Overview of the DeFi on-chain fund panorama: clarifying the pattern and trend of the on-chain fund track from 22 projects

Summary

1. Compared with the opacity of CeFi, DeFi on-chain funds bring a more efficient and transparent asset management model.

With the continuous maturity of on-chain exchanges, lending, and various derivatives platforms, DeFi on-chain funds already have sufficient investment space and the feasibility of landing development. Through customized smart contracts to set the scope of operation, multi-signature combined with permission control, and superimposed technical means such as automated algorithms, DeFi on-chain funds can be well compatible with the advantages of security, transparency and high efficiency. Although the overall DeFi chain fund volume is still small, especially active strategy funds, there will be more room for growth in the future.

2. The types of assets on the chain are constantly enriched, bringing more diversified investment portfolio targets to DeFi on-chain funds.

LP liquidity provides tokens, perpetual exponent contracts, perpetual leverage pools and other new types of assets and derivatives on the chain, bringing more composability to DeFi on-chain funds and enabling diversified hedging and dispersion risk, and bring users a financial product that is safe, transparent, and balanced between risks and returns.

3. Reduce the user’s entry cost, and the trend of packaging complex financial products is obvious.

During the research process, we clearly saw a trend that platform-based projects began to build their own or through ecological cooperation to build financial products with clear packaging, simple and easy-to-understand, and no frequent user operations, such as Vault built by Umami Finance and Crab by Opyn. Strategy.

4. After the security of the funds on the chain is verified, the wallet will be the ideal traffic entry.

Similar to the logic of Web2 financial brokerage software, it is a reasonable trend to push fund products on the wallet page. For funds, it is a traffic and capital channel, and for wallets, it can obtain a source of income, instead of only relying on the past to send transactions to extract fees. way. But for wallet users, the security of the fund is paramount. The transaction scenario is a one-time scenario, and you can leave after use. As long as there is no problem with the transaction process, the wallet is not responsible. On the chain fund products, once an accident occurs, the harm will be serious. At present, the entire track is in its infancy, so more time is needed to verify product safety.

Intro

There are always risks and opportunities in the cryptocurrency market that we cannot imagine. In May, the market value of Luna, the top ten cryptocurrency project by market value of tens of billions of dollars, returned to zero in a week, and then triggered a thunderstorm of institutions such as Celusis, 3AC capital, Babel Finance, BlockFi and so on. The essential reason is that in the absence of supervision in the cryptocurrency investment field, the assets of various companies are opaque, and at the same time, they continue to lend to each other in an optimistic market. Leverage builds up outside the regulatory framework, and risk builds up secretly. Luna eventually became the match lit in the fireworks factory, triggering a series of thunderstorms, and even endangering the centralized exchanges that had gone through two rounds of bull and bear. Historically, the subprime mortgage crisis in 2008, although it affected a wider range, has basically the same basic reasons.

This article will start from the fund management industry in the traditional financial field, and discuss and analyze a track that has not yet exploded in the DeFi field: on-chain funds/asset management.

We collected nearly 60 projects from the market, and after screening, classification and sorting, we selected 22 projects that met the definition for analysis, and conducted an in-depth analysis of three representative projects: Ribbon Finance, Umami Finance and iZUMi Finance

Fund Profile

No matter who you are, you can tell you a few familiar fund names, and “funds”, a form of operation that focuses small and public investors into large funds, actually appeared two hundred years ago.

The emergence and vigorous development of new things often need to meet the needs of the general trend of the times. The essence of finance is to improve the efficiency of capital utilization, and as a socialized financial management tool, funds can achieve more efficient resource allocation, and its origin is also derived from the capital demand brought about by the development of the real economy.

Britain in the 19th century had just experienced the first industrial revolution. The productive forces developed substantially, colonies and trade spread all over the world, and wealth grew rapidly. While public investors hear similar myths, they suffer from lack of relevant knowledge and understanding of the overseas investment environment, so they have the idea of ​​entrusting the operation and management of funds to relevant professionals. At the same time, some businessmen and seafarers have sufficient relevant experience but lack financial support. Subsequently, the British government supported such an idea, and the government set up an investment company and entrusted specialized financial experts to invest on its behalf, allowing small and medium investors to share the benefits of international investment and diversify risks. In 1868, the United Kingdom established the “Overseas and Colonial Government Trust” organization, published a prospectus in The Times, and publicly offered stock warrants to the public.

