Institutional investors have long been interested in entering the decentralized finance (DeFi) space, but bridging the gap between off-chain capital and crypto asset staking poses significant challenges. However, a new partnership between institutional credit infrastructure provider Credora and Polkadot DeFi hub Acala aims to address these challenges and bring yield opportunities to bitcoin holders.
Working alongside Swiss-based market-making firm Portofino Technologies, the partnership’s initial offering targets family offices, credit firms, and hedge funds. The product is expected to generate annual returns of 7% to 10% for investors.
Previous attempts at offering yield to bitcoin lenders have not always been successful, with some firms proving to be opaque, fragile, and ultimately dangerous for customers. Credora believes it has solved these issues by creating a legal and technical structure that provides lenders with greater security and transparency.
The first product to be launched is a Special Purpose Vehicle (SPV) that generates yield from staking Polkadot’s native currency, DOT. In this process, loaned bitcoin is exchanged for DOT, which is then staked with Acala. To hedge price risk, derivatives markets on platforms like Bitmex, Bybit, or Deribit are utilized. According to Acala’s co-founder Bette Chen, the staking yields for Polkadot fall in the range of 15% to 21%.
One of the key features of this offering is the secure and transparent structure it provides. Portofino is required to provide its own capital as a junior tranche, while bitcoin lenders are senior to it. This means that the assets of bitcoin lenders are secured by the entire funds pool. In addition, the SPV is designed to be bankruptcy remote, ensuring that each SPV can only engage in specific activities.
Credora also provides real-time monitoring for lenders, allowing them to track the movement of capital both on-chain and off-chain. This anti-principal lender approach ensures transparency for lenders and helps eliminate the risks associated with lending platforms that lack transparency regarding the use of lenders’ principal amounts.
The current offering is considered a proof-of-concept, but the partners plan to launch similar SPVs in the future with different strategies or input capital. For example, stablecoins could be used as input capital. Once the model is proven successful and regulatory clarity improves, Acala’s Chen believes institutions, including fintechs, will be interested in wrapping these products and offering them to retail customers.
Bringing DeFi yields to institutional investors is an important step in the evolution of the crypto industry. By addressing legal and technical challenges and providing a secure and transparent structure, Credora and Acala are making it easier for institutional investors to access the benefits of crypto asset staking. With more institutions entering the DeFi space, the overall adoption and acceptance of decentralized finance will likely continue to grow.
