Treasury Yields and DeFi Interest Rates / And Why is Candy Smaller These Days?? 🍬🤔

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TradFi to DeFi Weekly Wrap Up

Every Friday at 3 pm EDT, the TradFi to DeFi community has an open mic round table, where we discuss DeFi (decentralized finance), how it intersects with traditional finance, and where we see this whole thing going. This article briefly summarizes the topics of our latest discussion.

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Treasuries Tripped

This week’s Wrap Up kicked off with a discussion on the recent treasury yield plunge. Grab a bungee cord because the 10-year yield fell to 1.30% on Wednesday. Coming on the heels of the Fed publishing their meeting minutes, this drop represents the lowest yield since February. Dustin opined that the primary catalyst for this drop might well be the pervading recovery narrative being called into question. The “smooth sailing” recovery we have seen thus far in the United States has slowed as vaccine uptake stalls. Encouragingly, hospitalizations remain significantly down, and, despite some gray clouds, the US remains firmly in the top quartile for overall vaccination rates.

Companies are also loving this yield drop — as some community members noted, the overall response from markets was bullish. The S&P 500 continues to hang out near all-time highs, patiently awaiting catalysts like this yield drop to usher it one way or the other. Hiring figures also remain high as companies scramble to secure new talent as the economy comes back online. With yield declining, corporations can afford to take on a bit more debt during this hiring scramble, easing some of the pain associated with this significant transitory time.

Speaking of transitory, while hiring may be so, inflation figures are still up for fierce debate. While companies enjoy this slight windfall, they are simultaneously scrambling to pass on increased costs wherever they can. Shrinkflation, the pesky phenomenon of shrinking products that cost the same amount of money, has reentered the public mind. This annoying force is why the candy you remember as a kid seemed so much larger back then — it totally was. The market is very aware of this fact. Tyler thinks that Tech remains the promised land sector with hopes of outpaced productivity, staving off the inflationary nightmare. Whether tech will shield investors from the falling arrows of declining purchasing power remains unclear, but many investors are increasingly eyeing DeFi as their life raft.

Low Liquidity or DeFi’s Destiny?

When the pandemic first hit, the markets tanked as the world rushed to dollars for safety. Six trillion (yes, $6,000,000,000,000) in liquidity later, and markets have access to just a bit more capital than before. This reality led our discussion in a fascinating direction — with markets far more liquid than ever before, will people panic sell their stablecoins during the next black swan event? While potentially a no-brainer for risk-averse investors, the growing mainstream acceptance of stablecoins suggests that their status as collateral equivalent to the US dollar continues to grow in the public mind. The US Currency Comptroller even approved stable coins for payments via independent node verification networks (INVN).

But at least we can see the Fed robbing us blind with inflation. Why trust opaque teams of copycats and take on more risk for a dollar-equivalent asset? The nearly unanimous answer: yields. The DeFi giant Compound recently announced an eye-popping 4% yield for institutional investors — just over 200% more return than the 10-year Treasury note. That’s a big deal in an investment environment with persistently low yield and rising inflation. If you want to preserve wealth, let alone turn a profit, Compound looks like a desert oasis. The distinction of institutional yields remains a crucial one. While your average Joe can bite the learning curve of DeFi, financial institutions have significantly more plates to spin when shopping around.

Wall Street firms must comply with anti-money laundering enforcement regulations. This process entails documenting the source of funds to ensure no revenue generation occurred from unlawful activities such as terrorist financing, drug trade, or commerce with blacklisted countries. As you might imagine, these entities are keen to whitewash their funds, so it’s a constant game of tug-of-war. For this reason, we’re seeing DeFi giants start to interface with Wall Street via semi-permissioned versions of their protocol. Compound isn’t alone in this move. Aave Pro offers permissioned pools to whitelisted applicants, allowing for regulatory compliant DeFi solutions without compromising the decentralized architecture of the native protocol.

Where Do We Go From Here?

One thing is for sure, the immutable and auditable nature of DeFi solutions entails an incredible decrease in fees and rent-seeking for the financial industry. By streamlining the investment process and connecting willful participants, more of the yield derived from a successful investment can enter the pockets of the initial investor. Many lawyers, regulators, processors, auditors, and other costly components of the investment process are rendered partially or wholly redundant by DeFi products. While certainly not an overnight process, the trend towards DeFi sticks out like a sore thumb in the otherwise yield-starved investment landscape.

According to some members of the TradFi to DeFi community, regulators are terrified of the rise of DeFi and the flirtatious nature of major banks. Wall Street needs yield to survive, and while it’s often difficult to tell which tail wags which dog when it comes to Wall Street and new financial regulations, authorities know they have to act fast lest they risk losing their global competitive edge. With China cracking down on crypto, the US sits at a perfect time to craft thoughtful and accommodating DeFi regulation. Whether or not they act on this golden opportunity remains to be seen, but Wall Street certainly has its preference.

Nobody has a crystal ball that can see the future. Nonetheless, a diverse team of talented and experienced individuals comprises the TradFi to DeFi community. This composition affords us rich insights as we collaborate and communicate throughout the week. The subsequent value of the Weekly Wrap Up calls is self-evident — this article captures only a fraction of the value derived from the chat. Networks expand, friendships form, and jobs are secured regularly in our group — join us and see what all the excitement is about!

Major shout out to the amazing contributors in our latest call! Tyler, Dustin, Ray, John, DanielTKilleen, Matt, and others! And a special thanks to Ray for writing our summary.

What is TradFi to DeFi?

TradFi to DeFi describes the journey from the legacy world of traditional finance to the emerging universe of decentralized finance. We are a networking hub, project incubator, talent connector, mentorship provider, and opportunity maximizer for the DeFi enthusiast. Come see what we’re all about!