Pension plans Reloaded

Can crypto secure our retirement?

Rarely in history has the concept of work been interpreted in so many different ways. While for some it still stands for the traditional employee model, others speak about the gig economy all the way to decentralized organizations (DAO). What they all have in common: there has been little to no sense of security for retirement plans. Well, until now! With traditional pension funds increasingly turning to cryptocurrency and new players working on crypto-native savings options for DAO contributors, things are moving forward.

In this article, we take a look at current movements in the DeFi landscape, showing prospective employers, as well as interested investors, new approaches to long-term retirement planning.

Traditional Pension Funds turn Crypto

Following smaller pension funds in adding crypto to their investment mix (e.g. ForUsAll), the Houston Firefighters’ Relief and Retirement Fund (HFRRF) made headlines when announcing (Oct ’21) investments of $25 million in Bitcoin and Ether. To this point, it’s been considered the first big traditional U.S. pension fund to add digital assets directly to its balance sheet.

“It has a positive expected return, and it manages my risk. It has a low correlation to every other asset class. ” — Ajit Singh (CIO HFRRF) via Coindesk

So far, risk aversion has been primarily rooted in the volatility associated with this asset class. 73% of institutional investors listed this as the biggest barrier (IIDA study Sep ‘21). Though, as more pension funds invest in cryptocurrencies, the general restraints are beginning to fade. One key driver can be assumed to be simply the familiarity with this maturing market. Zooming out, volatility is put into greater perspective.

“We have experienced enough market cycles (…) the kind of pullback we’ve seen in the past few months usually precedes a big upward trend” — Elena Sinelnikova (CEO Metis) via Cointelegraph

In addition, crypto talent is now wider available and can help traditional funds to explore these new territories. However, the real innovation and thus the enabler for crypto retirement plans are certainly the rapidly evolving DeFi building blocks such as Stablecoins, Yield Farming, DeFi insurance and Risk Tranches.

Advanced Yield optimization as pension engine

Stablecoins, with each coin being pegged to a presumingly stable value (e.g. $1) are gaining steam as a viable option to invest in crypto without being exposed to the risks associated with volatility. USDC, USDT, and DAI are considered amongst the safest choices as they continuously improve the protection mechanism of the coin value by boosting their collateralization with fiat currencies and other real-world assets.

These digital assets are generating attractive returns by lending them to third parties or for example by providing them as collateral for insurance policies. With more than 2 years on the market, Idle Finance is an experienced player in the field of low-risk yield generation. Idle automatically allocates all deposited funds across different battle-tested (yield generating) DeFi protocols. This leads to substantial risk mitigation, e.g. by moving them to a safe place in case of a hack. At the same time, the fund allocation towards the most profitable lending sources enables attractive returns above those of isolated yield sources (9% for USDC in Q4 2021).

A new group of DeFi insurance companies such as InsureDAO, InsureAce and Nexus Mutual are entering the market to protect crypto investors from potential risks, such as smart contract failures or hacks, as well as the de-pegging of stable coins from their attributed value. For example, if a stablecoin drops beneath its attributed value for a set period of time (e.g. 80 cent value for a $1 worth token), the policyholder can make a claim. The same counts for losses if the Smart contract of a DeFi protocol has been compromised. It can be expected that more new players, as well as traditional insurance providers, will join the DeFi insurance arena, expanding both the use of cryptocurrencies as collateral for insurance claims and the protection of digital assets themselves.

Last but not least, in connection with protected savings options, risk tranching has to be mentioned. Here, the returns of each digital asset are divided into 2 risk-adjusted groups — the Senior and the Junior tranche. Those who pay into the Junior tranche receive a higher share of the returns (80%), but also take on additional smart contracts and financial risks. Vice versa, Senior tranches receive a smaller share of the returns (20%), but they are also repaid first in the event of a default. Thus, applying the Senior tranche, yield generation of a wide range of assets can be moved from a medium-risk to a lower-risk category. Along with a growing portfolio of tranched assets, Idle.finance launched Perpetual Yield Tranches for ETH Staking in partnership with DeFi Protocol Lido. Within the first 4 weeks, users deposited 3,900 ETH via this novel DeFi solution.

DAO Payment tools as Interface to new saving options

As decentralized organizations (DAOs) become more prevalent, so do their contributors and employees, of whom most are paid 100% in crypto. In addition, an increasing number of the growing gig worker community is choosing to receive their compensation in the form of digital assets. Global hiring firm Deel has reported a 10% month-over-month increase in talents seeking crypto pay since November 2020. This is one of the reasons why Opolis Employer Cooperative offers solopreneurs various service packages around an integrated payroll, including paychecks in fiat and crypto.

With the rise of this on-chain workforce and thus the immediate proximity to the DeFi landscape, payroll will eventually serve to be much more than simple salaries executed on a monthly basis. Rather, as this area evolves, key retention features such as yield-backed payroll, vesting of native tokens, and many more contributor-facing financial products are being developed.

Players such as Utopia Labs have already launched dedicated tools to help manage the payroll of a crypto-native workforce. Utopia connects directly to the central crypto wallet of a decentralized organization (usually in the form of a Gnosis SAFE). And right there, within the organization’s treasury and its payment workflows (e.g. payroll, expenses, invoicing), savings and pension opportunities are a no-brainer. Thus, Idle Finance and Utopia have started to map out opportunities to divert part of the monthly payments and overall treasury vaults into a crypto-native pension plan. Not least, to give decentralised organisations a powerful competitive advantage in addressing top Web3 talents.

DeFi — a place for both risk lovers and long-term thinkers

DeFi is still developing at such a rapid pace that even crypto-natives having a hard time keeping up. Many new risky strategies with promises of high returns enter the market on a daily basis. At the same time, all these earlier experiments of the “DeFi Wild West” have resulted in battle-tested, more moderate and safer DeFi primitives. So now that a new generation of workers is entering Web3, there are some valid options for long-term saving. Especially as fiat currency inflation progresses and confidence in banks continues to wane, we will see a further move towards crypto-favored retirement plannings.