The fund originated in the United Kingdom, but has grown most rapidly in the United States. After the First World War, the United States experienced rapid economic development and became a major capital exporter from a capital importing country. In 1926, the Massachusetts Financial Services Corporation of Boston established the “Massachusetts Investment Trust Company,” the first modern-looking mutual fund in the United States. In the 1920s, the U.S. fund industry developed too fast, with the total asset value increasing at a rate of more than 20% every year, and even more than 100% in 1927, followed by the 1929 crash.

After the collapse and the impact of World War II, the U.S. government has formulated comprehensive legal requirements such as the Securities Act, the Securities Exchange Act, the Investment Company Act, and the Investment Consultant Act, which have contributed to the development of the U.S. financial industry. laid a solid foundation.

With the continuous development and improvement of the financial system, the fund or asset management industry has also flourished. As of 2021, asset management (capital) has become a trillion-dollar market, and in recent years, it has reached as high as 12. % annual growth rate is developing rapidly. And the share of passive investment has grown rapidly, reaching ⅓ in 2020, indicating that investors’ preference for passive wealth management and investment methods that diversify risks through portfolio strategies has increased.

Overview of the DeFi on-chain fund panorama: clarifying the pattern and trend of the on-chain fund track from 22 projects

Overview of the DeFi on-chain fund panorama: clarifying the pattern and trend of the on-chain fund track from 22 projects

Data source: https://www.bcg.com/publications/2021/global-asset-management-industry-report

The fund sells fund shares, concentrates investor funds, and forms independent properties, which are managed by the fund custodian. .

Why are funds so popular?

The fund broadens the investment channels for small and medium investors, operates the fund through experts, and helps many small and medium investors make portfolio investments. By converting savings and idle funds into investment, the fund releases social funds and provides impetus for industrial development and economic growth. In the process, investors reap the benefits, society releases idle funds, and fund managers earn performance-related income.

In addition, through the operation and management of professional investors, the development of the fund is also conducive to the stability and development of the financial market. Generally, foundations focus more on long-term strategies and enter and exit less frequently, thus reducing the volatility of the securities market.Likewise, stabilizing financial markets will create a more stable and predictable financing environment for companies.

As a new type of asset, encrypted assets have reached a market value of trillions of dollars in just over ten years. Regarding the management of encrypted assets, there has also been a completely different way from traditional finance. At present, most of the encrypted assets are still managed by the traditional fund operation method and the management system composed of the current legal system, regulatory organizations, and assessment agencies. However, based on the decentralized, permissionless blockchain network and smart contract technology, a more efficient and transparent fund operation method has been continuously explored and multiplied in recent years. They take code as the law, remove middlemen, and combine emerging chains On the asset, provide more efficient, lower risk, more diversified financial products.

DeFi on-chain funds

DeFi applications quickly imitated traditional finance in just five years, introduced tiered funds, futures options and various derivatives, and mixed various innovations, such as perpetual options, liquidity provision tokens (LP), etc., and the scope is very wide. . Here we limit the scope of discussion to “DeFi on-chain funds” to facilitate research and discussion, which is defined as follows:

The project party/fund manager invests the funds (mainstream tokens, such as BTC/ETH/mainstream stablecoins) from users, according to the pre-agreed strategy, with operations entirely on the chain, into one or several types of decentralized finance Products, products and projects that realize the appreciation of user assets.

By extension, the following criteria need to be met:

About users : Based on the anonymity and openness of DeFi, any user can participate in the investment fund, but some on-chain funds have the function of setting a whitelist.

