Problem
2022 was a year of catastrophic failures of centralized systems: FTX, Celsius, BlockFi and many other crypto platforms went bankrupt causing not only ordinary people, but even professional investors such as hedge funds and asset managers losing their funds.
The year proved that CeFi can't credibly provide transparent and secure investment management capabilities as the platforms co-mingle customer funds, engage in extreme rehypothecation, have lack of solid risk management practices and, sometimes, commit plain fraud.
DeFi has been around for a while to solve this issue: its transparent and immutable nature means that the clients always know what's happening with their funds, and self-custody as well as programmable interactions mean that they also preserve ultimate ownership over their funds.
More and more financial institutions from smaller shops to the world's largest conglomerates are starting to use DeFi, but realizing that it's extremely hard as it requires extensive technical capabilities and effort to manage multiple ecosystems, protocols and interactions.
Since DeFi is highly fragmented by nature, it's becoming grueling to create well-rounded strategies across multiple protocols without having a whole team of smart contract engineers working on it, which means it can take gigantic amount of time and investments just to get started.
Current process of launching and distributing a new fund (or structured product) involves multiple intermediaries and is costly & time consuming.
The fund manager needs to choose a digital asset custodian to safekeep crypto; an execution management system to trade; an institutional wallet to access DeFi opportunities and a team of smart contract engineers to execute more complex strategies; a fund distributor and transfer agent to manage client register, onboarding process (and KYC/AML) and subscription/redemption; a fund administrator to track the NAV, manage expenses and performance fee calculation; reporting system to generate legal documents per regulatory requirements, and many other adjacent service providers.
This creates prohibitively high barriers to entry and prevents smaller fund managers from entering the space even if their investment strategy is superior.
Last modified 17d ago