By Nathan Ferguson
It is no more news that the advent of cryptocurrency and blockchain technology has caused a huge disruption in the financial industry. However, over the years, the crypto space has evolved to cater for different needs as they are arising and this has increased the credibility and the global adoption of the space.
The motivation behind the creation of Bitcoin, as stated by Satoshi Nakamoto in the asset’s white paper, is to create a system that accommodates the unbanked population and ensures financial transactions are done with no intermediaries. This, generally, has been the fundamental motivation for the creation of other assets aside from the specific problems they are looking to solve.
From the Bitcoin white paper, the emphasis is decentralization — having a running system without any central organization controlling it, but with the rise of crypto exchanges and the need for an institution in the crypto space to get proper licenses before operating in some jurisdictions, the space cannot be said to be decentralized again.
What is Decentralized Finance (DeFi)?
Decentralized Finance is a new financial technology that is built on distributed ledgers just as most cryptocurrencies are. But instead, the system runs without any central control hence no institution can lay claim to the system.
The system became popular because the users can boycott extra fees charged by banks and other financial institutions for using their services. Other reasons crypto users embraced the emerging technology include the ability to keep their assets securely in digital wallets instead of banks, fast financial transactions, and the ability to use without any special requirements outside internet connection.
To fully understand how decentralized finance works, there is a need to understand the operation of the centralized financial system.
In centralized finance, there is at least one third-party involved in any financial transaction you are carrying out, and the goal of the corporation is to make money. They generate revenues from the fees they charge their users which can be outrageous sometimes. For example, if you want to make a purchase with your credit card, for the transaction to be successful, the merchant will charge its bank, while the bank charges your credit card network, and credit card network on performing their checks, request payment from your bank. Upon approval from your bank, the same goes to the credit card network, back to the merchant’s acquiring bank, and the merchant itself.
What you must be aware of is that all these entities involved are there to make gains, and they all receive payment for their services, and it can, oftentimes, be overwhelming for the users.
In a bid to solve this problem, the decentralized finance system emerges. This system eliminates all intermediaries involved in any given transaction by allowing people (including businesses and merchants) to conduct financial transactions through peer-to-peer financial networks that run on connectivity, security protocols, hardware, and software advancements.
As long as you have an internet connection, you can trade, borrow, or lend using software that is capable of recording and verifying your financial actions on the distributed financial databases.
A distributed database collects and aggregates data from all users and verifies it with a consensus mechanism. The database, however, is accessible across various locations. It is with this technology that the centralized financial systems and models are eliminated and this gives anyone access to financial services irrespective of their personality and location.
How DeFi works
The decentralized finance technology runs on blockchain technology with all cryptocurrencies are running. The blockchain allows the DeFi technology to run a secured and distributed ledger or database, and the applications that are used in handling transactions are called dApps, and they run on the blockchain as well.
Basically, in blockchain, each block has transaction records and the transactions are verified by other users in the space. As soon as the verifiers agree on a particular transaction, the block is closed and secured. However, another block that has the information of the previous block within it is created. This is what creates the link between each block and that is where the technology got its name, “blockchain.”
The core premise behind the decentralized finance system is peer-to-peer financial transactions. This means that an automated system facilitates a P2P DeFi transaction upon agreement between the two parties for goods and services.
For example, if you want to get a loan, instead of going to banks where you are asked to pay service charges and interest for money made available by lenders, all you have to do is to initiate an algorithm that matches you up with an available lender after you have input loan needs. Upon agreement of terms, you receive your loan.
The transaction is then recorded on the blockchain and the expiration of the agreed intervals triggers a repayment from your end. The same happens when you make a payment through any dApps.
To round up this section, it is good to talk about the currency of the DeFi space. The decentralized finance system is designed to run with cryptocurrency as currency for its transactions. However, much of the concept is built to run on stablecoins — cryptocurrencies pegged to the value of an entity including commodities, and fiat currencies.
