Institutional Investors Are Rediscovering DeFi

During the last crypto boom, much was made of the influx of institutional investors and high net worth individuals (HNWIs) into crypto.

But for the most part, those investors focused on Bitcoin, the most mainstream—if any cryptocurrency can be called mainstream—crypto asset.

Now, institutional investors are turning their attention to more sophisticated crypto assets and applications, such as the opportunities presented by decentralized finance (DeFi). In late 2021, Brett Tejpaul, head of institutional sales at crypto exchange Coinbase, hailed the “light-bulb-on moment for institutions,” adding that, “one thing I’ll say is it’s not all about Bitcoin.”

“There’s definitely a rise in activity in the DeFi sector,” Tavia Wong, director of marketing and business development at institutional crypto custodian platform Cobo, told Decrypt, as “institutional investors move towards activities that accentuate their investing edge.”

Singapore-based Cobo is building and deploying tools and infrastructure to help those investors embrace the long-term opportunity presented by crypto and DeFi, offering a standard set of SaaS-like services to help institutions and high net worth individuals (HNWI) easily and securely invest in decentralized finance products.

And despite the crypto crash of 2022, the appetite for DeFi among institutional investors is “very much still there,” Changhao Jiang, CTO and co-founder of Cobo, told Decrypt. But following the collapse of high-profile DeFi projects like Terra, “they have a better understanding of the risks,” he said. “They’re more rational than before.”

Being more careful—going in with both eyes open—is not a bad thing, said Jiang. Institutional investors may be wary, he added, but they’re still ready to explore DeFi—and looking for tools to help them navigate the complexity of diving into DeFi.

“It helps to align yourself with tools and companies that aren’t focused on things like minor price changes in the short term,” said Jiang.

Meeting institutional needs

Institutional investors have three primary needs—essential boxes that must be ticked—before they can take the leap into DeFi: security, compliance and ease of use.

Although most institutional investors “think of DeFi as a high-yield solution and are still very curious,” said Lily Z. King, Cobo’s chief operating officer. “After this recent market collapse, they’ve realized that there are unique internal and external risks associated with this space.”

“What we allow them to do is to test their curiosity with minimal risks,” she said.

Argus never sleeps

To facilitate this, Cobo has introduced Cobo Argus, a platform that complements insitutionals’ internal control framework and provides secure custody architecture for crypto assets.

Named for a hundred-eyed giant from Greek mythology, Argus is designed to be a vigilant watchman for institutional investors. It supports teams working across all sectors of the new crypto economy, including DeFi, NFTs, decentralized autonomous organizations (DAOs), GameFi and SocialFi.

Argus is a smart contract-based custody tool that combines internal control risk management, automation, and preset rules so that multisig wallets can work safely and effectively for institutions. Its role-based delegation system segregates access controls to reduce the risk of internal errors, negligence or even fraud.

A bird’s-eye view

The platform’s core functionality is to provide role-based access controls for smart contract invocation. For DeFi teams, that means that owners can predefine which DeFi protocols their operators can interact with, essentially creating whitelists that prevent fraud or negligence within the organization, and their attendant losses.

As well as assigning access to specific whitelisted protocols for traders, Argus can also limit the actions traders are able to perform. For example, one trader might be allowed to add or remove liquidity while another is able to move funds and swap.

Owners can also establish granular trading rules on the platform, such as setting trading parameter thresholds and allowable trading pairs for each operator/trader, allowing for full control and a powerful bird’s-eye view of their entire operation.

It’s all customizable and can be written into smart contracts from the outset.

“This is about putting strict safeguards in place so you know who in your organization has access to which protocols, what activities they can do and you can monitor all of it in a systemized way,” Wong said. “Having this security and flexibility means you can have the peace of mind to scale your organization.”

Streamlining multisig wallets

For institutions, scale brings complications when it comes to crypto, such as the need to manage multisig wallets—digital wallets shared by more than one person. They’re a headache for institutions, because multiple owners have to approve every single trade, and teams are often large and located across borders and in different time zones.

But having to manually approve every transaction is more than inefficient—it’s an operational risk, Wong said. Imagine having to approve hundreds of transactions every day. “At a certain point, you get fatigued,” she said, “and you probably won’t end up vetting those transactions properly.”

Cobo Argus streamlines the process of using multisig wallets by enabling automatic approval of certain predefined transactions. For example, certain recurring or lower value transactions can be approved without the tedious process of requiring all owners to sign off on them, greatly improving workflow efficiency without sacrificing security.

It integrates with industry-leading multisig wallet Gnosis Safe, and is whiteliested on its safe apps. In a statement, Gnosis Safe pointed to the “great synergies with our partnership with Cobo,” adding that, “their Argus product can help solve many institutional smart contract invocation workflow needs.

A wealth of additional services are also available within the platform to support institutions on their DeFi investing journey, including on-chain address analysis, anomaly detection, automatic deleveraging and security incident monitoring across the crypto community.