According to a Bloomberg report, a Virginia pension fund in Fairfax County is reportedly mulling deploying money into DeFi. The announcement came within hours of Jane Street, a Wall Street giant, indicating that it would deploy funds in DeFi too.
The basis of the report were comments made by the fund’s chief investment officer, Katherine Molnar. Molnar is the CIO at the Fairfax County Police Retirement System and made the comments at a conference held in Los Angeles on May 3.
Fairfax pensions have been early bettors on the future of crypto. In 2019, they deployed pension funds in “crypto-linked investments.” Last year, the Fairfax County Police Retirement System and the country’s broader Employees’ Retirement System invested $50 million into a fund which buys tokens and derivatives in the crypto market.
Molnar said during the talk that she is expecting investments to “offer a yield of at least 9%.” In terms of allocation, the fund could allocate up to 8% of its AUM to yield farming.
The Fairfax and Jane Street news are relatively unprecedented moves from traditional finance companies, but one which spells increased confidence in decentralized protocols. It might simply be the first wave of traditional investment money to enter the nascent DeFi ecosystem, but it certainly won’t be the last wave.
What does this mean for you, lay reader? Well, if you’re not involved in the world of DeFi, it might not mean a whole lot. However, if you are involved in any form of staking, yield farming, liquidity mining, or on-chain activities? You might want to sit up and lean in.
Increased capital inflows to blockchain stands to increase TVLs, which certainly legitimizes the space on paper. However, it reduces the overall reward to people engaged in staking and DeFi activities, which are inherently risky in nature.
Tl;dr: More capital = lower returns/yield = more risk for less returns. There is one contingency which might come with that, which is: if DeFi protocols and web3 technology becomes more utilized, the attractive rates might remain.
However, in the life of DeFi, lending costs have been down and to the right. As of today, Ethereum-based protocols are offering scraps for stablecoins. $USDC on Ethereum’s Aave protocol is sitting at a base rate of 1.82%. On Compound, it’s 1.65%. A “bonus rate”, which is often paid in the governance token of the protocol, may vary from platform-to-platform (and varies on price.)
In order to unlock higher yields in this environment, investors generally have to gamble with riskier protocols and structured strategies. Or, alternatively, they’d have to seek returns on other chains with different assets. All of these elements can affect the risk/reward of engaging in DeFi, but also affect the broader market’s health and prevailing rates.