Income and investment : The product goal is that the product itself or in conjunction with other products can gain value from the mainstream currency standard. Here, the income is the mainstream currency, rather than the altcoins with higher volatility obtained through staking and other activities (there can be some platform coins as incentives but the main income is the mainstream tokens). In this way, fund products can capture long-term benefits through strategies, rather than short-term benefits brought by additional issuance of economic models.

Regarding operation authority and scope : authority is controlled by smart contracts, all operations are on the chain, and interact with a set of other contracts specified by the contract, or operate a set of assets specified by the contract. Operate on the chain to ensure the transparency of funds, rather than investing in CeFi or CEX for opaque operations. Permissions are controlled by contracts, specifying the scope of operations and ensuring the security of funds.

How big is the market space for funds on the DeFi chain?

At present, global funds manage a total of 112 trillion US dollars of assets. According to Twitter Kol Alf data, the global stock market is 109 trillion US dollars, the bond market is 124 trillion US dollars, gold is 12 trillion US dollars, and digital assets are less than 2 trillion US dollars. According to investopedia data, the derivatives market has a size of about 600 trillion US dollars. If we assume that 10% of the assets are managed by various funds, and 30% of them are managed in the form of on-chain funds, then based on the current market value of 1.2 trillion in the cryptocurrency market, there will be 36 billion assets entering the on-chain funds. Fund volume is much lower than this amount.

Overview of the DeFi on-chain fund panorama: clarifying the pattern and trend of the on-chain fund track from 22 projects

https://twitter.com/macroalf/status/1488960411349110784

Comparison of the ecological roles of traditional funds and funds on the DeFi chain

Overview of the DeFi on-chain fund panorama: clarifying the pattern and trend of the on-chain fund track from 22 projects

The traditional fund industry has developed a complete ecological industry chain, including front-end services, back-end rating and certification, and related laws and regulations. In contrast, funds on the DeFi chain have no standards, no certification, and no upstream and downstream services in related industries. At present, only due to technical advantages, they have certain advantages in asset transparency and the efficiency brought by de-intermediation.

DeFi on-chain fund classification

Traditional foundations are based on fundraising methods (public offering, private placement), operation methods (closed, open), investment ideas (active, passive), legal forms (contractual, corporate), transaction methods (on-exchange, off-exchange), Dozens of classification items such as investment objects (stocks, bonds, currencies) are distinguished. However, whether in DeFi or in the traditional financial field, no matter what asset or framework it is based on, the strategy is the most fascinating part, so here we divide it by strategy, and at the same time for the 15 collected in the market. A project with multiple dimensions of analysis.

The categories are divided as follows:

First, the product will meet our definition of “DeFi on-chain fund”, and then be classified into three types according to the specific execution form of the strategy: algorithmic strategy fund, active strategy fund, and passive strategy fund . The specific definitions are as follows:

Active strategy fund: Fund managers/teams use their professional knowledge to conduct on-chain operations within the scope of investment specified by the contract, in order to pursue returns that exceed the average performance of the market. Such as DeFiEdge Protocol, Arrakis Finance, etc.

Algorithmic strategy fund: Users invest funds, and contracts are automatically executed according to defined algorithms and strategies to help users build structured asset portfolios or help users perform repetitive operations. Typical products are Yearn.Finance, a product of Ribbon Finance.

Passive strategy funds: mainly index funds, diversify investment in a certain type of assets, or track the performance of certain/multiple types of assets, providing users with extensive market exposure, low operating expenses and low portfolio turnover. Typical products are DeFi Pulse Index (DPI), Metaverse Index, ETH 2x Flexible Leverage Index, etc.

Risk from high to bottom: active strategy funds > algorithmic strategy funds > passive strategy funds

Returns: Active Strategy Funds > Algorithmic Strategy Funds > Passive Strategy Funds

Active Strategy Funds: Taking the Contract as the Law, Casting the Hands of Diamonds

Active strategy funds are relatively simple, and the mechanism basically defines the investment scope in terms of contracts. In the process of deploying the fund pool, the scope of operation will be set, and the fund manager can only operate within the preset scope, such as borrowing on large platforms such as Aave and Compound, or limited to a certain trading pair of Uniswap V3. city.