The Role of DeFi in Asset Management
In early 2019, when the DeFi space is starting, the potential of the technology caught the attention of many professionals and investors in the asset management space. New attributes like composability, decentralized exchanges, derivatives, security tokens, and protocols when combined have presented an indication of massive Innovative solutions for investors.
At the same time, these factors have created a foundation for the adoption of DeFi asset management. This is because the traditional financial landscape focuses more on risk profile needs, income, and life goals before making investment decisions. With these factors comes the burden of manual processing and standardization.
Over the years, the evolution in the asset management space has seen the development of automated advisors like Betterment, and other self-investing platforms like Robinhood. However, the current trending model in the asset management market is index funds, and together with the propositions of the DeFi technology, DeFi asset management has seen huge growth.
Before the arrival of DeFi, experts have considered crypto trading as the alternative to the traditional financial systems, but the growth of the Ethereum network, together with the ERC-20 tokens, has positioned decentralized exchanges as the alternative to the centralized exchanges considering their hazards and pitfalls.
Together with the decentralized exchanges, the aspiration for fund hedging, margin trading, lending, and borrowing has increased the popularity of the DeFi technology.
The Rise of DeFi Asset Management and Platforms to Look out for
Because of the complications associated with the decentralized financial system, it is difficult to answer ‘what the DeFi assets are’ and how they work. One of the reasons is because users can now tokenize assets in the real world and which can be traded on DeFi protocols without any problem.
With this, you might begin to wonder which of the traits of DeFi work in favor of asset management. This section will consider those characteristics that help DeFi empower asset management namely transparency, composability, and trustlessness.
- Transparency
The traditional financial system has proven that transparency is a myth. Extended settlement time and prolonged reporting system make it difficult to have a clear understanding of the current status of the asset and fund you want to invest in. Since asset managers publicly display the report of their assets monthly or quarterly, the best details you can find about the performance of an asset or asset manager are from the previous month or quarter.
With DeFi asset management, there is comprehensive visibility of a token or asset, which gives you insight into the performance of the asset or the asset manager.
Some asset management platforms are profound for transparency and one of them is Melon Protocol. This protocol, in association with Avantgarde Finance, devises functionalities that enhance asset creation and it has other features like trading tools, reporting, investment mechanisms, and manager incentives. Moreover, their private investment funds or hedge fund is accessible easily by any user with an Ethereum wallet.
Another example of protocols promoting transparency in the DeFi space, especially in asset management is Set Protocol. Set Protocol has a feature called Token Sets, and the first entry among these sets are Robo-advisor tokens which can be adjusted based on your trading strategy or allocation.
- Composability
Since the conventional financial system and models require that asset managers and advisors work comprehensively to create a portfolio for growth, hedging, income, and liquidity, asset managers can charge as much as they want. This, however, has increased the cost of asset management.
With the advent of DeFi, the asset management market can now show composability because of the ability to bring multiple positions, layering exposure, yield, and risk management within a single transaction.
An example of a platform that offers this in the DeFi space is ZapperFi. With this, you can evaluate your risk profile and get recommendations that fit your portfolio. Also, there is the RAY — Robo-Advisor for Yield feature that ensures higher returns on low-risk investment opportunities by allowing you to move your assets through different lending protocols.
- Trustlessness
One of the critical aspects of DeFi that favors asset management is trustlessness. The development of DeFi on the Ethereum network has given users the ability to interact with asset management options by just connecting their wallets. However, compared with the centralized financial systems, there is no need for KYC, hence you have your privacy in the space.
One of the notable examples of asset management platforms in the DeFi space that introduce trustlessness is PieDAO. The platform successfully integrated the DAO (Decentralized Autonomous Organization) functionality into asset management. Users on PieDAO can make use of the DOUGH token to create and manage assets.
Other DeFi Asset Management Platforms to Look out for in 2022
As mentioned earlier, the decentralized finance system is an attempt to build an alternative financial ecosystem for those who believe in the future of cryptocurrency and blockchain. There is a wide range of investment tools and smart contracts built on the space to provide alternative investment opportunities for crypto users.
