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By Valentin Pletnev, CEO and Co-Founder Quasar Fund
Custodial, permissionless, DeFi native asset management is coming. The creations proven by crypto natives are slowly finding their way from global citizens to corporations and high net worth individuals. Somewhere out there, the new BlackRock and Fidelity are now being born – decentralized and globally available.
At the time of writing, the value of global assets under management has reached $126 trillion USD and represents 28% of global assets, That’s up from 23% a decade ago. As the market is expected to grow at a compound annual growth rate (CAGR) of 23% over the next decade, the predictions don’t look bleak either. While financial literacy has increased globally, assets under management in the Web3’s most innovative, complex, and still immature markets account for only about $30 billion in assets — a staggering 3% of all crypto assets. Coinmarketcap analysis data.
Emerging markets generally follow a recognizable pattern: an opportunity for value transfer is identified, strategies for exploiting the opportunity are rigorously optimized (hand in hand with an increase in the complexity of said strategies), and the increase in value transferred and captured is ultimately aggregated with the experts in that market.
Usually, at that point, the average investor doesn’t have the ability in their day-to-day lives – either in terms of expertise or time – to find ways to ride out the worst of the market, add value and capture profits. So they do the next best thing – give their money to a professional asset manager, who will deploy their capital on their behalf, with a cut of the expected profits.
In the Web3 space, we call this transfer custodial because the investor transfers custody of their capital from their personal control to the asset manager’s control. Contracts, laws and regulations give investors the security they need to feel like they’re still in control of their money.
While this may go well in many cases, the risk is always there. Custody transactions are always prone to fraud. Anyone remember Bernie Madoff?
Custody exchanges rely deeply on trust. This is why older and older asset managers can access capital more easily and grow much faster than newer and younger ones. How does it compare on web3?
In web3, there are very few large and mature asset managers – apart from some crypto-native venture capitals such as Blockchain Capital and Polychain Capital. Crypto investors who require expertise and asset management are more retail-focused than corporate-focused. As such, retail investors are instead turning to consumer apps that promise basic asset management dynamics like staking, credit and leverage services. But the track record for these applications is terrible; Voyager, BlackFi, and FTX all blew up this year, Users lose billions of dollars.
In fact, many security services on the web3 have lost their users money. Cross-chain bridges, which allow you to trade a token beyond its original blockchain (by using a synthetic token), have been hacked several times this year, losing users. $2 billion USD.
Therefore, it is understandable that many web3 investors have vowed never to use custody services again, with the maxim “not your keys, not your coins”. The proverb is a stark reminder of the dangers of over-reliance on centralized institutions.
Naturally, users burned by security services are beginning to explore the options and opportunities available in decentralized finance. DeFi is an attempt to create a new financial system that can coexist with the traditional one while learning from its mistakes.
‘Decentralized’ in this instance can be understood as synonymous with non-custodial, meaning that users are always in control of their funds. This refers to a permissionless system, which means you don’t need to create an account to interact with it. And it’s a smart-contract-driven system, which means everything specified in a contract is executed without the risk of human intermediaries disrupting the process.
DeFi puts math and coding at the forefront of services and functionality, removing the risk factor that humans (unfortunately) often pose to these systems. I already mentioned Bernie Madoff, but unfortunately many more recent examples ring true here.
The benefits of this structure are clear – no one but you has control over your finances, and you can use your assets however you see fit. Also, as long as you keep your funds under self-custody, they are often not at risk for ethical hacks or exploits.
DeFi is largely built on the foundations of Ethereum, with the first decentralized asset management application emerging as a decentralized application (dApp) in 2020: Year Finance. Allows anyone to invest in transparent investment strategies. Users can deposit capital into these strategies and withdraw whenever they want (as long as they don’t willingly deposit funds over a period of time to get higher returns). Iron currently manages approximately $250 million USD in depositor funds, spread across a variety of strategies from low to high risk.
Iron, however, does not allow for unauthorized fund creation, which is what web3 is leading to as the future of asset management. There is no public team behind it, and any serious financial institution that wants to learn should build on the platform. DeFi-native asset management tools are gaining popularity and could lead to the next paradigm shift towards the democratization of financial markets. This change will allow a wider range of investors around the world to access the opportunities offered by expert-guided financial markets.
An important opening here is the discovery of unsecured funds. Asset managers are now able to manage users’ funds without ever having to hold them in custody by solving many regulatory issues. At the same time, smart contracts guarantee that the profits generated for depositors following an asset manager’s strategy are automatically distributed appropriately to both parties. By gaining steam with self-sovereign identities (SSIs) regulatory systems, established managers can develop DeFi-native strategies that can only be accessed by their existing clients; This way they can profit from all the benefits of crypto without increasing their exposure to regulatory risk.
Many more questions remain to be answered. Additional tests may lead to greater clarity. But whether Wall Street wants to be a part of it or not, it’s certain that crypto-native projects are working hard to fill this void.
At the young age of 23, Valentin Pletnev has already gained exposure and experience in a wide variety of blockchain and emerging technology-focused fields. In 2018, he was accepted into Draper University. After that, he joined Advanced Blockchain, where together with his co-founders, he brought Quasar Finance, a Cosmos project for next-generation DeFi investment opportunities powered by expert and community strategies. Raised $6M+ from investors like Polychain Capital and Blockchain Capital.
The views and opinions expressed herein are those of the author and those of Nasdaq, Inc.
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