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Decentralized Asset Management – An Introduction

Decentralized Finance, known as DeFi, saw an extreme uptick in popularity in the years 2020 and 2021. Most projects that were connected to DeFi saw great returns and media coverage. However, once the bear market hit and the money flowed out of the cryptocurrency market, these projects were the ones that were hit the most.

Luckily, the fact that some project loses on price does not mean that it loses on its value. Those projects that are solving problems of everyday users should be able to continue their services even during the bear market. A good example of projects that are providing a real value to the customers are those, which are connected to decentralized asset management.

What is decentralized asset management, how it can put pressure on the current, traditional asset management and what projects are worth following will be expanded on more in this article.

Recap of what DeFi is

Prior to jumping to the main point of today’s article, decentralized asset management, let’s first briefly recap what DeFi is. Decentralized Finance (DeFi), refers to a group of financial services that are implemented on blockchain and do not involve central authority. Instead, these third-party intermediaries are replaced by smart contracts.

 

 

How to Invest in Defi: The Complete Defi Course for Beginners – Linen

Source: Linen

The movement of DeFi has surged from the cryptocurrency world, where decentralization gained a lot of momentum. In fact, decentralization is one of the core values of this industry, which means that proponents of cryptocurrencies value it highly. Thanks to the versatility of DeFi solutions, they are able to improve almost any sector or industry in the world, especially if it is connected to the financial sector. A good example of that would be asset management.

What is decentralized asset management?

Before we introduce more ideas connected to decentralized asset management, let’s have a quick look and see what asset management actually is. Asset management (often interchanged for investment management, money management or wealth management) is a service that provides dealing with financial assets on behalf of other people.

Put very simply, it is handling and managing money of other people in exchange for a fee. There are two types of asset management: active and passive. Active asset management refers to buying and selling assets with a goal of outperforming indices or benchmarks by timing the market. On the other hand, passive asset management is simply buying a specific index or a benchmark and simulating its growth and the growth of the market as such.

When it comes to decentralized asset management, this term refers to the use of blockchain technology and smart contracts to provide services connected to asset management. However, in this case the main difference would be that these services are trustless, unstoppable and uncensorable.

Source: DeFi Beyond the Hype, Wharton School of Business

This means that anyone can become its own asset manager or have a trusted third party manage their funds if they choose to. Yet, unlike traditional finance, since all of it would happen over blockchain technology, it is easily traceable and open, which means that any providers of these services have to be completely honest and transparent.

Examples of decentralized asset management projects

Decentralized asset management already has different types of products, which are similar in their essence to traditional asset management. The products or services that are offered by different platforms are for instance on-chain actively or passively managed funds or different structured products. They can also include anything from liquidity pools and protocols to different yield staking opportunities or lending and borrowing.

There are already several structured products that are mimicking the DeFi market, allowing users to be part of a more complicated asset management structure themselves. There are examples of protocols, DApps or DAOs that are building a decentralized asset management ecosystem. DeFi Pulse Index (DPI), Balanced Crypto Pie (BCP) or Exchange Index Fund (XTF.oooEXC) are just some of them.

For this category to fully thrive, there needs to be enough data, aggregators or analytic companies and providers to help users make the best decisions with their assets. That is why products such as DeFi Pulse are important as they provide countless information on this whole industry, helping the investors in their decision making.  

Benefits of decentralized asset management

Some of the benefits of decentralized asset management have already been mentioned, but let’s look at them in more detail. Here are the three biggest reasons why decentralized asset management can benefit the investors:

1. Trustlessness

Thanks to Web 3.0 and DeFi, anyone has the ability to become their own bank due to holding their own keys to assets. However, many projects and platforms allow their users to lend their assets or use it as collateral for a loan and many more.

No third party or intermediary is needed for any of these services, making it extremely beneficial for anyone who wants to become self-sovereign. Moreover, no KYC or ID is needed for the vast majority of these services, making them private as well as open to anyone.

2. Transparency

Another benefit of decentralized asset management is the transparency it brings. With almost everything that is being done in this sector happening on blockchain, the visibility of all the actions of the users is extremely high.

While this still means that the users can have privacy, no one can claim to do something and not do it as the proof would be provided thanks to blockchain. Thus, for instance, asset managers cannot fake their results or performance as anyone has the ability to check and verify the flow of funds.

3. Composability

The third benefit of decentralized asset management is composability. Composability in this context is an ability to bring multiple positions, yield and risk management into one single transaction. It can thus serve as an easy way of taking care of one’s assets, which in the world of traditional finance would take too long, cost too much money and be less transparent.

Other benefits

There are obviously other benefits to decentralized asset management such as shorter starting time or lower costs. Additionally users can also benefit from being more liquid i.e. having a shorter lock-up period or the minimum initial investment can be more flexible.

How the Blockchain Could Fix Asset Management | Institutional Investor

Source: Institutionalinvestor.com

Biggest drawback of decentralized asset management

However, not everything is peachy when it comes to decentralized asset management. There are obviously some drawbacks that can affect this subsector of DeFi, yet, there is one drawback that stands above all. And that is the volatility.

In this case, the volatility does not necessarily mean the volatility in price of DeFi protocols or assets, though that one is important as well. The volatility risk can be also connected to the yield or fees that the asset managers have to pay in the digital realm. Moreover, it can also be manifested by a huge turnover of projects, where countless new ones are emerging, while many are disappearing.

Other drawbacks would include security problems and many hacks or breaches, complexity, too time consuming or uncertainty. Yet, as is often the case with DeFi, the benefits will outweigh the drawbacks to many users, which is a main reason why one can expect decentralized asset management to flourish.  

Conclusion

Decentralized asset management, like its other similar projects, has one main goal: to make it much easier for individuals to take care of their wealth, without any need for third parties or intermediaries. DeFi has provided a pretty solid bedrock for that, however, with the current market sentiment, it is unlikely that this sphere of cryptocurrencies will thrive. But once the bull market starts again, it can be estimated that this will be one of the first to move forward and gain attention.

 

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