Such funds are closer to the traditional fund model, charging certain management fees and commissions.Such funds are currently relatively small in scale and have a lot of room for growth.

Overview of the DeFi on-chain fund panorama: clarifying the pattern and trend of the on-chain fund track from 22 projects

Algorithmic Strategy Funds: Combining New Assets, Algorithms Emerge

Algorithmic strategy funds are more diversified than the other two types. Yearn Finance and Beefy Finance belong to the type of algorithmic strategy funds (this type is called “machine gun pool”, and the number of projects is relatively large and will not be listed). Algorithmic strategy funds are relatively more innovative, combining more new DeFi assets, such as liquidity providing tokens LP, power perpetual contracts, etc., and then combining other long/short leveraged products for hedging, becoming a near-neutral strategy fund products, which have relatively high returns and low risks.

Algorithmic strategy fund shares are generally not tradable, but they can be deposited or withdrawn at any time, or deposited/withdrawn after periodic settlement.

Overview of the DeFi on-chain fund panorama: clarifying the pattern and trend of the on-chain fund track from 22 projects

Overview of the DeFi on-chain fund panorama: clarifying the pattern and trend of the on-chain fund track from 22 projects

Passive Strategy Funds: Build Synthetic Assets, Automatically Anchor Targets

Passive strategy funds will issue erc20 tokens to represent the share of the fund, and the invested funds will buy and sell the corresponding target during adjustment according to the rules. The platform will attract users to buy index funds in the form of staking rewards platform governance tokens, or use platform tokens to incentivize the liquidity of the erc20 trading pair on DEX. The platform allows users to trade fund shares in the market, which is closer to ETFs, and can achieve arbitrage in the form of minting and redeeming shares.

Overview of the DeFi on-chain fund panorama: clarifying the pattern and trend of the on-chain fund track from 22 projects

Typical project example

Ribbon Finance – Option-based on-chain automation strategy

Ribbon Finance is a DeFi structured product based on Opyn’s early options products. The minting, selling and exercising of options all take place on the Ethereum chain. The currently launched structured products include Covered Call (shareholding insurance strategy) and Put Selling strategy (unsecured bearish) strategy. Contracts have been deployed on the three chains of Avalanche, Solana, and Ethereum. As of early August 2020, they will be available on Ethereum. There is an AUM of 70+M on the platform, which belongs to the largest amount of funds among the same type of products.

After investors invest funds, Ribbon Finance sets the option exercise price and mints option oTokens through algorithms on the Opyn platform, and sells options on multiple platforms every Friday. profit return. In the future, Ribbon’s main trading products cover options, futures, fixed income and other directions (currently mainly options products), helping users to improve the risk-return of funds.

Core Products & Design Principles

The core product currently launched by Ribbon Finance is Theta Vault, which includes two strategies of Covered Call and Put Selling, with a total of 12 products.

Ribbon Finance’s Covered Call is a strategy that holds the corresponding cryptocurrency and sells call options of the cryptocurrency every Friday to obtain premium income. Put Selling is the opposite strategy, investing in USDC and selling a certain number of put option combinations every Friday to get a profit.

Algorithmic strategies take current market volatility into account by setting a fixed delta value. In Ribbon Finance V1, the team manually calculated the strike price of the option on the basis of delta=0.1. In V2, the contract reads the current spot price from Chainlink and automatically calculates the market volatility, and automatically calculates the exercise price in combination with the preset delta value. All options are valid for one week.

In addition, in the latest version, Theta Vault integrates with Yearn Finance, investing idle funds into Yearn Finance to increase a small additional risk-free return. All operations on Ribbon are implemented through smart contracts, which are typical algorithmic strategy funds.

risk and benefit

Whether you sell a call or a put, the way to make a profit is in the hope that the option won’t be exercised (and thus lapsed) at settlement. Looking at Ribbon’s historical performance, options have been exercised (and thus lost) less than 5% of the time since January 2020. Since the altcoin market fluctuates greatly, it is easy to break down the exercise price, and the funds that are exercised are mostly covered call strategies of altcoins.

