Decentralized Asset Management

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21 Aug, 2024

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Decentralized Asset Management (DAM) refers to a decentralized finance (DeFi) service that uses blockchain technology and smart contracts to manage the crypto portfolio of users. Their primary goal is to incorporate trust, efficiency, and transparency while managing the client's assets.

Here, clients (or crypto users) are the sole custodians of their assets on the DAM platform. There is no central authority or bank in this process. DAM only enables blockchain technology to create transparency. It works on specific protocols to maintain data integrity. However, scalability and technological risks are associated with such platforms.

What Is Decentralized Asset Management?

Decentralized asset management refers to the platform for the management of crypto assets. It is based on blockchain technology for the execution of smart contracts.
It aims for transparency, trust, composability, and efficiency of the assets held. The platform removes any third party or trust to enable decentralization.
Investors can either act as fund managers or contact one to manage their assets. However, the control of assets remains with the user.
Some platforms include Enzyme Finance, Set Protocol, dHedge, and Syndicate.

Decentralized Asset Management Explained

Decentralized asset management protocols empower users to transparently and autonomously manage their cryptocurrency assets. These systems leverage blockchain technology, secured by smart contracts, to safeguard users' portfolios and enhance transparency. While they operate as non-custodial platforms, granting users complete control and ownership of their assets, users can choose to delegate decision-making power to the platform while accessing assets.

Decentralized asset management protocols function on distributed ledger technology (DLT), serving as asset ledgers where users can update the ledger. Transactions involving digital assets are recorded on a public ledger and verified by nodes, ensuring transparency within these platforms. Notable applications offering DAM solutions include Enzyme Finance, Syndicate, Set Protocol, and others.

These platforms manage a variety of DAM products, including actively managed funds, passive funds, indices, structured baskets, and more. Leveraging blockchain technology, they aim to provide higher yields to clients and offer numerous benefits to the DeFi industry:

Rapid development (typically within a few months)
Empowerment of crypto users to act as fund managers and investors
No minimum threshold requirements
Elimination of third-party intermediaries
Implementation of strict algorithmic rules for network and asset security
Enhanced liquidity and ease of redemptions due to organized fund positions
Real-time auditing and tracking capabilities

Examples

Let us look at some examples to comprehend the concept better.

Example #1

Suppose Caul is a software engineer in the telecommunication sector. Also, he is an active trader in the equity and crypto markets. However, Caul found it challenging to handle both portfolios. As a result, he signed up for Enzyme Finance (a decentralized platform) for managing his crypto assets.

The platform ensured that most crypto tokens were in the popular indices like the Nasdaq crypto index to hedge the risk. Therefore, with their guidance, Caul could quickly earn a good return from the funds. He received a yield of 12% by the end of three years. Likewise, he could easily withdraw them at the time of redemption.

Example #2

Valio, a decentralized asset management platform, expanded its presence on the Arbitrum and Optimism networks. This innovative platform allows investors to entrust their assets to professional managers without the need for intermediaries or trust-based custody. Assets within Valio are securely held in smart contracts, preventing money managers from withdrawing them.

The platform employs a predetermined list of DeFi applications to manage investments and ensures that money managers cannot significantly impact an individual investment's price. Valio's user-friendly approach aims to attract a broader audience interested in DeFi's success, leveling the playing field by emphasizing performance over traditional credentials. This move reflects the ongoing trend of simplifying DeFi applications to make them more accessible to users less familiar with the complexities of Web3 technology.

Benefits

Apart from the above features, this asset management protocol has various benefits. Let us look at them.

Works without any trust: The prime benefit of this service is that the platform consists of no trust or third party. Thus, investors can place their assets with a manager without involving a crypto trust.
Enables transparency: Another incentive of these platforms is the transparency provided. It works on a distributed ledger so that the transactions and investment made does not remain opaque to the users. Thus, the results are tamper-proof to the investors. Hence, fund managers cannot fake reports or results for lucrative offers.
Composed of various functions: DAM solutions have a composability factor in their products. The platform combines risk, rate, and investment variables to derive the preferred returns.
Efficient and cost-reduction: As blockchain technology eliminates any centralized party, there is less cost incurred. For instance, the startup cost of DAM is less than $100 compared to a traditional asset management company. Likewise, the same benefit is transferred to the users. Plus, it also boosts the efficiency of the asset-based platform.
Ensures the security of assets held: Unlike traditional managers, the decentralized platform works on blockchain technology. It works on network protocols built on security layers. Thus, no third agent or hacker can interfere with or alter the assets held. Hence, the investment made by the client stays secured.
Easy accessibility: These services are easily accessible to users on any device. They can track their portfolios on the vaults and determine their next strategy. As a result, any upcoming risk is well taken care of.

Drawbacks

In contrast to the benefits offered, there are some drawbacks to DAM protocols. Let us look at them:

The platform does include a specific range of protocol fees, which brings volatility risk to the users. For example, 25 to 50 base points on the Enzyme Finance platform.
It also introduces market risk for investors unaware of the market functioning. Thus, investors acting as custodians may deploy a wrong investment strategy. Therefore, the assets locked may also experience losses.
Although it claims security, there are high chances of cyber-attacks on the platform. If it does occur, the investors will lose their crypto assets. Likewise, it also brings regulatory and legal risks in some countries where crypto is banned.

Frequently Asked Questions (FAQs)

1. Can anyone become a money manager in DAM?

Yes, these platforms often allow anyone to become a fund manager. Users can create their vaults and manage assets based on their performance, leveling the playing field for investors worldwide.

2. Are DAM platforms regulated?

The regulatory status of DAM platforms varies by jurisdiction. Some operate in regulatory-friendly environments, while others may face legal challenges in regions with strict crypto regulations. Users should be aware of the regulatory landscape in their area when using DAM services.

3. How to use a decentralized asset management platform?

Following are the steps for utilizing a decentralized asset management platform. Let us look at them:
● Visit any asset management platform like Enzyme Finance.
● Sign up for the service.
● Connect the wallet to the application.
● Create a vault with the help of the desired investment parameters.
● Track the assets and redeem them whenever needed.