Defined by financial applications based on blockchain technology, DeFi refers to financial apps that allow digital transactions between numerous parties.
The blockchain is simply a public record for digital assets, such as cryptocurrencies, and it is becoming more popular.
DeFi might take the form of lending cryptocurrency, transmitting cryptocurrency, or investing in cryptocurrency.
And, perhaps most importantly, DeFi occurs without the involvement of a central authority or the participation of banks or other conventional financial institutions, thus the term “decentralised.”
The DeFi financing business, which was almost non-existent just a few years ago, has now evolved into an industry with a market capitalization in the hundreds of billions of dollars.
What is asset management?
Asset management is the service of guiding a client’s wealth or investment portfolio on their behalf, which is most typically conducted by a business on their behalf.
These companies often need a minimum amount of money to be invested in. Their clientele often has a substantial amount of wealth.
Understanding the area of asset management, as well as the function that asset management businesses play, can assist you in hiring the most qualified expert to assist you in achieving your objectives.
DeFi Asset Management
With DeFi asset management, a great deal of freedom, flexibility, and power has been granted to common users as a result of the new digital environment.
Everyone can now be their own bank, managing their money with more transparency and control over their investment choices.
In addition, the introduction of composability into DeFi projects, as well as the development of new financial products by investors, serve as powerful indicators of the expansion of DeFi asset management services.
In recent years, the emergence of decentralised asset management has opened up new possibilities for the development of complex financial products.
At the same time, decentralised asset management supports the flexibility of investing in both real and virtual assets with relative simplicity, as shown by the example of Bitcoin.
DeFi vs. Traditional Asset Management
Many traditional investors have taken their positions for granted since they can afford the risks and expenses associated with them and reside in areas where there is a dependable financial market that enables them to participate in the conventional environment.
Decentralized asset management, on the other hand, will provide investment options to a larger range of users for whom the conventional financial model has proven too expensive or restricted in their ability to invest.
Following the present or conventional model, specialised institutions and financial advisers design an investment portfolio that is tailored to an individual’s risk profile, income, and investment objectives and goals.
This procedure is overseen by asset management businesses, and investors have very restricted access to their own assets while fees must be paid to the intermediary players in order to complete the transaction. Investors, on the whole, have limited freedom and autonomy over their own assets and investments.
When it comes to conventional finance, an investment manager would normally put together a regulated product, such as a mutual fund, exchange-traded fund (ETF), separately managed account (SMA), or private equity stake.
Wealth managers bundle these products into asset allocations, which are then disseminated to customers via the use of financial advisers and broker-dealers. If you need help with your money, you can go to a Robo-advisor, which is a financial service company that helps you with automated financial services.
Usage of tokens and smart contracts in DeFi asset management
Among the fundamental investments in DeFi are tokens, digital assets that capture conventional exposure, synthetic structured tokens, and interest-bearing accounts, among other things.
Using smart contracts, DeFi asset management protocols group them into “vaults” or “pools,” which serve as a kind of diversified portfolio of digital assets.
The boundaries between asset classes and package kinds, as well as the conventional business models for these services, are still in the process of being established.
There’s no denying that DeFi is deserving of a spot in your investment portfolio. In terms of returns for DeFi lending products like Uniswap, the S&P 500 and the S&P US Aggregate Bond Index were equivalent.
The emergence of DeFi platforms is mostly due to the skyrocketing return of Ethereum, as most DeFi solutions are built on Ethereum.
Putting all of your money into one asset class simply because it outperformed others over a given time is a bad idea.
The short-term winners and losers don’t teach us anything about the long-term winners and losers of a certain asset class. Investing for the long run requires a diversified portfolio across numerous asset types.