With their leveraged RWA strategy Apollo’s entrance into DeFi has been the talk of the town. Are we asking the right questions about this positive trend? While headlines tout "institutional-grade DeFi" and "enhanced yield," I'm seeing a potentially dangerous game being played with retail investors' money. It's like watching a seasoned poker player enter a kids' card game – are they really there to teach, or to clean house?
Leveraged RWA: Whose Yield Is It?
The core of this strategy is a leveraged bet on Apollo's own credit fund. They're dressing it up with fancy terms like "financial composability," but underneath all that jargon is a simple, age-old tactic: borrowing money to buy more of something you already own. And in this case, it's ACRED, a tokenized feeder fund that invests in Apollo's Diversified Credit Fund.
Securitize’s sToken tool wraps ACRED into a compliant package called sACRED. Users and investors can now actively engage in sophisticated DeFi strategies paying the lowest rates possible with the Compound Blue lending protocol, made possible by Morpho. The "looping" technique, using ACRED as collateral to borrow USDC and buy more ACRED, amplifies both potential gains and losses. Gauntlet's risk engine is supposed to prevent disaster, but I'm not entirely convinced.
Here's the rub: who benefits most from this arrangement? Whose interest is being served here, the average investor’s, or Apollo and their partners’? Apollo tokenizes their fund and uses it to get leverage in DeFi. This strategy brings them access to a different pool of capital and increases demand for their Diversified Credit Fund. That rising demand would boost the fund’s performance, creating a self-fulfilling cycle of gains for Apollo. It's a self-serving cycle, and while investors might see some yield enhancement, the lion's share of the upside likely flows to Apollo.
Think of it like this: it's like a casino offering you a "risk-free" way to win big, as long as you keep betting on their house. The house always wins, eventually.
Looping: A Ticking Time Bomb?
This “looping” technique is where my anxiety truly goes into overdrive. It’s DeFi’s version of margin trading, and we know how such stories often conclude. The strategy deposits the deposited ACRED tokens as collateral to borrow USDC, which is then used to purchase additional ACRED tokens. Each step is done recursively, amplifying profits and losses exponentially.
Those smart contracts, automated and communications-enabled, along with Gauntlet’s advanced risk engine, will work together to help each ecosystem manage risk prudently. Can they truly cover an unexpected black swan event? DeFi continues to be the Wild West, subject to flash crashes, exploits, and cascading liquidations. If ACRED’s value suddenly drops to zero, it creates a risk of the whole loop collapsing. This chain reaction of involuntary sales could fully bankrupt many investors.
On their FAQ page Gauntlet states that their risk engine continuously watches live leverage ratios and unravels positions when conditions become volatile. Risk models are no better than the data they’re provided with, and DeFi is an extremely volatile space. Are their models sophisticated enough to even begin to address the nuances of a leveraged RWA strategy? This strategy even functions on a comparatively untested protocol such as Compound Blue. I have my doubts.
It would be like trusting a weather report that never predicts rain, even though you live in hurricane corridor. Hope for the best, prepare for the worst.
RWA Tokenization: Premature Hype?
The enthusiasm around RWA tokenization is palpable. With added pressure on returns from rising interest rates, institutions such as BlackRock and Franklin Templeton continue to test these waters. Most think this revolution is just the beginning of the future of finance. I think that we are getting ahead of ourselves.
These days, everyone gets excited about the idea of putting real-world assets onto the blockchain. Yet, technology is still nascent and the regulatory landscape is in flux. Just tokenizing an asset doesn’t inherently increase its value or lower its risk. In reality, it can add additional layers of complexity and, therefore, new opportunities for risk and attack.
The promise of “financial composability” – making tokenized assets immediately usable across DeFi applications – is equally exaggerated. Even though it’s true that sACRED enables investors to tap into more expansive DeFi strategies, these risks are perilous. We believe this strategy provides investors in funds like ACRED a new level of financial composability that traditional financial rails are unable to deliver. This statement begs several questions. Traditional finance has no shortage of mechanisms to leverage assets, they just don’t refer to it as “looping.”
All of this sounds great in theory, it feels less like a revolution and more like financial engineering rebranded for the DeFi generation.
In the end, Apollo’s DeFi bet can lead to a nice return on investment. But before diving in headfirst, ask yourself: are you truly comfortable with the risks involved, and who is really benefiting from this brave new world of leveraged RWAs?
