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London-based cryptocurrency investment firm KR1 saw profits of £4.6 million ($5.5 million) in the first half of 2019, according to a press release, with a substantial portion of those returns coming from staking cryptocurrencies and decentralized finance (DeFi) applications.
Staking cryptocurrencies involves putting large amounts of cryptocurrency as collateral on proof-of-stake blockchain platforms, in exchange for running the network and receiving daily rewards. It represents an alternative to Bitcoin’s energy-intensive proof-of-work consensus mechanism and is becoming more widespread in the crypto industry. However, critics argue that the new consensus mechanism is less secure.
KR1's CEO George McDonaugh said that, on top of its direct investments in cryptocurrencies and the companies building them, it made £117,000 ($142,000) in three and a half months by staking coins on Cosmos, a new proof-of-stake blockchain platform that launched in March, 2019.
McDonaugh added that proof-of-stake blockchains like Cosmos, Polkadot, and Dfinity are “going to yield healthy cash flows to the business going forward.”
With several high-profile proof-of-stake projects like Algorand flopping in recent weeks, KR1’s returns will provide welcome reassurance for supporters of proof-of-stake blockchains—demonstrating that incentivizing people to keep the network running is starting to work. It also bodes well for Ethereum, which is slowly shifting to proof-of-stake over the next few years.
As well as cryptocurrency staking, McDonaugh said that a lot of attention has been on DeFi in recent months. An emerging use-case of blockchain technology mostly built on the Ethereum blockchain, DeFi allows anyone, anywhere, to make financial commitments to other people without the use of trusted third parties such as banks. For example, you can lend or borrow money using DeFi protocol Compound—and smart contracts enforce the loans.
The excitement in DeFi stems from the fact that separate projects can be deeply integrated with each other, said McDonaugh. “[This allows] processes that would have taken many months in the legacy finance world to be reduced to just a few transactions on the blockchain,” he added.
KR1 is backing several DeFi projects including insurance provider Nexus Mutual, asset manager Melon Protocol, and privacy-focused protocols like the Nym Project.
McDonaugh added, “The DeFi space provides yields and rates not available anywhere outside of the sector.” But that’s because they are relatively risky investments, based mostly on smart contracts.
And we all know what happens when smart contracts go wrong.