DeFi Asset Management: Definition, Importance & Risks

People have been looking for ways to manage and grow their assets with as little effort as possible for centuries. The realm of traditional finance has many institutions and instruments put in place to facilitate those endeavors. However, it wasn’t until the crypto boom that DeFi asset management appeared, offering never-before-seen options and versatility.

But what exactly is DeFi? How does it stand to transform the global financial ecosystem? How did something that was reserved for tech and cryptography enthusiasts grow into becoming a vital element of the world of digital finance?

In this article, we’re unmasking the marvel that is DeFi and exploring various ways users can take part in DeFi asset management. Let’s dive in!

What Is DeFi?

DeFi stands for “decentralized finance" and refers to a digital financial ecosystem that is a product of blockchain technology and cryptocurrencies. The concept stands in stark contrast to TradFi (traditional finance), which relies on third parties as intermediaries.

In traditional finance, asset management is often facilitated by financial institutions and establishments, like banks and insurance companies. On the other hand, DeFi is all about self-governance, which was made possible with smart contracts.

Smart contracts are self-executing and programmed to do so once the terms that are written in the contracts are met. That allows automation of all services and operations without the need for a centralized authority.

One of the key reasons why many investors go into DeFi is its financial inclusivity. Essentially, anyone with an internet connection can access DeFi platforms and take advantage of their features.

All transactions are recorded on the blockchain, which is a public, distributed, and thus transparent ledger accessible to everyone. That combination of transparency and security through cryptography has made DeFi explode in popularity in recent years.

What is Asset Management in DeFi?

DeFi asset management refers to the passive control and generation of wealth by using decentralized platforms.

The term “asset management” came from the world of TradFi (traditional finance). However, cryptocurrency enthusiasts are likely more familiar with the concept of yield aggregation. It has the same meaning as asset management, and the two are used interchangeably.

In essence, asset management is the professional supervision and governance of one’s portfolio of assets. There is usually a financial objective that an individual is striving toward. To achieve that goal, they are buying, selling, or holding assets in response to the happenings in the market and with the purpose of growing their portfolio.

In the space of decentralized finance, asset management is driven by the underlying technology of the blockchain. The mechanics of cryptocurrencies transform asset management while keeping their fundamental ideas the same.

While DeFi is a widespread crypto concept nowadays, it’s believed that the term was invented in 2018 at the height of a bull run. Naturally, the core ideas of decentralized finance have existed since the introduction of Bitcoin in 2009, but it wasn’t until the Ethereum network’s programmability that they were implemented at such a scale.

Algorithms, smart contracts, and various other protocols and instruments facilitate peer-to-peer trading to remove the need for intermediaries. That allows individuals to be in full control of their portfolio and single-handedly manage an assortment of crypto coins and tokens.

With DeFi fund management, there is no need for third-party portfolio managers, brokers, or banks. Crypto users can leverage the power of blockchain to execute investment strategies themselves, keep track of their assets, and modify their portfolios on the go.

Ultimately, DeFi and TradFi asset management are similar in many ways, with the key difference being a shift toward autonomy and decentralization.

DeFi Asset Management Features

Let’s examine some of the key DeFi asset management features that helped popularize this concept and even introduce it to mainstream audiences.

#1. Transparency

Transparency is the core principle behind blockchain and cryptocurrencies. In TradFi, most transactions occur “behind closed doors,” and only certain governing authorities have access to those records.

On the other hand, blockchain’s distributed-ledger design concept makes it transparent and accessible to every network participant. All transactions by all users are permanently recorded and available to the public.

That approach to transparency helps foster trust among participants while facilitating easier asset management.

#2. Composability

One of the main appeals of DeFi asset management is its composability. The term “money legos” is often used to describe the way different DeFi aspects and features can be stacked together and built on top of each other.

For instance, a user can take advantage of a DeFi lending protocol to obtain a certain amount of cryptocurrency. They can then use those funds to provide liquidity on another platform. Finally, they can stake LP (liquidity provider) tokens to earn passive income.