On the whole, in the absence of extreme market conditions, Ribbon Finance can indeed bring value-added value to users. If the rights are not exercised, Ribbon Finance can bring users: ETH annualized 34%, BTC 27%, USDC 50% annualized return. But in fact, considering the volatility of the crypto market, the overall return is not ideal. The one-year return of the BTC fund is currently 6.05% of the currency standard, 3.38% of Ethereum, and -28% of USDC.

Taking into account the Ribbon product mechanism design, the Covered call strategy is more suitable for bear markets, avoiding call options with rapid price rises from being exercised, and gaining some currency-standard returns. In the bull market, USDC’s put selling strategy is suitable to avoid the rapid price drop and the put option being exercised.

Umami Finance – High Yield Hedge Fund Based on DeFi Innovative Assets 

Foreword: Umami Finance closed this fund project on 8.19 and is currently working on the second version.The reason for the closure is the deviation of the Mycelium leveraged token algorithm in the case of severe market fluctuations. When the short-selling token is used to hedge the downside risk, the short-selling token does not increase as it should. In the end, the team chose to close the project and compensate the damaged users with team funds.

Umami Finance was originally a decentralized financial reserve platform similar to Olympus DAO on Arbitrum. Last month, it launched GMX-based GLP and Mycelium’s (formerly Tracer DAO) Perpetual Pool’s USDC fund – GLP/TCR USDC POOL. Combine with Perpetual Pool for risk hedging, and obtain USDC standard annualized returns of about 20%.

Overview of the DeFi on-chain fund panorama: clarifying the pattern and trend of the on-chain fund track from 22 projects

Source: Umami Finance Documentation

Low-level DeFi Lego modules: GMX’s GLP and Mycelium’s Perpetual Pool

GMX is a decentralized perpetual contract exchange, currently deployed on Arbitrum and Avalanche networks, the two networks are not interoperable. Among them, GLP is the liquidity provider in the GMX ecosystem. As the counterparty of contract transactions and spot transactions, it provides liquidity for various transaction scenarios in the GMX platform. Transactions in GMX have no slippage, but are directly exchanged at this price according to Chainlink’s quotation. The counterparty funds for the exchange come from GLP and the upper limit will be set according to the size of the GLP fund pool.

Overview of the DeFi on-chain fund panorama: clarifying the pattern and trend of the on-chain fund track from 22 projects

Here, Max ETH in and Max USDC out are the upper limits specified when exchanging ETH for USDC (or when doing contract transactions).

In addition, when the transaction amount increases, the handling fee will also increase relatively, from 0.3% (small transaction) to 0.8% (large transaction).

GLP is provided by the user and consists of a basket of assets, the ratio of which is set by the platform. Users can use any one of the basket of assets to go to Mint GLP. In order to maintain the stability of the ratio, users will incur fees in the process of mint GLP. By adjusting the Mint fee, users are encouraged to use the assets missing from GLP to go to Mint to maintain the GLP pool. balance. For example, when the amount of WBTC in the GLP fund pool is much lower than the set ratio and ETH is higher than the set ratio, the user will incur additional fees for using ETH Mint GLP, and the cost of using WBTC to Mint will be reduced.

70% of GLP’s revenue from trading, minting and burning GLP, leveraged trading, and liquidation on the platform (collectively referred to as Platform fee) will be distributed to GLP in the form of ETH. The rest is allocated to the governance token GMX. GLP can also participate in Staking to get GMX rewards.

Since GLP is a basket of assets in a certain proportion, the net value of GLP units will also fluctuate with the fluctuation of token prices. The figure below shows the composition of GLP.

