The Future of Cogito Finance: Tokenizing Traditional Assets to Revolutionize Onchain Finance

8 min readAug 10, 2023

Introduction

Decentralized Finance (DeFi) has been a revolutionary concept, but it hasn’t been without its challenges. From unsustainable yield farming to risky credit offerings, the DeFi space has experienced significant hurdles. However, there is a glimmer of hope on the horizon — the Cogito Finance — a revolutionary platform offering tokenized traditional financial assets as a solution. In this article, we will delve into the problems faced by the DeFi space and how the Cogito Finance aims to reshape the landscape.

Problems in Decentralized Finance

Unsustainable DeFi Yield Farms

The DeFi sector has witnessed a speculative frenzy over the past few years, with investors chasing ever-higher yields through yield farming. Unfortunately, these high rewards were often tied to the market value of the native tokens of the protocols, making such opportunities unsustainable in the long run. This created a volatile environment and left investors exposed to considerable risks.

Risky DeFi Credit Offerings

Many DeFi protocols face inherent risks, including credit risk, legal complexities, and an over-reliance on third-party due diligence. Moreover, the lack of compliance and regulation in these protocols poses a significant risk, which could amplify in the future. DeFi needs a robust solution to tackle these issues and gain the trust of traditional financial institutions and investors.

Large Idle Stablecoin Supply

The total supply of stablecoins is over $120 billion, with a significant portion of them remaining unallocated. This leads to opportunity costs for stablecoin holders, who could otherwise be earning returns on their idle assets.

The Solution: Tokenized Traditional Financial Assets

The Cogito Finance presents a groundbreaking solution to the problems faced by DeFi. By offering three investment products in the form of smart contract vaults — GFUND, TFUND, and XFUND — the protocol is bringing traditional financial assets to the blockchain world.

TFUND — Sovereign Bond Fund: Offers a basket of sovereign bonds, including U.S. Treasury Bills, with an annual yield of 4%-5%. These highly liquid and low-risk assets appeal to crypto-native investors seeking safe and regulated investment options.

GFUND — Green Bond Fund: Provides investors with exposure to a basket of green bonds, offering an annual varied yield of ~3–9%. These investment-grade assets promote sustainable development while providing stable returns to investors.

XFUND — Tech/AI Equity Fund: Represents a basket of tech and AI equities, providing exposure to innovative companies in the technology sector. This option caters to investors seeking higher returns who are willing to take on more risk.

The tokens representing these investment products are ERC-20 tokens issued on the Ethereum blockchain, backed 1:1 by the underlying assets and USDC stablecoin. This ensures transparency and trust for investors.

Benefits of Onchain Assets

Low Risk: Investment-grade assets, including AAA-rated U.S. sovereign bonds, offer stability and security and are highly liquid, with more than $100 billion traded daily.
Attractive Returns: With the Federal Reserve rate expected to remain elevated, fixed-income products are attractive to crypto-native investors who lack easy access to this asset class.
Fully Regulated and Institutional-Grade Partners: Cogito Finance collaborates with trusted and regulated partners to ensure compliance and mitigate risks.
24/7 Instant Settlement: Smart contracts enable instant investment and redemption on-chain, providing investors with increased flexibility and convenience.
Real-Time Transparency: Chainlink’s proof-of-reserves provides cryptographic verification that fund tokens are backed by underlying assets held in secure custodian accounts.
Transferability and Composability: Fund tokens can be transferred and staked across different protocols, maximizing capital efficiency and flexibility for investors and enabling new use cases.

Permissionless lending pool

cgvUSDC is a permissionless yield-bearing stablecoin backed by a pool of FUND tokens and USDC. It gives its users indirect exposure to interest from fixed-income financial instruments.

Risk Disclosure and Management

Cogito Finance prioritizes risk management and transparency. Investors are provided with comprehensive risk disclosures, ensuring they understand the potential risks associated with each investment product.

Smart Contract Risk

Smart contracts are a new form of financial settlement technology that operates on blockchain platforms. While they offer transparency and efficiency, their code can be vulnerable to hacks and exploits. With Cogito Finance, the Vault smart contracts are built upon well-established code standards that have been battle-tested and widely adopted. However, no smart contract is entirely immune to security vulnerabilities. Cogito encourages investors to conduct thorough due diligence and understand the underlying technology before investing.

Interest Rate Risk

Investing in the fund vault exposes investors to interest rate risk. If interest rates rise, the value of the vault’s portfolio and the fund token’s exchange rate may generally decline. Conversely, if interest rates decrease, the portfolio value and token exchange rate may rise. The Cogito Finance mitigates this risk by offering a target weighted-average maturity of 3 to 6 months for the TFUND portfolio and a green bond index fund with a shorter maturity for GFUND. This approach aims to reduce the sensitivity of the portfolio to fluctuations in interest rates.

Credit Risk

The vault invests in fixed-income securities, which are backed by the “full faith and credit” of the issuer, such as U.S. Treasury Bills where the credit risk lies with the U.S. Federal Government. There is a certain level of credit risk associated with the issuer, e.g. If the credit risk of the U.S. government were to rise, it could impact the volatility of the vault’s portfolio value and, consequently, the fund token’s exchange rate. Investors should be aware of this inherent risk when considering investments.

Liquidity Risk

During periods of heightened volatility in the fixed-income market or during large redemption requests, investors may face market liquidity risk. In such scenarios, the Vault may be forced to sell its bond holdings below the mark-to-market price to meet redemptions, potentially impacting the portfolio’s overall value. To mitigate the impact of such price volatility, funds will diversify their holdings across different maturities. Additionally, the fund will secure credit lines from market makers to accommodate redemptions without causing massive sell-offs.