This interoperability of platforms and services facilitated by decentralized blockchain technology allows for diversification of income, strengthening users’ portfolios.

#3. Permissionlessness

Financial inclusion has made DeFi especially popular among audiences who have limited or no access to traditional financial instruments. Most DeFi platforms are permissionless, allowing anyone with an internet connection to use their protocols. This democratization of financial tools results in a larger possible pool of traders and investors compared to TradFi.

#4. Programmability and Automation

The programmability of smart contracts and DeFi asset management platforms makes the whole ecosystem highly versatile and flexible. Blockchain developers can create customized products and solutions to cater to a wide audience.

Moreover, programmability facilitates automation. Smart contracts’ self-execution feature allows for various features, such as automated interest rate adjustment, lending approvals, and even asset trading.

#5. Self-Custody

DeFi allows for self-custody, which means users can be in complete control of their assets. TradFi asset management generally involves users depositing capital and having third parties do the work for them. While this approach is more hands-off, it comes with third-party risks, which include various types of scams, hacks, and fraud.

On the other hand, DeFi capital management eliminates these risks by relying on foolproof algorithms, protocols, and smart contracts, as well as the security of blockchain technology.

How Is DeFi Asset Management Different From Traditional Wealth Management?

The main difference between DeFi asset management and traditional wealth management is autonomy. In TradFi, there are usually financial entities and institutions that manage assets on behalf of their holders.

These institutions employ skilled professionals adept at evaluating risks and finding optimal investment strategies to grow clients’ portfolios. While that’s a proven approach that has worked well for centuries, there are plenty of aspects of TradFi asset management that DeFi improves upon.

Here are some of the key ways DeFi asset management differs from TradFi asset management:

• Transparency. In traditional finance, investment professionals provide users with regular updates, but these sometimes happen just a few times per year. In DeFi, users can keep track of their assets on a daily basis.
• Decentralization. TradFi wealth management happens through banks, brokers, and other centralized channels. That approach results in fees and less privacy. DeFi wealth management eliminates intermediaries in favor of peer-to-peer transactions.
• Ownership. Assets deposited in banks and other traditional financial institutions aren’t always at the holders’ disposal. For instance, banks can deny paying out their users (e.g., during bank runs). On the other hand, DeFi is all about self-custody, where individuals have full control of their assets and private keys.
• Accessibility. TradFi asset management often features multiple barriers to entry. Users might be geographically locked or asked to deposit a certain minimum amount. DeFi aims to democratize finance as it allows anyone with an internet connection to participate and take advantage of all of its features.

Challenges and Risks of DeFi Asset Management

DeFi asset management, while full of potential and upsides, is not without challenges. Here are the key risks in the realm of decentralized finance:

• Smart contract vulnerabilities. Smart contracts represent the foundation of DeFi, and they enable most of its features. However, they are immune to bugs, glitches, and other vulnerabilities. If a smart contract isn’t properly written and examined, it can be prone to exploits, which can result in financial losses for users.
• Custodial risks. Self-custodial nature of DeFi is a double-edged sword. If a user isn’t careful enough, they can lose their assets. This can happen in a number of ways, including wrong transactions and hacking attacks. Since there’s no governing authority, like in TradFi, these losses are usually permanent.
• Lack of regulation. While many crypto enthusiasts welcome the lack of regulation, that makes the ecosystem prone to manipulation by malicious parties. The unregulated DeFi space is filled with scammers and hackers, which range from unknown individuals and entities to celebrities.
• Complexity. One of the biggest challenges that the DeFi space needs to overcome before widespread mainstream adoption is complexity. A barrier of entry for the average user can be too high, and many investors are put off by the amount of learning they have to do before starting with DeFi asset management.

5 DeFi Asset Management Tools

Let’s examine some of the key DeFi asset management tools that can help you get the most out of this space.