Overview of the DeFi on-chain fund panorama: clarifying the pattern and trend of the on-chain fund track from 22 projects

Composition of GLP (2022.08.07), source: https://www.gmxstats.com/

Overview of the DeFi on-chain fund panorama: clarifying the pattern and trend of the on-chain fund track from 22 projects

GLP net value change curve (2022.08.07)

Mycelium (formerly Tracer DAO) Perpetual Pool

Taking 3x leveraged tokens as an example, Mycelium has built 3x long and 3x short tokens, and users can directly use USDC to mint long or short tokens. Long/short tokens represent the share of the pool for long/short, respectively. Mycelium will periodically adjust the ratio of the capital pools on both sides according to the price of Ethereum. Assuming that the asset price rises by 1%, the triple leverage pool will automatically transfer 3% of the funds from the short fund pool to the long fund pool during adjustment, thus realizing leveraged products that will not be liquidated.

The adjustment of the pool is adjusted according to the following curve (in the figure, 2x leverage is used as an example), the horizontal axis is the price change of the underlying asset, and the vertical axis is the amount of funds transferred in the pool. It can be seen that the larger the price change, the more difficult it is to adjust the leverage accurately.

Overview of the DeFi on-chain fund panorama: clarifying the pattern and trend of the on-chain fund track from 22 projects

In addition, the arbitrage model is adopted in the middle to maintain the balance of the pools on both sides, and a certain fee is extracted to trigger the contract to realize the stable operation of the product.

Umami’s strategy:

As can be seen from the above, GLP contains about 40+% of fluctuating assets (mainly BTC and ETH, plus Uni and other currencies) and 50+% of stable assets (mainly USDC). Therefore, buying GLP is equivalent to holding this basket of assets, and there will be various future GMX platform fees as cash flow income.Therefore, Umami’s Vault uses Mycelium’s triple leveraged tokens for hedging in proportion to the fluctuating assets (Mycelium only supports ETH and BTC, but has already hedged most of them) to obtain a stable income. The contract is adjusted once a day to ensure that the hedged amount is accurate.

In addition, a small amount of money purchases GLP insurance from insurance platform insurance to avoid accidental losses due to hacker attacks.

Risk and Benefit:

This product Umami actually fully considers various risks, including purchasing insurance on insurance and riskhabor to avoid GLP’s unexpected security incidents; and using Mycelium to hedge GLP risks. However, due to the mechanism of the underlying product, there are still risks:

  • Risks from Mycelium: Mycelium will rebalance at intervals and allocate the ratio of long/short pools to maintain the leverage ratio. However, Mycelium’s curve is an approximate simulation. If large-scale price fluctuations occur, Mycelium cannot guarantee that the pools are distributed completely evenly.
  • and Mycelium presents other contract-related risks. Currently Umami’s insurance does not cover Mycelium.
  • If the large-scale withdrawal or deposit of GLP causes an imbalance in the proportion of GLP, Umami will pay extra costs for rebalance every 9 hours;
  • According to the data on the chain, according to the current scale, the amount of rebalance every 9 hours is about 1% of the fund, and the fees paid to GMX and Mycelium during the rebalance process in one year may account for several points of the total amount, which will be greatly reduced Benefit to the end user. Higher overhead will occur if there is an uneven proportion of GLP with higher purchase fees.

Closed-End Active Fund Executed by Professional Team – iZUMi Finance

iZUMi Finance is a multi-chain one-stop liquidity service platform that provides a variety of products around liquidity services, including liquidity incentive tool liquidity box, efficient decentralized exchange iZiswap, etc. iZUMi Finance is about to launch three products, namely fixed income bonds, dual currency wealth management, and free loss insurance.

Among them, fixed-income bonds and dual-currency wealth management belong to DeFi on-chain funds and are active strategy funds. Compared with the various fund products mentioned above, iZUMi Finance provides closed-end funds, which cannot be traded after purchase, and can be redeemed with interest after maturity.

iZUMi Finance Fixed Income Products

iZUMi Finance’s fixed income bonds are implemented through the Gnosis multi-signature wallet. Permission control is achieved through the Cobo DaaS multi-signature control, allowing a party to perform operations within a preset range, such as trading on Uniswap and adjusting the price range on V3.

The bond product provided by iZUMi Finance lasts for 30 days. The USDT is invested to provide an annualized 10% yield, and the principal and interest are paid at maturity. The purpose of bond fundraising is to provide liquidity in decentralized exchanges, and professional trading teams provide strategies.

