Decentralized finance plays an important role in the process of financial reform.
First, this is an open and license-free system for the general public.
Second, interoperability (cross-chain) will promote the product development of DeFi companies.
Combining the above two, competitive financial products can promote more credible developers to build a DeFi ecosystem. For example, the stablecoins of the Compound protocol work together to create more lending agreements.
Although the current lock-up value in the DeFi protocol has exceeded 9 billion US dollars, it is far behind the funds controlled by the centralized financial company (CEX cryptocurrency exchange). The key reason is that the time-consuming process of understanding the basic content of decentralized finance has scared away most cryptocurrency traders and wealthy investors.
In the traditional financial system, wealthy investors mostly authorize asset management companies to manage their assets. In the global economy, the importance of asset management companies is increasingly recognized by the public. According to the US Securities and Exchange Commission (US SEC), the total market value of global asset management in 2016 was as high as US$69.1 trillion.
They make appropriate investment decisions for clients, help clients increase their income, invest in securities portfolios, save time and cost, and open the door to the financial market for them, which cannot be done by individuals alone.
Can the DeFi ecosystem maintain its core values in a trustless and license-free system?
There are several reasons why wealthy investors or companies use asset management services: First, asset management companies are closely related to the world. From politics to extreme weather can affect the stability of the market, and this type of company has professional investment. Strategies ensure that investors' assets can benefit; second, because of the diversity of investors' assets, they can better avoid risks and actively adjust their monetization strategies during the ups and downs of the market.
Although the status quo of DeFi's asset management services is attractive to wealthy investors, in traditional asset management companies, customers usually have confidence in such companies and believe that such companies are beneficial to wealthy companies and individuals. of.
For the management of cryptocurrency funds, the asset management agreement applicable to DeFi should take into account the decentralized financial characteristics of trustlessness (no central control), security, and no license requirements (open to everyone).
Ways to a better user experience-set and forget
The superiority of Ethereum is to allow DeFi applications to enter the lives of the public. These services not only enhance the user experience, but it is more feasible, convenient and cheaper for developers to implement a Dapp. Similar service layer agreements include Gelato Network and Furucombo, which are all smart contract automatic execution tools.
Automatic smart contracts promote the development of decentralized financial agreements for asset management. It simplifies the user experience by avoiding complicated human operations and each transaction setting. Using this automated service, developers can create an automatic rebalancing function, in which the user's funds will be transferred to the next largest revenue strategic plan, automatically maximize benefits.
Reduce operating costs (miner fees/handling fees)
One problem with automatic rebalancing is that it increases the interaction with the network, and the cost is not low. Each interaction will incur processing costs and may also affect the user's income. This problem can be solved by allowing users to mortgage assets in the mining pool. When the value in the mining pool accumulates more, users can save 99% of the handling fee, and all types of investors can participate in liquid mining.
This model also applies to APY. Finance (on-chain revenue aggregator). At present, Ethereum is challenging its throughput limit, and we need a more effective method to deal with increasingly complex decentralized financial transactions. By concentrating working capital and then transferring the working capital to the original financial assets in batches, not only a lot of handling fees are saved, but the number of transactions on the network is also reduced. This reduces transaction fees for everyone on Ethereum, not just users of the platform.
Ensure the safety of user funds (non-custodial method)
In order to ensure the safety of user funds in the mining pool, the mining pool address can be a multi-signature wallet-no single ownership or key can be destroyed, that is, no one has ownership and is interacted by smart contracts. In addition, developers can conduct strict audits on their smart contracts to ensure that they are not affected by attacks or bugs.
The DeFi agreement also uses a model similar to traditional mutual funds: allowing the DeFi agreement to be non-custodial.
When users deposit their funds into a DeFi protocol (such as a loan), they will get interest-bearing tokens in exchange. These tokens generate interest every 15 seconds for each Ethereum block and can be transferred to anyone. Those who hold these interest-bearing tokens can redeem the principal plus interest at any time. For example, interest-bearing tokens: derivative tokens, such as cDAI, cETH.
However, a good process by itself does not guarantee good results. Another key factor that makes the asset management DeFi protocol successful is how they manage risk.
Risk management methods
The method of rebalancing should also consider the risk profile before choosing a strategy. Each available strategy in the platform library should have the following parameters-smart contract risk, financial risk and concentration risk. Therefore, the funds should be allocated strategically according to the user's risk preference.
The risk assessment of this strategy should be completed by the community using the platform voting structure (governance model). By voting with governance tokens, users can provide quality information during the decision-making process. Therefore, it is important to involve the wider community in voting and to conduct surveys before voting. Without accurate and up-to-date information, the returns of the mining pool may be at risk.
We see this model and the upcoming APY.Finance (liquidity mining aggregator) financing platform in Yearn.Finance (on-chain revenue aggregator). Both agreements have different risk management methods.
In Yearn Finance (liquidity aggregation tool), the platform provides users (people who earn income by providing liquidity for DeFi) with a wide range of investment strategy options, requiring users to make their own decisions on strategies and risks.
APY.Finance (liquidity mining aggregator) is different from Year (chain revenue aggregator). APY.Finance simplifies the financing of risky applications by providing liquidity providers to invest in a single pool of funds, from diversification of funds to strategies based on user-defined risk tolerance allocation.
The risk score of the strategy is defined by the community through the governance structure.
These measures in the DeFi asset management agreement can help DeFi users expand from DeFi novices to traditional institutional investors.