The burgeoning world of decentralized finance (DeFi) is dynamic and innovative, looking for ever new and different ways to provide investors with enticing risk and return profiles. Apollo Global Management, a leading alternative investment manager, is venturing into this space with its Diversified Credit Securitize Fund (ACRED), a tokenized feeder fund investing in Apollo's $1 billion Diversified Credit Fund. This program joins with Securitize and Gauntlet to introduce institutional-grade credit strategies on the DeFi side. Now, accredited investors can have leveraged yield opportunities that were once unimaginable in the crypto realm. MetaBlock X explores this new paradigm in greater detail. It follows the journey as tokenization, smart contracts, and risk management converge to deliver a next-gen investment product.

ACRED: Bridging Traditional Finance and DeFi

ACRED is an important advance in connecting the world of traditional finance (TradFi) with DeFi. Securitize is providing the technology to tokenize 5% of Apollo’s Diversified Credit Fund. This strategic shift democratizes investment participation by significantly expanding the category of accredited investors with access across many blockchain ecosystems including Aptos, Avalanche, Ethereum, Ink, Polygon and Solana. This tactical advance addresses the growing market need for real-world asset (RWA) tokenization. It seeks to pioneer the liquidity and efficiency benefits of blockchain tech for traditional assets.

Securitize’s new sToken tool is an essential element to ensure that ACRED doesn’t accidentally violate regulatory requirements. This tool would help accredited token holders preserve important compliance and investor protections even in fully decentralized networks. That last part—attracting institutional investors—is what is most critical. They deserve the confidence that their investments are not only compatible with, but squarely within, well established legal and regulatory guardrails. Unfortunately, the fund is currently only open to accredited investors. These investors have strictly defined financial thresholds, so only those with the advanced understanding of the market—and the ability to withstand risk—can invest.

Our partnership with Gauntlet really brings a unique level of sophistication to the project. Gauntlet is the largest DeFi risk management platform. It offers indispensable risk assessment and optimization services that protect the viability of leveraged yield strategies and cement their long-term safety. This collaboration is critical to cultivating confidence among investors and minimizing downside risk from DeFi investments.

The 'Looping' Strategy: Maximizing Yield in DeFi

Securitize and Gauntlet are using a ‘looping’ strategy to create leveraged yield for ACRED investors on Polygon. The strategy is to use ACRED tokens as collateral for borrowing from DeFi lending platforms. By leveraging more assets and putting that money to work, investors can earn yield over yield. This process can be done repeatedly, or ‘looped,’ to dramatically increase returns.

Additionally, this strategy takes advantage of the composability of DeFi protocols, enabling ACRED to efficiently interact with different platforms and maximize capital efficiency. Our objective is to produce a more competitive product than other stablecoin strategies. Our mission is to provide crypto-native investors the option they’ve been waiting for- a far superior alternative with potentially higher returns. Reid Simon, head of DeFi and credit solutions at Securitize, wants to democratize access to tokenized securities. He makes them sexy by beating out conventional investment products.

The success of this winding approach depends on sound risk management. Gauntlet’s ability to provide risk assessment and optimization is key to ensuring the strategy will achieve long-term sustainability. Gauntlet continues to observe live market conditions and iterates parameters. This strategy reduces the dangers of leveraged positions and safeguards investor capital.

Compound and Compound Blue: Key Components of the Strategy

Compound, one of the oldest and most influential DeFi lending protocols, is a key part of the looping strategy. Compound is a network of publicly available smart contracts running on the Ethereum blockchain. Users are able to lend and borrow other cryptocurrencies. They receive interest on their deposits and pay interest on their borrowings. The core lending/borrowing smart contract for Compound V3 is Comet. Compound tokenizes deposits into cTokens.

Compound Blue provides a regulated, institutional–grade version of Compound. It almost certainly makes for a safer, more extant, and more regulatory-friendly environment for ACRED to prosper. This new and improved version of Compound tokenizes the world’s first whitelisted, KYC/AML compliant real estate property. Through better security provisions, it is more appealing to institutional investors.

How Compound Works:

  • Borrowers pay interest on the assets they borrow.
  • Lenders earn interest on the assets they lend.
  • Compound distributes COMP tokens to both borrowers and lenders as an additional incentive.

For instance, borrowers can pay 6.71% interest and earn 2.58% interest in COMP. Lenders could potentially make 6.47% on lending USDC and then an extra 4.63% through COMP incentives. It’s important to note that these rates and rewards are subject to change depending on market conditions and protocol governance.

Implications for RWA Tokenization and Financial Composability

ACRED’s tentative first step into DeFi holds enormous potential for the nascent RWA tokenization space at large. Real-world assets that are tokenized can open up entirely new use cases and new markets, especially in DeFi. Together, this huge potential attracts institutional capital and drives innovation. The project aims to showcase the power of financial composability. It empowers you to combine multiple DeFi protocols and create sophisticated investment strategies.

Benefits of RWA Tokenization:

  • Increased liquidity and capital efficiency: Tokenization addresses inefficiencies in traditional asset markets.
  • Improved composability: Financial composability enables tailored investment strategies.
  • Simplification and acceleration of transactions: RWA tokenization reduces costs and complexity.
  • Enhanced collateral usage and intraday liquidity: 24/7 settlement and on-chain data improve capital efficiency.
  • New investment opportunities: Tokenization enables fractionalization, allowing smaller investors to participate.

By utilizing these advantages, ACRED seeks to develop an investable product powerful enough to pull in crypto-native and traditional investors alike. We hope that this initiative will result in positive use cases that encourage more widespread RWA tokenization adoption. Beyond that, it will help power the expansion of the entire DeFi ecosystem.

The introduction of ACRED into DeFi is a demonstration of the power of smart contracts to automate complex financial processes. Through smart contracts, lending, borrowing, and yield generation strategies are deployed transparently and indiscriminately. They reduce the need for intermediaries and the market inefficiencies and transaction costs that come along with them. This enhanced efficiency is a win for investors and the DeFi ecosystem as a whole.

Apollo’s expansion into DeFi with ACRED is a monumental advance in the evolution of decentralized finance. This new initiative uses tokenization, smart contracts, and risk management to drive equity. Beyond that, its mission is to build a standout investment product that extends the reach of traditional capital and finance into the crypto ecosystem. This can be a successful first endeavor and pave the way for further adoption of RWA tokenization. More importantly, it would further boost the DeFi landscape. MetaBlock X intends to have a correspondingly active presence in this space. They’ll be sharing their journey in building ACRED and helping propel other innovative DeFi projects along.