Asset management protocols in DeFi
Asset management protocols in DeFi are definitely on the rise and one of the most innovative verticals. These asset managers are partly algorithmic, partly DAO coordinated and take place inside various smart contracts. The most notable example of this is Yearn Finance, however other kinds of asset management protocols are also currently deployed. Yearn can be considered as more of an active asset manager, whereas structured products are also being brought to the market. In this section, we will examine Yearn as well as Powerpool which is another “asset manager” project that can be compared to an ETF from the traditional finance world.
Yearn Finance is an active fund management protocol. Various “strategies” (called vaults) can be deployed inside Yearn. These are executed by a smart contract and their yield is distributed to users depositing their funds into a vault. Vaults utilize a wide range of other DeFi protocols, both exchanges and lending platforms, to access the optimal yield. One example of a vault represents Yearn ETH (which is combined with the Yearn DAI vault). In total, there are nine vaults currently active on Yearn Finance platform.
So how does the Yearn ETH vault work? The graph below can be helpful to visualize the mechanism of the particular vault. At first, users deposit ETH into the Yearn vault. Part of the deposit (which varies based on the risk management rules set by the vault designer) is deposited into the MakerDAO protocol where it is used to mint DAI (an algorithmic stablecoin which aims to be pegged 1:1 with the USD). The DAI is consequently deposited into the Yearn DAI vault, where it is put at work inside another protocol called Curve which is a liquidity pooling protocol for the stablecoins. In Curve you get rewarded for providing liquidity to the liquidity pool with LP tokens. By locking these LP tokens in the Curve gauge (a tool to measure liquidity provision) users can receive extra CRV tokens, on top of the standard trading fees generated by supplying liquidity to the pool. These additional tokens are exchanged back to Ether as vaults follow the rule which allows for withdrawals in the same asset as deposits.
Important to emphasize again, that the above mentioned feature is only possible due to the interoperability of the DeFi protocols. The seemingless integration and automated value transfer from one protocol to another results in more efficient and effective capital allocation.
Yearn will be implementing a 2/20 fee structure similar to most active capital management funds, where a 2% annual fee is levied over the assets locked in the protocol. In addition, a 20% performance fee is levied on the profits. Half of the collected fees goes to strategy developers, as they are primarily responsible for creating the profits, and the other half is dedicated to Yearn governance token holders. Token holders can vote on which strategy to implement, whom to pay, what fee structure to implement and so forth. This is a DAO by all means.
As previously mentioned, Yearn has its governance token called YFI. There are two main use cases of YFI, namely voting rights for the protocol changes and the fees collection. In fact, the recent change to the 2/20 fee structure was implemented due to the YFI holders voting in favour of that proposal – democratic and decentralized decision making. Besides, token holders get rewarded for their active participation in the voting which is another innovative feature. Due to the new fee structure, the YFI holders will receive 10% performance fee (half) as well as 2% management fee. The maximum supply of the tokens is capped at 30,000 and in fact, it was already fully distributed. Therefore, if anybody would like to participate in the governance and collect fees, then they need an exposure to the YFI token.
Another asset manager in the DeFi world is PowerPool. PowerPool developed a so-called Power Index which stores 8 governance tokens with equal weighting (12.5% each, see the graph below) which could be compared to an Exchange Traded Fund (ETF) known from the traditional finance world. The index is operable by using only one asset – PIPT (same scenario as with SPY ETF tracking S&P 500 index). Essentially, it represents the above mentioned basket of tokens which makes it very convenient and cost effective to trade and store. Besides, PowerPool allows the token holders to lend, pool, borrow, get income, and accumulate governance power in protocols based on Ethereum which transforms the “useless” tokens to valuable ones making it a large differentiator comparing to an ETF where the shares contained in the fund can only be seen as an exposure to the market. Finally, Power Index also allows to swap the governance tokens between each other as well as to vote for the particular governance proposals which once again, creates an additional value in comparison with a traditional ETF.
The native digital asset for the PowerPool protocol is the CVP token. Similarly to YFI, it is a governance token that allows for the collection of fees from the protocol as well as represents the voting rights for the possible improvements and changes in the project (e.g. creating new index, setting up rewards for liquidity mining). An example of this are the recent proposals around new liquidity mining incentives for the PowerIndex and the first proposal for launching an NFT focused index product has also been put forward by a community member.