeFi concepts such as synthetic asses (with Synthetix weighted at 4.43%) and DeFi ecosystems (with Uma Protocol weighted at 2.93%).

With Uniswap weighted so highly within the index, it becomes apparent that Grayscale is banking mostly on the decentralized exchange sector within DeFi. This is unsurprising as Uniswap has 77% of Coinbase’s trading volume despite having a significantly smaller team.

Uniswap is also a pioneer of the industry as it was the first exchange to successfully implement an Automated Market Maker (AMM). This is how traders engage with algorithms and liquidity pools that fetch them the best rates, rather than using a traditional order book like on CeFi exchanges. 

In their press release, Grayscale noted that:

“The emergence of decentralized finance protocols provide clear examples of technologies that can redefine the future of the financial services industry. We’re proud to offer investors exposure to DeFi through Grayscale’s trusted, secure, and industry-leading investment product structures”

In other words, Grayscale believes that DeFi is a revolutionary means of handling finances, so they want to package them in a way that makes them enticing to institutional investors. It should be noted that, as Grayscale is far from a DeFi project itself, by creating such a fund they are presenting these projects in a highly centralized way, which is sure to make it more palatable to traditional traders who know little about the DeFi industry. 

What makes this so important is that it reveals how much desire there is for DeFi among traditional financial circles, meaning the industry is expanding beyond niche fans and crypto developers. For a field that has only existed for less than a decade, this is extremely impressive.

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The DeFi Landscape is About to Change

This is not the first time a centralized team has ventured into DeFi. Binance has also built its own DEX, and many of its ex-staff members have worked on the critically acclaimed PancakeSwap. Bank of America has also voiced its opinion on DeFi, calling it “intriguing”, but it appears that they have not gotten actively involved so far. 

Goldman Sachs has also been paying attention to DeFi. It has been investing heavily in Circle, the entity largely behind stablecoin USDC, which has been adopted by many decentralized projects. Circle is set to go public relatively soon.

However, it is still fair to say that DeFi is relatively untouched by the centralized world. One reason is due to its experimental nature and the fact that it has only been around for a handful of years. Another reason is that there is currently a great deal of uncertainty within the industry. 

This arises from two places. Firstly, DeFi has built a poor reputation due to consistent hacks. Secondly, the SEC is still in the process of developing guidelines and possible restrictions for DeFi. Together, these are sure to make traditional and institutional investors shy away.

This is where Grayscale’s fund comes into play– it is aimed directly at institutional money, designed to make it more enticing for them. It essentially legitimizes the field by telling institutions that they are confident in the future of DeFi, and especially any of the projects included within the fund itself. This type of support can have a huge effect on the growth of DeFi, not only by bringing in more money, but by influencing the SEC’s stance on this activity.

This fund could be the beginning of a new shift. While the industry certainly doesn’t need a nod from the centralized world (as it runs perfectly fine without it), it will certainly help it grow and mature. Arguably, this could also pose a new challenge for DeFi, urging developers and traders alike to question just how much centralized involvement they really want, and how much power they are comfortable with them having. 

What DeFi projects do you think will get added to Grayscale’s fund in the future? Let us know in the comments below.