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, the original author: Ashvarya, compiled by Odaily translator Katie Gu
Decentralized finance plays an important role in the process of financial reform.
First, its an open, 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 the DeFi ecosystem. For example, the stablecoins of the Compound protocol work together to create more lending protocols.Although the current lock-up value in the DeFi protocol has exceeded 9 billion US dollars, it is still far from the funds controlled by centralized financial companies (CEX cryptocurrency exchanges).
The key reason is that the time-consuming process of understanding the basics of decentralized finance scares away most cryptocurrency traders and wealthy investors.
They make the right investment decisions for their clients, help them increase their income, invest in portfolios, save time and cost, and open the door to financial markets for them, all of which cannot be done by individuals.
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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 global, from politics to extreme weather can affect the stability of the market, and this type of company has professional investment The strategy ensures that investors assets can benefit; second, because of the diversity of investors assets, they can better avoid risks and actively adjust the realization strategy when the market fluctuates.
For the management of cryptocurrency funds, asset management protocols suitable for DeFi should take into account the decentralized financial characteristics of trustlessness (no central control), security and no license requirements (open to all).
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The Approach to Better User Experience - Set it and Forget itThe advantage of Ethereum is to allow DeFi applications to enter the lives of the public.
Automated smart contracts facilitate the development of asset management decentralized finance protocols. Simplifies the user experience by avoiding complex manual operations and transaction settings each time. Using this automated service, developers can create an automatic rebalancing feature where users funds are shifted to the next highest yielding strategy, automatically maximizing benefits.
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Reduce operating costs (miner fees/handling fees)
This model also applies to APY. Finance (on-chain yield aggregator). Currently, Ethereum is challenging its throughput limits, and we need a more efficient way to handle increasingly complex decentralized financial transactions. By pooling liquidity and then transferring the liquidity in batches to the original financial assets, not only a lot of fees are saved, but also the number of transactions on the network is reduced. This lowers transaction fees for everyone on Ethereum, not just the platforms users.
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Keep user funds safe (non-custodial approach)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.
Additionally, developers can perform rigorous audits of their smart contracts to ensure they are free from attacks or bugs.
DeFi protocols also employ a model similar to traditional mutual funds: allowing DeFi protocols to be non-custodial.
However, a good process by itself does not ensure a good outcome. Another key factor that makes asset management DeFi protocols successful is how they approach risk management.
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risk management approachThe approach to rebalancing should also take into account the risk profile before choosing a strategy.Each strategy available in the platform library should have the following parameters - smart contract risk, financial risk and centralization risk.
Therefore, funds should be strategically allocated according to the users risk preference.
Risk assessment of this strategy should be done by the community using the platform voting structure (governance model). By voting with governance tokens, users are able to provide quality information in the decision-making process. Therefore, it is important to involve the wider community in voting and to do research before voting. Without accurate, up-to-date information, mining pool returns can be at risk.
We see this model implemented in Yearn.Finance (on-chain revenue aggregator) and the upcoming APY.Finance (liquidity mining aggregator) financing platform. Both protocols have different approaches to risk management.
In Yearn Finance (liquidity aggregation tool), the platform provides users (those who earn income by providing liquidity for DeFi) with a wide range of investment strategy options, and users need to decide strategies and risks by themselves.
APY.Finance (liquidity mining aggregator) is different from Yearn (on-chain revenue aggregator). APY.Finance simplifies financing for risk 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 configurations.
The risk score of a strategy is defined by the community through the governance structure.