The multi-signature wallet is jointly managed by iZUMi Finance and LP, and is only open to the Market Maker (MM) team to provide liquidity and adjust the price range. Funds are withdrawn by three co-signatures at the end. The bond income is a fixed 10% APR, and the rest of the income is owned by Market Maker. If the LP income is not enough, Market Maker will make up for it with margin.

iZUMi Finance Dual Currency Wealth Management Products

Another wealth management product of iZUMi Finance is dual currency wealth management, which has slightly higher risks and returns than bond products. The product is invested in USDT, and the lock-up period of 1/7/30 is selected, and the funds will be used to provide liquidity on the BTC/USDT trading pair of DEX.

The assets returned by Dual Currency Wealth Management are determined by the market price. When purchasing a product, a price range will be set, and when investing, the contract will automatically trade a% of USDT on DEX as BTC at the market price to form liquidity and make a market within this price range.

If the price remains within the price range at the time of redemption, the user will withdraw the liquidity corresponding to the principal and receive an annualized return of 50% to 150%. If the price is higher than the set price upper limit, the user can obtain USDT with liquidity tokens higher than the corresponding amount of the price range. If the price is lower than the set price lower limit, the user can obtain BTC whose liquidity token is lower than the corresponding amount of the price range

Compared with other active strategy funds, in addition to maintaining the security and transparency of the funds on the chain, iZUMi Finance’s products are more flexible through the operation of professional teams, and can provide stable and basically unrelated market bulls and bears. even more competitive.

iZUMi Finance Free Loss Insurance Product

After the user obtains the liquidity proof NFT by making a market on Uniswap V3, he invests the NFT into the smart contract of the iZUMi Finance gratuitous loss insurance product, and the contract automatically calculates the amount to be hedged and related expenses, and the insurance market is 30 days. The contract will automatically use a portion of the LP fee income as the cost of purchasing insurance. iZUMi Finance will provide users with free loss insurance through combined hedging strategies in CEX. Settlement to pay user premiums when insurance expires or liquidity leaves the set price range. By purchasing free loss insurance, users can avoid free losses by providing liquidity, thereby obtaining stable market-making fee income.

The three products of iZUMi Finance are innovative attempts. The first two can be classified as DeFi active strategy on-chain funds. The insurance product combines the strategy of CEX, but the calculation and payment of free losses and amounts are all on the chain. Transparent and checkable. Glass Finance, which iZUMi Finance is currently incubating, has joined the first phase of Cronos Accelerator and looks forward to the product launch soon.

Advantages of DeFi On-Chain Funds 

Asset transparency and security : Asset operations are completely checkable on the chain, reducing black-box operations. Whether it is an active, passive, or algorithmic strategy fund, the fund’s positions and positions can be checked in real time. And most funds can be withdrawn at any time, and user funds can be better guaranteed.

New type of asset composition : On-chain funds such as Thetanuts Finance, Index Coop, Cook Finance and other on-chain funds have issued corresponding ERC20 tokens as certificates representing fund shares, which can participate in other staking activities, and can even be used as certificates to participate in lending and other activities in the future.

Diversity of investment targets : traditional funds take into account risk control, and only allow funds to invest in allowed asset classes, such as currency, stock, bond funds, etc. DeFi on-chain funds can invest in more diverse targets, including interest bearing tokens, power perpetual contracts, leveraged tokens, liquidity provision tokens, and more. Through the combination and hedging of different new products, low-risk, high-yield products close to Delta Netural (stable currency income of more than 20%) are formed. Such products contain a certain amount of risk, but provide about 20% stability compared to Luna’s Anchor Protocol. Income, the source of income of such products is stable, and the risks are controllable.

Flaws of DeFi On-Chain Funds

Excessive transparency : It is easy to be attacked by malicious counterparties, such as maliciously raising option prices, resulting in losses of some algorithmic strategy funds. Assets are nested layer by layer, which is easy to accumulate risks.

High operating costs : Some fund products with automatic operation strategies require frequent on-chain operations, resulting in high handling fees.

