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Decentralized finance uses crypto to build a new, unregulated kind of market

- Pat Regnier

Money manager Vladimir Vishnevskiy can earn a negative interest rate for holding a European government bond. Or he can pocket the annual equivalent of a 20% yield for locking up money in one of the wilder corners of the cryptocurrency market, known as decentralized finance, or DeFi.

He decided to go for the 20%. “You can’t get those yields in the traditional space,” says the co-founder of Swiss-based St. Gotthard Fund Management, which runs a portfolio designed to squeeze income out of crypto assets. The strategy is so new that even Wall Street pros may have trouble wrapping their heads around it. Take what you might know about Bitcoin—that it’s a digital currency that exists only on an online ledger governed by computer code. Now make it even more mind-bending, and imagine the code isn’t just recording transactions. It’s running lending platforms, insurers, and financial markets with little human intermediation. That’s DeFi.

Traders like Vishnevskiy can collect yields by committing in the form of crypto tokens the capital that’s needed to make these disembodied and largely unregulated financial institutions run. At the peak last month, investors put as much as $86 billion into various DeFi programs, compared with just under $1 billion a year ago, according to data from DeFi Pulse, a website that tracks the industry.