Despite stagnant prices, institutions continue to show interest in blockchain technology

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(Kitco News) – Institutional investment in the cryptocurrency sector has long been hyped as bringing legitimacy to the nascent asset class as the world’s largest financial institutions are expected to throw their weight behind digital assets as the next financial frontier.

2021 saw the emergence of many popular market sectors that caught the eye of institutions – including decentralized finance (DeFi), nonfungible tokens (NFTs) and the Metaverse – but the widespread withdrawal of cryptos in 2022 has reduced the desire for firms to increase their crypto involvement.

While the PR surrounding companies getting involved in blockchain has subsided, interest in the sector continues to grow at an astonishing rate, according to Tongtong Gong, COO and co-founder of digital asset data firm Amberdata, who spoke to Kitco Crypto about growing interest in blockchain technology from institutional investors.

Services offered by Amberdata include trade research, risk management, backtesting, accounting and compliance, which firms use to help make more informed decisions when investing in the blockchain space.

Several companies have contacted Amberdata to use their services to gain a better understanding of the crypto markets and the different types of information available to them. This includes firms such as Citibank, Nasdaq and National Australia Bank, all of which are current customers of Amberdata, according to Gong.

Evidence of the increased demand for crypto data support can be found in the expansion of Amberdata, which has grown from a small team of 10 people to a staff of 60 people in less than eight months.

“I would say 80% of my customers are all institutions and supply stores,” Gong said, highlighting the behind-the-scenes institutional demand that currently exists. “More than anything, even if a company decides not to get involved in crypto, they want to be smart about it and stay well informed about the latest developments.”

Information that tops the list of importance for institutions includes a token’s fundamentals, such as issuance rate, available supply, and consensus mechanism, along with various metrics that provide insight into the health of a network.

Areas of interest include decentralized finance (DeFi), stablecoins, smart contracts and interoperability, as well as a simplified way to view data from hundreds of crypto exchanges around the world to better understand available liquidity and potential arbitrage opportunities.

The growing prominence of derivative products such as futures and options contracts has further complicated the information gathering process, making it even more challenging to participate in the crypto world.

Sectors of interest

One of the sectors attracting the most attention from institutional players is DeFi, which introduces some “fun financial market primitives” such as leveraged lending and trading.

The process of launching DeFi products is relatively simple compared to the cumbersome process required in centralized finance (CeFi). DeFi is also available globally, while CeFi products are often only available in individual markets.

Another key selling point for DeFi protocols is that they do not require a human to operate, thanks to smart contract technology.

According to Gong, CeFi institutions will likely start incorporating DeFi offerings, such as lending and yield farming, in the near future as they seek to offer users the best of both worlds while trying to tap into all available revenue opportunities.

In the case of NFTs, the underlying topic of discussion is digital rights management.

“When McDonald’s or Starbucks announces the launch of NFTs, it’s really about digital rights management,” Gong said. “NFTs offer a way to capture digital rights interest as a revenue stream, and for artists, they can continue to make money as their product is used.”

“So I think it solves a lot of problems, especially for the artist industry.”

The importance of data and DYOR

The most important thing for institutions to focus on moving forward is to “know your data and do your own research,” Gong said.

While the main focus of the discussions in 2019 centered around “is crypto just a scam?” after the ICO hype cycle, this time, “questions are more centered around how do we understand this better and how do we manage our risks better?”

Issues such as available liquidity and counterparty risk are more of a priority than a fixation on fraud. More than anything else, companies are looking to figure out how to avoid making the same mistakes again.

“Whether it’s Three Arrows Capital, Celsius or Luna, all the problems that have been seen are very similar to what has been experienced in the traditional markets, like with Long-Term Capital Management or Lehman Brothers. The whole financial industry is created based on risk management, and now crypto is no different, the COO said.

“Our mission is to provide the best, most comprehensive and deepest insights and data for institutions to help make crypto more legitimate, mainstream and here to stay.”