#1. Set Protocol

Set Protocol is a DeFi tool that helps individuals use cryptocurrencies for investing in a manner similar to ETFs (exchange-traded funds). The tool can be accessed using a dApp called TokenSets. It allows individuals to bundle different coins and tokens into sets, which they can then trade on exchanges.

This tool is perfect for investors who want to diversify their portfolios without micromanaging every single token. Its automated rebalancing feature helps offset some of the volatility of the cryptocurrency ecosystem, allowing for a more hands-off approach to asset management.

#2. dHEDGE

dHEDGE is a DeFi asset management platform built on the Ethereum network. It allows individuals to connect their wallets and join investment pools in a non-custodial manner.

The platform features different vaults that users can join and submit their crypto to. These vaults are transparent, always displaying how much value is managed, what the risk factor is, and what the expected 1-year return is.

Every vault has a manager, and users can choose which one they want to join based on the manager’s performance. The dHEDGE platform makes it easy to sort vaults based on the amount of capital invested, performance, or overall score.

#3. Range Protocol

Range Protocol is an automated DeFi asset management solution. It features non-custodial vaults where users can deposit their funds to utilize diverse strategies.

At the moment, Range Protocol supports a number of decentralized exchanges, such as Uniswap, Pancakeswap, and Quickswap, as well as liquid staking platforms. Future plans involve adding real-world assets, NFT finance features, and derivatives.

Individuals can choose from numerous automated strategies created to tailor the needs of various investors while enjoying on-chain transparency and no custodian risks.

#4. Enzyme Finance

Enzyme Finance offers a comprehensive DeFi asset management solution. It’s an all-in-one platform that offers plenty of user-friendly features, such as automated reporting and risk management.

The goal of Enzyme Finance is to help users create an optimized asset management experience that best suits their needs. Their extensive use of smart contracts allows for everything from setting stop-loss limits during trading to granting permissions within organizations.

#5. Yearn Finance

Yearn Finance is a decentralized platform focused on maximizing yield. It offers users different ways of earning passive income. Individuals can deposit tokens in vaults to earn yield, take part in the ecosystem’s governance, stake crypto, and even participate in DeFi lobbying by buying or selling votes.

The platform optimizes yield by moving assets between different lending protocols in the DeFi space, maintaining security while looking for the best returns.

Key Takeaways

That concludes today’s lesson on transparent money legos that are DeFi. We’ve seen how potent and inclusive this ecosystem is and how it gives its participants unprecedented transparency, security, and opportunity for the growth of assets.

Still, like with any new system or technology, there are many obstacles to overcome if DeFi is to see large-scale mainstream adoption. The biggest benefits of the cryptosphere—such as decentralization and permissionlessness—are also its drawbacks, which can push away non-savvy users.

Regardless, the future of DeFi looks bright, and early adopters stand to gain a lot by persisting with it. Remember to practice caution and continuous education so that your DeFi asset management will be fruitful!

DeFi Asset Management FAQ

• What are DeFi assets?

  DeFi assets are cryptocurrency coins and tokens, which are types of digital currencies secured by cryptography. They are used for various purposes, including exchanging value, making payments, governing projects, and more.

• What is the best asset management for DeFi?

  What the best asset management for DeFi is depends on the individual needs and circumstances of each user. Strategies range from simply buying Bitcoin and holding it long-term to using lending, staking, and yield farming platforms to earn continuous passive income.

• Is DeFi worth the risk?

  DeFi is worth the risk if you’re looking for a system with huge upside potential but where big and sudden downtrends are just as possible. The ecosystem’s novelty and volatility can handsomely reward bold investors, but it can also be severely punishing, particularly to inexperienced participants.

• What is an example of DeFi?

  An example of DeFi is decentralized exchanges (DEXs), such as SushiSwap and PancakeSwap. You can use these DeFi platforms to trade assets, join staking pools, earn rewards and passive income, and much more.