19 August 2022
2 min read
DeFi Asset Management
What is DeFi ?
Decentralised Finance, DeFi in short, is a newly emerging space in the world of digital currencies. It removes third parties or intermediaries in financial transactions. In comparison to centralised finance where money is held by a bank or an institution, DeFi is completely a peer to peer transaction.
DeFi Asset Management
The objective of DeFi Asset Management is to give freedom and flexibility to general users. It increases the transparency and distributes the power to each individual. It has been gaining popularity for a couple of years now. The entire system relies heavily on the underlying network infrastructure. In contrast to conventional asset management by wealth managers and institutions, DeFi asset management happens through smart contracts. Assets in the real world can be tokenized and traded on chain via DeFi protocols. The selection of an asset or a structured product is also decentralised and done through a voting mechanism by the governing body of a protocol. These are called DAOs or Decentralised Autonomous Organisations. DAO votes on a proposed asset or crypto structured product to run on-chain. The entire process and functioning of the protocol is decentralized and incentivised. The community which is involved in decision-making, creating new tokenized assets or contributing in other ways are rewarded for their efforts. Similarly, multiple other tokens or crypto structured products and coins can be traded on a single DeFi protocol.
What makes it different ?
DeFi Asset Management has significantly changed the way we manage our wealth. It does not require anyone to fill KYC details or divulge personal information to any third party organisation.
Traditionally, fund managers or asset management companies have to ensure growth, liquidity, return and risk adjustment for a specific portfolio and create balanced products. This needs financial expertise, informed decision making and a lot of complex calculations. With DeFi asset management, composability is a big advantage. Combinations of different underlying crypto structured products with multiple yields, income and hedging have become easier. Everything can come within a single transaction.
Disrupting the Disruption
Cryptocurrencies and Blockchain technology were in itself a disruption in the financial landscape after 2008. However, as the space emerges and develops in due course, it also faces challenges. One of which is the issue of having centralised exchanges or protocols that manage large blockchain networks. Bitcoin, on its advent, was invented to move away from the traditional financial framework of financial intermediaries. Centralised projects on blockchain are similar to any large corporation having control. For instance, a centralised exchange or digital wallet on blockchain still has control over all the funds transacted through it. DeFi has come as a disruption within a disruption. It promises to revolutionise the space and create value for all.
There might be several pertinent questions and issues with understanding the DeFi Asset Management. It is advisable to navigate through more information on DeFi and thoroughly understand before investing. While it has got a lot of traction, DeFi is still a work in progress. There is a scope for decentralising the real alpha in an investment. It is certainly the way to look forward.