'Yield farming' is flashy, but in some ways it resembles what's happening in traditional markets

Although the cryptocurrency world sits on the bleeding edge of finance, much of what we see in the burgeoning digital asset space reflects ongoing trends in the conventional world of stocks and bonds.

Take recent trends in the fixed-income market. Institutional interest in high-yield investment opportunities has reached a fever pitch. Inflows into high-yield fixed-income active strategies clocked in at more than $25 billion in the second quarter of the year, according to reporting from the Financial Times. By way of comparison, outflows in Q1 stood at $8 billion. 

eVestment data shows recent flows represent a turnaround for the fixed-income market. These investment strategies are seeing net inflows after seeing net outflows in every quarter since the beginning of 2017, with the one exception being the third quarter of 2018. Indeed, "yield starved" institutions have been pouring money in triple C-rated debt, according to an FT report this week. At the same time, yields in Treasuries have collapsed and those in debt among more credit-worthy companies have also declined. That's pushed investors into more risky debt. 

Coincidentally, this trend has been playing out almost in lockstep with the yield farming mania that has swept the crypto market. Crypto hobbyists and some professional firms have been pouring money into protocols that offer a yield when investors park funds and engage with their respective networks.

As my colleagues at The Block have reported in recent days, a number of decentralized finance protocols have already locked in more than a billion dollars in value: Recently lending protocols  Curve and Aave joined MakerDAO in the billion-dollar club. At the same time, centralized lending firms, such as Blockchain.com and BlockFi, have seen activity on their respective platforms soar. Such firms allow investors to park stablecoins in yield-bearing accounts that can fetch retail and institutional clients a double-digit yield. 

Genesis Global Trading, one of the largest trading and lending firms in the crypto market, reported earlier this year that various crypto yield generation strategies helped fuel a record-breaking quarter for the firm in Q2. 

To further capitalize on opportunities in liquidity mining (also called "yield farming"), hedge funds have borrowed additional tokens from Genesis to then deposit on DeFi platforms like Compound to earn yield. Traders moved quickly between various tokens, according to Genesis head of derivatives Joshua Lim, reflecting the speed at which traders jumped from opportunity to opportunity. 

To be sure, all of these investments carry their own risks and are not palatable for investors across the board. Still, these parallel trends illustrate what appears to be a growing connection between crypto markets and their predecessor markets: investors in both are turning to more esoteric and risky products for outsized returns. 

There are of course important differences. Investing in triple C debt, for instance, may come with risks that aren't necessarily present in DeFi. Investors in DeFi protocols can conduct granular audits of the smart contracts underpinning those protocols. One institutional investor told me over drinks, for instance, that he was comfortable "yield farming" on various protocols because he knew the people behind the code. 

In a world where it is "hard to find yield," as Brian Robertson, a portfolio manager at Pacific Asset Management recently noted, some less risk-averse investors might be drawn to DeFi or other yield generating crypto strategies, including options trading. 

Market insiders told The Block that they know of a few investment firms in the crypto market exploring the launch of DeFi-specific funds. This would be a new development. Venture investors have invested in DeFi projects, and some have likely dabbled in yield farming. But to date, no funds with explicit yield farming strategies have come online, at least not publicly. Apparently they are on the way, though. Though they declined to name the funds on the record, my sources have identified three firms in crypto that are at least exploring it. 

Whether it actually comes to fruition will depend on investor appetite, of course. There are also operational impediments. For starters, firms might have to raise at least $50 to $100 million to execute such strategies properly. And from a legal perspective, it would be difficult to properly express all of the risks associated with such a fund. Nonetheless, it's worth noting that it's not just crypto: the DeFi craze is in important ways reminiscent of what we are seeing in the world of traditional investing.