Institutions are entering crypto. ETF inflows have been the driving factor of the most recent $BTC rally. The short-term effect of this market change has probably mostly played out quite as some ETFs now seeing outflows heading into the halving next month. Now market participants may be looking for where the puck is headed next, as institutional demand for crypto has not stopped at the $BTC front, with BlackRock creating a 9-figure tokenization fund on Ethereum.
Chains like Avalanche have been partnering with TradFi institutions, and the Blockworks DAS summit with an institutional presence recently wrapped up. Ondo Finance has announced ambitions to tokenize equities and bring them onchain. With $ETH ETF by May prospects looking a little less likely, more options there might be less concentration of capital looking to benefit from the institutional narrative in one asset, and rather flows of capital across several chains, protocols, etc. that people deem ‘institution-adjacent’.
Today we’ll be briefing you on Spool; Spool is an institutional yield protocol that has been around for a while but has been gaining some more traction recently amidst some key integrations with the likes of Gearbox and some key players in the Arbitrum ecosystem e.g. GMX, Pendle, and more. Keep reading to learn more about what Spool actually does, opportunities on the protocol, and more!
Background on Spool
Spool serves as a middleware protocol, allowing users to participate in a subset of yield-generating protocols. This is done in a risk-diversified, automatically managed, and efficient fashion, which is the benefit users would attain in this context rather than just using the underlying integrated protocols themselves.
The protocol contains several strategies, with an average APR of 8.7%. This has attracted $8M+ in TVL (down from $70M at its peak), with some $205M in Total Value Routed (TVR, a concept coined by Spool) to its integrated protocols. Users can get a yield on $WETH and stablecoins including $USDT, $USDC, and $DAI.
Spool has integrated with the likes of Aave, Morpho, Yearn, Compound, Curve, and now Gearbox to total 41 integrations, with plans to include over 100 strategies on the dApp by years end.
For those who wish to use certain strategies or pools on these protocols, Spool acts as a balance between their inherent innovation and risk management. While things may be bullish and there isn’t too much thought floating around of protocols blowing up, risk is always present and exaggerated in crypto compared to most markets. The Spool lists Anchor protoocl/ Terra as an example, where a middleman allowing users to profit from the ~19% stablecoin APR at the time, but in a risk-managed way, would have been tremendously helpful for many. Ethena’s $sUSDE synthetic dollar has drawn some comparisons to $UST as it offers unusually high APRs.
Proper risk assessment is made harder during a bull market with new projects springing up left and right, and more noise all around. Many people don’t have an abundance of time to keep up with changing narratives and perform prudent due diligence. On the institutional side, these participants just might not be that crypto native at first and might experience a learning curve that protocols like Spool can help alleviate in the meantime.
Spool V2
Spool launched their V2 in In facEthereum mainnet and Arbitrum instances of the protocol’s V1 will no longer be guaranteed support, and users have been urged to withdraw funds. When comparing versions, the V2 is more flexible and can handle both stable and volatile assets.
The protocol uses risk models to calculate risk scores for each investment strategy based on a variety of factors. Independent providers are used to generate these scores, which include aspects like the risk-free rate, yield, and the type of risk involved .The risk model can account for many variables like how long a strategy has been in the market, who audited it, and other attributes. It then generates a risk score on a scale of 0 to 10.
Risk models are open source, and anyone can contribute; they can also be directed to operate in a risk-averse or risk-seeking manner. V2 allows for more diversified and dynamic strategies, including those involving leverage. It also solves some liquidity issues present in the V1, making it easier for users to manage their investments.
Institutional Demand
Many onchain traders or DeFi users might not be interested in this kind of risk management. Of course, crypto retail and institutional tastes vary, sometimes wildly; the team mentions that some in the traditional banking sectors find this self-executing risk management system innovative and compelling.
Last year, the team mentioned working on a proof of concept with Deutsche Bank and Deutsche Asset Management, aiming for a proper on-chain fund that combines DeFi, crypto assets, and tokenized real-world assets. Demand in this area for crypto as a whole has clearly been confirmed, with the world’s largest asset manager deploying capital in this area.
The team sees potential for on-chain funds, mixing traditional and crypto assets, and shares that they are in talks with other major institutions as well. In 1the same way that Spool provides balance between innovation and risk-management, it can be a bit of a bridge between DeFi and TradFi.
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