Deep Dive: Crypto and Asset Management

TradFi has no Excuse anymore

The wider TradFi sector has generally regarded the crypto industry with a lot of skepticism that they have failed to see its true potential. However, the time for excuses and fearing the unknown is over. Several large TradFi institutions understand this, so they have shifted their perspective and embraced crypto in various ways.

For instance, BlackRock, the largest asset management firm in the world, is currently awaiting approval for its spot Bitcoin ETF and is set to shift its focus to an Ethereum ETF soon. This is a significant move that other TradFi institutions could draw inspiration from. Expect Bitcoin to have a pack of new spokespeople in 2024 – and they will come from TradFi.

Furthermore, the tokenization of real-world assets (RWAs) bridges the gap between TradFi and DeFi and provides a less intimidating point of entry for asset managers. The crypto sector has also grown immensely over the last decade through innovative scaling solutions, increased sustainability in DeFi, and the advancement of the international crypto regulatory environment. It seems like that through the advent of RWAs, the blockchain will finally disrupt traditional finance infrastructure. 

The astounding outperformance of Bitcoin, the largest crypto asset, is another reason to motivate TradFi institutions to join the crypto sector. The asset has outperformed traditional asset classes by a wide margin over the last five years, as shown below. These are facts hardly anyone can ignore any longer.

Source: The Bitcoin Layer

Traditional asset classes have also trailed Bitcoin in terms of performance in 2023, as indicated in the graph below. In a year that was overshadowed by two wars and mounting fears of an upcoming recession, BTC vastly outperformed other asset classes. This could explain why interest from asset managers has grown this year.

Source: The Bitcoin Layer

The Rise of On-chain Asset Management

While asset managers are on the brink of adapting crypto assets as an add-on to their own portfolio, the industry of asset managers as a whole is also slowly disrupted by blockchain technology. Iit is becoming exceedingly clear that asset management will eventually have to move on-chain. Experts predict the shift will happen in the next 10 to 30 years.

The Evolution of Asset Management

To better understand this transformation, let’s take a brief look ath the recent history of asset management. The first iteration of asset management was highly reliant on intermediaries, making it inefficient and slow. It also involved filing extensive paperwork, going through a lengthy KYC process, and paying high fees. The centralized nature of asset management firms also locked out investors from all the backend processes of their trades.

Fast forward to the Web2 revolution, fintech apps emerged, changing the investment process for the better. These apps allowed users to buy and sell financial assets straight from their phones, enhancing accessibility and convenience. However, the issue of intermediaries, high fees, and protracted KYC processes remained. Investors were also not privy to all the details of their trades, creating opaqueness.

In the current Web3 era, blockchain technology is set to transform asset management dramatically. It eliminates intermediaries where possible, reduces costs, creates transparency, adopts new, more efficient and privacy protecting ways to do KYC, and increases efficiency.

The Future of Asset Management is on-chain

As we have seen, blockchain technology offers game-changing advantages, signaling that asset management must move on-chain to boost speed, transparency, and efficiency.

Additionally, asset management will benefit from moving on-chain because of the ability to build new products, such as personalized crypto funds. These funds will enable individual investors to invest in on-chain funds suitable to their needs and wants. The personalization will be conducted by smart contracts, allowing investors to access targeted investments focused on their preferences and goals.

What is it exactly and what are the benefits?

So, on-chain asset management is the future, but what exactly is it? Well, on-chain asset management is the practice of increasing wealth by maintaining and trading assets that can rise in value on the blockchain. With RWA adoption around the corner, this array of assets will not only be constrained to blockchain native assets though. And while on-chain asset management functions in a similar way to traditional asset management, it is smart contracts that play an integral role by replacing intermediaries and setting code-enhanced rules for managing assets. 

On-chain asset management takes place on asset management protocols running on a blockchain. These protocols aim to give investors more control over the management of their assets while permitting them to enjoy transparency and efficiency.

The three main types of asset management protocols are yield aggregators, index funds, and one-stop platforms. Yield aggregators serve the role of fund managers. They pool funds from investors and reinvest them in DeFi yield-generating protocols to maximize returns.

On the other hand, Index funds transfer indices into tokens, which are 100% backed by the underlying assets in the basket.

One-stop platforms are protocols where both investors and asset managers can participate. Asset managers create pools for investors to deposit their assets. They then invest these assets in different ways on other DeFi protocols to generate yields. Investors can track the performance of their asset managers and the flow of funds.

Now that you know what on-chain asset management is and the different types of asset management protocols, let’s look at the benefits.

• 24/7 accessibility: In traditional asset management, settlements can only take place during business hours. However, on-chain asset management runs 24/7, 365 days a year. It is also borderless, making it accessible to anyone anywhere worldwide as long as they have an internet connection.

• Transparency: All trades are recorded on-chain in real time, where anyone can view and audit them.

• Reduced costs: Since on-chain asset management doesn’t involve intermediaries as much, the associated costs are reduced to cose to zero. Investors only have to pay network transaction fees. Because the applications are lean, the pressure to collect fees is not as high. Clever tokenomics can nevertheless generate revenue.

• Trustless and increased control: Investors do not have to trust a third party to manage their assets. Everything takes place on-chain with the help of smart contracts. Investors also have more control over the management of their assets.

• Increased efficiency: The use of several intermediaries like asset managers, fund administrators, brokers, and custodians minimizes efficiency and slows down trading and settlement processes. With on-chain asset management, the lack of intermediaries speeds up processes and boosts efficiency.

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Source: Avantgarde

What’s possible today

While on-chain asset management is still a young branch of DeFi, several projects are already operational. They include:

dHedge

dHedge is a one-stop on-chain asset management platform built on Optimism and Polygon. It supports over 100 assets on Polygon, Ethereum, and Optimism.

Investors deposit assets in pools known as vaults. The vault fee is set by the asset manager, and the maximum vault fee that can be charged is 1%.

Enzyme Finance

Enzyme Finance is another one-stop platform for on-chain asset management. It runs on Ethereum and has a deployment on Polygon. The protocol supports a wide range of derivative and standard tokens.

Deposit pools on Enzyme are also called vaults. Each vault can interact with other DeFi protocols on Ethereum and Polygon.

Fees on Enzyme are in the form of an annualized protocol fee calculated relative to an annualized target percentage.

Avantgarde Finance

Avantgarde Finance is a layer on Enzyme that offers institutional-grade on-chain investment products. One of its products is on-chain asset management, where investors and fund managers are brought together, allowing them to earn better net returns.

TokenSets

TokenSets, also referred to as the Set Protocol, is a one-stop on-chain asset management platform on Ethereum, Polygon, and Optimism. It permits users to create structured products that are essentially baskets of fully collateralized customized assets represented by ERC-20 tokens (or Set tokens). These tokens follow an asset manager’s investment strategy, which investors can replicate by purchasing or minting the Set token.

Investors pay network and streaming fees. Streaming fees are based on the market cap of a particular structured product. These fees go to asset managers.

Index Coop

Index Coop is an index fund that maintains several crypto indices like the DeFi Pulse Index, ETH Flexible Leverage Index, BTC Flexible Leverage Index, and Metaverse Index. It leverages infrastructure and smart contracts from the Set Protocol. These indices give investors exposure to digital assets when purchased. The index products are tradeable as ERC-20 tokens.

Yearn Finance

Yearn Finance is a yield aggregator on Ethereum that generates returns for investors by reinvesting funds into DeFi protocols using diverse strategies. The protocol requires investors to deposit funds in a vault in order to earn yields.

Users pay performance and management fees, which vary from vault to vault. The performance fee is debited from yields earned.