Inaccurate calculation : It is difficult for DEXs using AMM to accurately estimate the results during the transaction process. In addition, the way of designing curves to simulate leverage such as Mycelium will also have a large deviation in the case of severe market fluctuations, which will bring additional losses and expenses to the fund.

Contract risk : On-chain fund products are often a combination of multiple assets, linked to multiple smart contracts, and funds are hosted in smart contracts. Once there is a problem with a contract, it will affect the entire product. But at present, most fund products can allow users to cooperate with the purchase of insurance policies from insurance platforms such as insurance or risk habor to hedge certain risks. Umami Finance’s USDC Vault product even includes insurance policies directly.

Complicated products : Compared with centralized financial products, DeFi fund products still have higher barriers to entry. Not only the user base of DeFi products is small, the products are complicated and difficult to use, but also include: various fund income sources, operation principles, etc. For example, to understand the principles and risks of the Opyn Crab Strategy, it is necessary to understand the principles of products such as Power Perpetual Contracts and Opyn’s Squeeth.

The innovative product has not been stabilized yet and will be tested by time : Umami Finance uses Mycelium’s leveraged tokens for hedging, hoping to hedge the fluctuating asset positions in GLP without the risk of liquidation. However, Mycelium’s mechanism is designed to perform an adjustment every 8 hours. When the market fluctuates violently, it is easy to cause deviations, resulting in heavy losses in Umami’s USDC Vault on 8.18-8.19. Finally, Umami decided to close the Vault and compensate the gap with the team’s funds.Innovative products such as these use on-chain algorithms, and there is still a large and unverified risk that requires time to test.

Trends and Opportunities

Platform self-developed fund products: During the research process, we found that DeFi trading platforms are developing wealth management products based on their own platforms, which are packaged as fund products that users can manipulate as long as they can understand the existing risks and benefits. A typical example is the Crab strategy built by Opyn based on its own Squeeth.

Combining DID will be the future direction of active strategy funds: in an anonymous environment, even if there are smart contracts to ensure the safety of funds, it is difficult for users to trust active strategy fund products. Most fund projects, such as DeFiEdge, are relatively early, and the platform itself cannot provide sufficient credit endorsements for fund managers. Some projects use the method of linking Twitter accounts, and the effect is relatively limited. If the actual performance of the fund manager’s historical returns on the chain can be provided in combination with DID, and it can be confirmed that the fund manager is actually operating the fund, it can increase the credibility of the product and have the opportunity to derive an anonymous environment. Fund rating below.

DEX’s need for stable liquidity: DEXs such as GMX and Uniswap all hope that they can have sufficient and stable liquidity. Funds launched by Umami Finance, DeFiEdge, etc. can help DEX provide long-term and stable liquidity support. In addition, for Umami Finance’s products, liquidity and leveraged tokens are combined for hedging to provide users with high-yield wealth management products. In essence, the four parties (Umami Finance, GMX, Mycelium and investors) can benefit from it.

Fund marketing channel opportunities: Using wallets as the entrance, or aggregation entrances such as software and wealth management pages similar to traditional brokerages, it can horizontally compare the benefits and risks of various on-chain funds, help users reduce decision-making costs, and provide reliable DeFi on-chain fund products. diversion.

Epilogue

On the whole, the current DeFi on-chain fund is still a track with unexplored potential, and the overall AUM is small. However, innovative products, such as Umami’s USDC Vault and Opyn Crab Strategy, are still in short supply, indicating that market demand does exist. Large market fluctuations and many speculative activities are all situations that occurred in the early stage of the market. There are also many on-chain fund products facing difficulties due to imperfect market conditions and infrastructure.

Compared with the traditional fund model, the standards, operation processes, models, and ecological roles of on-chain funds are still at a very early stage, and many ecological roles are even missing. We look forward to seeing more builders emerge with more exploration and ideas in the future to build a stronger DeFi ecosystem.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/overview-of-the-defi-on-chain-fund-panorama-clarifying-the-pattern-and-trend-of-the-on-chain-fund-track-from-22-projects/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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