Digital Asset Management: A Newly Found Need

Given the recent rise of interest in Blockchain technology and cryptocurrencies, it‘s quite clear that there is a growing unspoken need for professional portfolio management services and well-established investment techniques.

The proliferation of investment opportunities and the increase in the sheer size of each investment in the cryptographic asset space requires the incorporation of concepts such as diversification, asset allocation and other basic and well-tested investment techniques. As the market grows, it’s obvious that there is a compelling need for both: professional portfolio management skills as well as a good understanding of the underlying information technology.

The main feature of an asset management infrastructure is to ensure its efficiency in order to reduce the drag on investment returns and to apply the conventional rules in a blockchain environment there are four necessary requirements to consider:

1. Rebalancing: a fund infrastructure that allows Fund Managers to re-balance portfolios whereby the investor retains full control of the underlying assets;
2. Custody: the infrastructure must allow direct safekeeping of the assets on the blockchain, on behalf of the clients without intermediaries;
3. Pricing: the fund infrastructure must solve the pricing problem related to both the underlying and the fund;
4. Execution: the fund infrastructure should allow real-time subscription, redemption and transferability.

These requirements are all non-sufficient, in that a unified solution to all these problems is crucial for a blockchain technology to: firstly, be able to disrupt the investment in digital-assets, subsequently affect the traditional Asset Management industry.

There is currently no integrated solution that can support these needs. These problems are all tackled in various blockchain projects, but they are all addressed individually and independently. There is always a fundamental trade-off between requirements. In fact, solving the rebalancing problem always seemed to come at the cost of bearing the risks of a weak custody solution, while having a real-time execution seemed to come at the cost of pricing the funds incorrectly.

Hence, the assets management infrastructure, is strained by many problems (of efficiency, transparency, duplication, etc.) affecting both conventional as well as crypto-assets. Yet, most of the available solutions on crypto-assets fit the conventional asset management infrastructures, which is not able to leverage the “unique operational and technological features” that blockchain technology has brought to the world. For example, conventional-assets are registered by centralized trusted third parties (with the exception of some outdated bearer certificates): if an unfavorable circumstance destroys or a malicious actor modifies the custodian’s database of an equity share ownership: the rightful owner can demonstrate his or her ownership (through past statements, proofs of payment, etc.) and authorize the company to destroy the previous certificate and re-issue a new one. This would not be possible for digital assets, in fact if a similar unfavorable circumstance destroyed the keys or a malicious actor stole them, the underlying assets would not be recovered.

Effectively most of the solutions proposed so far are akin to centralized exchanges where the private keys are held by third parties. This also means that in case of failure or misbehavior of such third parties the most likely outcome is the loss of funds.

For digital-assets, first-party custodianship is the only responsible form of safeguarding clients’ assets”. Another interesting point to note is the irony surrounding the fact that despite continuous preaching of cost savings by leveraging blockchain, the cost to set up and run crypto-asset funds is much higher compared to traditional funds (e.g. higher fees in crypto-asset funds).

In practice, adapting the conventional asset-management model generates a fund of cryptos; whereas, in order to upgrade the asset management infrastructure to be consistent with its nature of digital assets, there is the need of a crypto-fund, rooted, ingrained and powered by blockchain technology. The projects within the blockchain ecosystem which are currently working to revolutionize the fund management industry, are all taking an independent approach with regards to the four requirements at the core of successful (digital) asset management. The implied underlying assumption underpinning many of these projects is that they solely focus on one requirement at a time with the hope of solving the others later on.

These solutions should not be completely embraced as the asset management problems cannot be solved sequentially due to their interdependence. Instead, it needs an innovative approach that could solve all of them concurrently and combines a cutting-edge ledger and transaction blockchain technology with arbitrage ideas developed in traditional fund business, where Investors are bridged on a peer-to-peer level with Fund Managers, eliminating the need for all the possible intermediaries (Transfer Agents, Fund Administrators, Custodians, etc.) and service providers (Accountants, Auditor, etc.) that you may find along the way. The protocol will bring Asset Management democratization by allowing boutique players to market their expertise directly to investors and to set up a new structure with limited capital and time. In so doing, most of the Asset Management industry’s typical costs will become negligible. Investors will be able to maintain complete control over their assets and appraise managers fairly and transparently, and as a result to have their assets managed efficiently.

The development of such infrastructure enables a larger pool of people’s wealth to be invested in digital assets, as part of the optimal allocation of their portfolios. This, in turn, will drive demand for these assets, contributing to its awareness, development and consumption all while experiencing first-hand the transition to a largely tokenized economy.

About DEXTF Protocol

DEXTF’s on-chain asset management protocol will allow the creation, management and trading of digital-native funds units, connecting investors, arbitrageurs and portfolio managers in a way that has never been done before. Working to bring the biggest crypto investment funds on DEXTF protocol and to eliminate the need of a third party custody service.

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