By Valentin Pletnev, CEO and co-founder Quasar Finance
Non-custodial, permissionless, DeFi native asset management is coming. What crypto natives have proven works is slowly finding its way from global citizens to institutions and high-net-worth individuals. Somewhere out there, the new Blackrock and Fidelity are being born right now – decentralized and globally available.
At the time of writing, the value of worldwide assets under management has reached $126 trillion USD and represents 28% of global assets, up from 23% a decade ago. Projections don’t look bleak either, as the market is expected to grow with a compound annual growth rate (CAGR) of 23% for the next decade. Given that financial literacy worldwide has also increased, it's surprising that assets under management in the more novel, complex, and still unsaturated markets of Web3 only account for around $30 billion in assets – that’s only about 3% of all crypto assets, according to Coinmarketcap analytics data.
Emerging markets usually follow an identifiable pattern: an opportunity for value transfer is found, strategies to capitalize on the opportunity get fiercely optimized (going hand-in-hand with increases in complexity of said strategies), and value transferred and captured increases, ultimately being consolidated to the experts of that market.
Usually, by that point, the average investor will not have the capacity – in terms of expertise or time – in their day-to-day life to get into the nitty-gritty of the market and find ways to add value and capture profit. So they do the next best thing – give their money to a professional asset manager who will deploy their capital on their behalf, taking a cut of the hoped-for profits.
In the Web3 space, we call this exchange custodial because the investor transfers custody of their capital from their personal control to the control of the asset manager. Contracts, laws, and regulations provide the investor with the perceived safety needed to feel like their money is still under their control.
While this may go well in many cases, there is always a risk. Custodial transactions are always vulnerable to fraud. Anybody remember Bernie Madoff?
Custodial exchanges rely deeply on trust. This is why the oldest and biggest asset managers can access capital more easily and grow much faster than the newer and younger ones. How does this compare in web3?
In web3, there are very few big and mature asset managers – except for some crypto native venture capitalists such as Blockchain Capital and Polychain Capital. Crypto investors in need of expertise and asset management however, are more retail-focused rather than corporate-focused. So, retail investors instead turn to consumer applications promising basic asset management mechanics such as staking, lending, and leverage services. But the track record for these applications is horrible; Voyager, BlockFi, and FTX all imploded just this year, losing users billions of dollars.
In fact, many custodial services in 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 multiple times this year, losing users another $2 billion USD.
So it’s understandable that many web3 investors have vowed to never use custodial services again, with the maxim of “not your keys, not your coins” suddenly gaining much greater significance. The saying is a grim reminder of the pitfalls of relying too much on centralized institutions.
Naturally, users burnt by custodial services are starting to explore the options and opportunities available in decentralized finance. DeFi is an attempt to build a new financial system, one 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 users always have control of their funds. It also means a system that is permissionless, meaning you don’t need to create an account to interact with it. And it’s also a smart-contract-driven system, meaning whatever is specified in a contract will be executed without the unpredictability and risk of human intermediaries disrupting the process.
DeFi places math and code at the forefront of services and execution, eliminating the risk factor that humans (unfortunately) often pose to these systems. I already mentioned Bernie Madoff, but sadly there are many more recent examples that also ring true here.
The benefits of this structure are clear – nobody has control of your funds but you, and you can deploy your assets however you see fit. Further, as long as you keep your funds in self custody, they are often not at risk of protocol hacks or exploits.
With DeFi largely built on the foundation of Ethereum, the first decentralized asset management application emerged as a decentralized app (dApp) in 2020: Yearn Finance. Yearn allows anyone to invest in transparent investment strategies. Users can deposit capital into these strategies and pull out whenever they wish (unless they willingly commit funds for a certain time period to get higher returns). Yearn currently manages around $250 million USD of depositor funds spread across different strategies ranging from low to high risk.
However, Yearn does not allow for permissionless fund creation, which is where the future of web3 asset management is headed. It also doesn’t have a public team behind it, something that any serious financial institution that wants to learn more and build on the platform would require. DeFi-native asset management tools are growing in popularity and will lead the next paradigm shift toward the democratization of financial markets. This shift will allow a wide range of investors worldwide to access the opportunities that expert-guided financial markets offer.
The crucial unlock here is the innovation of non-custodial funds. Asset managers are now able to manage users' funds without ever holding custody over them, solving many regulatory issues. At the same time, smart contracts can guarantee that the profits generated for depositors who follow an asset manager’s strategy will automatically be distributed appropriately to both parties. And with self-sovereign identities (SSIs) gaining steam with regulatory bodies, established managers can even create DeFi-native strategies that only their existing clients can access; in this way they could profit from all of the benefits of crypto without increasing their exposure to regulatory risk.
There are still many questions to be figured out and answered. Additional experiments will lead to higher clarity. But rest assured, crypto-native projects are working hard to fill this vacuum, whether Wall Street wants to be a part of it or not.
At just 23 years young, Valentin Pletnev has already had exposure and experience in a variety of blockchain and emerging technology-focused fields. In 2018, he was accepted into Draper University. After that, he joined Advanced Blockchain where he, together with his co-founders, came up with the idea for Quasar Finance, a Cosmos project that is home to next-generation DeFi investment opportunities powered by expert and community driven strategies. It has raised $6M+ from Investors like Polychain Capital and Blockchain Capital.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.