Also, with the volatile nature of the crypto space, DeFi has proven to be the most lucrative investment option for people out there. However, before we dive into this section, it is good to say that as much as such concepts as yield farming and staking in the DeFi space are tempting, there is a steep learning curve and everyone interested in the space must be ready to commit to researching and tracking their investments, even like a full-time job. The truth there is, the journey can be discouraging and stressful when the market goes bearish.
With that said, this guide is looking to provide you with various other user-friendly tools that can make your navigation and analysis in the DeFi space easier. With these tools, you can find the right investment opportunities as well.
- HyperDEX
HyperDEX is one of the best DeFi asset management platforms out there. It is known for its user-friendly interface, as it was developed to reduce the entry barrier for those that are new to DeFi investments. There are different ranges of investment opportunities on the HyperDEX platform from safe and simple ones to risky and advanced ones. There are other features like algorithm trading, fixed income, and race trading which are similar to the liquidity pools available on other DeFi platforms.
These features are represented in Cubes and end-users can choose whatever Cube fit their level of risk tolerance. For instance, for anyone interested in getting a guaranteed return, their best bet is the fix-income option.
Another wonderful thing about the HyperDEX platform is that all three Cubes have their advanced options, which allow simultaneous investment with the native token of the platform — HYPER.
Altogether, the HyperDEX platform aims to become a DeFi hub where anyone who owns crypto can invest in Decentralized Finance with zero knowledge.
- Coinbase Wallet
Coinbase has grown to be a household name in the crypto space, and this has influenced the growth of every product they release. Coinbase Wallet, however, is more than a wallet for cold storage of coins, but rather it is a multi-coin and non-custodial wallet that can be used as a dApp browser.
The wonderful thing about Coinbase Wallet is that there is no need for users to hold an account with Coinbase to use it. With this, users can trade and store their tokens securely on their devices without transferring them to a third-party platform. With the Coinbase Wallet, some tokens can earn users’ interest.
Lastly, you can have access to dozens of other dApps as well as popular DeFi platforms and DEX (decentralized exchanges) built on the Ethereum network with just the Coinbase Wallet.
- DeFi Saver
With DeFi Saver, users have access to a simple and easy-to-navigate dashboard for DeFi asset management. Also, it is easier for investors to manage every aspect of their investments in the DeFi space, including DeFi loan refinancing, creating custom transactions, staking tokens, and changing to another lending protocol.
The platform has another laudable capability called Simulation Module which allows new investors in the DeFi space to experiment with different DeFi markets just to practice different concepts like coin staking where they can learn before using real assets.
- LiquidityFolio
This tool is another popular DeFi asset management tool that is designed specifically for liquidity providers. It allows you to have access to different protocols including Balancer, Uniswap, 1Inch, Curve, and others.
Another feature that makes LiquidityFolio very popular is its easy-to-navigate dashboard that allows you to track your investment portfolio easily at a glance. Other research tools allow investors to discover pools for staking tokens.
Generally, the major benefit of the LiquidityFolio platform is that it helps investors discover the best liquidity pools that earn them better yield for every ERC-20 token they stake.
- Zerion
Zerion is a DeFi asset management platform for investors looking to manage their DeFi portfolio on a since platform. With this platform, investors can enjoy the benefit of access tools like DeFi blue chips and DeFi indexes which allow them to trade tokens, perform cross-blockchain asset transfers and show off their NFT collections on just one platform.
Zerion supports different blockchains, including Polygon (through which investors access the Ethereum network), Binance Smart Chain, Optimism, and Arbitrum. Also, Zerion aggregates all major DEX and layer-2 blockchains.
Conclusion
The overall impression of DeFi asset management shows it is a favorable intervention for the pitfalls of the conventional finance ecosystem. Also, the evolution of the DeFi ecosystem has proven that there is still a possibility of introducing more functionalities that will attract more investors.
For now, the DeFi ecosystem is focusing on stabilizing asset management while addressing the risk involved. And since experts have named the ecosystem a revolutionary alternative to traditional finance, it is of great importance that everyone starts learning how the space runs as we all make our way to the world of DeFi asset management.