AI applications powered by SingularityNet

In the ever-evolving landscape of investment and financial management, Artificial Intelligence (AI) is poised to redefine the way we perceive and handle investments. Specifically, its applications extend to revolutionizing fund management, both in terms of strategy and cost efficiency.

One of the most exciting prospects is the potential for AI to create versions of XFUND that are dynamically reweighted. Given that XFUND is dedicated to representing a basket of tech and AI equities, an intelligent algorithm, which constantly learns and evolves, would be an ideal mechanism to oversee and adapt its holdings. AI has the capability to analyze vast amounts of data in real time, from market sentiments to global events and even subtle shifts in the tech industry’s ecosystem. Through this, it can discern patterns and predict trends faster and more accurately than human analysts. As a result, a dynamically reweighted XFUND, under the guidance of AI, could potentially maximize returns by making real-time adjustments to its equity allocations.

Moreover, AI can automate many of the traditionally labor-intensive processes involved in fund management, from rebalancing portfolios to conducting deep analytical research. This not only enhances the efficiency and performance of the funds but can also significantly lower operational costs. Such advancements could make funds like GFUND and TFUND even more attractive to investors, offering the promise of stability with the added advantage of cost efficiency.

In conclusion, the integration of AI into fund management is not just a fanciful idea but a logical evolution. As we continue to unlock the capabilities of AI, the potential for dynamic, responsive, and cost-effective fund management becomes an increasingly tangible reality.

Implications to CGV Token Holders

Cogito’s governance token, CGV, plays a crucial role in the ecosystem. CGV token holders enjoy benefits, including revenue sharing and fee waivers. Over the years, a portion of the revenue will be distributed to CGV stakers, fostering a sense of community and rewarding long-term engagement.

Timeline

Setup Phase:

Legal Structure: Establish the legal structure, including the formation of a Cayman fund and a Fintech company to operate the Cogito Protocol.
Smart Contract Development: Develop and thoroughly audit the smart contracts that will underpin Cogito Finance’s investment products.
Stakeholder Onboarding: Onboard various stakeholders such as the fund manager, broker, custodian, administrator, auditor, tax advisor, and bank to ensure the smooth operation of the platform.
Website Rebrand: Revamp the website to align with Cogito Finance’s offerings and mission.

Launch Phase:

User Onboarding: Open the platform for onboarding and KYC
Token Launch: Offer TFUND and GFUND as the initial investment products
Launch Lending Pool and cgvUSDC: Introduce the lending pool and cgvUSDC, the yield-bearing stablecoin backed by FUND tokens and USDC
Market Expansion: Launch Cogito Finance in the Asia Pacific market

Expansion Phase:

Target AUM: Achieve an AUM of $60 million.
Introduction of XFUND: Introduce XFUND as an additional investment product, representing a basket of tech/AI equities
Algo Trading and AI Tools: Onboard an algo trader and leverage AI-powered trading tools to enhance fund performance
Revenue Distribution: Allocate 50% of the revenue to CGV stakers
Jurisdiction Coverage: Expand the jurisdiction coverage to include Europe and emerging markets
cgvUSDC for DeFi: Integrate cgvUSDC in DeFi protocols

Growth Phase:

Target AUM: Achieve an AUM of $120 million.
Continued Revenue Distribution: Adjust revenue distribution to CGV stakers to 25%
Regulatory Compliance: Obtain licensing as a regulated asset manager in Hong Kong, lowering transaction and custodian costs

Beyond:

Target AUM: Achieve an AUM of $180 million.
Sustained Self-Sufficiency: Reach net profit
Continued Revenue Distribution: Adjust revenue distribution to CGV stakers to 10%

Note: The targets and milestones mentioned are indicative of the platform’s goals and vision for the future and are subject to change.

Conclusion

Cogito Finance provides institutional-grade investment products by bringing fixed-income assets and equities onchain. Through tokenization, Cogito addresses challenges in DeFi, such as unsustainable yield farming, credit risk, and regulatory uncertainty. As a SingularityNET ecosystem partner, they leverage Ben Goertzel’s expertise to implement Artificial Intelligence in their processes, including portfolio management.

Q&A

Q: What are the main offerings for professional investors provided by Cogito Finance?

A: The main offerings for professional investors provided by Cogito Finance are FUND tokens, which represent a basket of securities in specific sectors. These FUND tokens include GFUND, which represents green bonds, XFUND — tech/AI equities, and TFUND — sovereign bonds.

Q: What is the offering for retail investors in Cogito Finance?

A: The offering for retail investors is cgvUSDC, which is a yield-bearing stablecoin. cgvUSDC is backed by tokenized securities and USDC. It offers permissionless onchain access for everyone.

Q: How does Cogito Finance incorporate AI and algo trading?

A: Cogito Finance employs AI and algo trading, which are applied offchain to traditional markets. This approach is more convincing as it leverages better data and liquidity for efficient execution.

Q: Who is the main client focus for Cogito Finance?

A: The main client focus for Cogito is on acquiring professional investors, both individuals and entities. The team’s expertise and background make this approach more suitable and achievable.

Q: How can cgvUSDC be integrated with DeFi protocols?

A: cgvUSDC, being a yield-bearing stablecoin, can be integrated in DeFi protocols and utilized as collateral in decentralized lending protocols.