DeFund: Decentralized ETFs on Cosmos for Easy-mode Passive Investing
Coming soon to Cosmos, DeFund is developing tools to support decentralized cross-chain ETFs. As an idea, dETFs are not the most innovative or breakthrough of DeFi products on offer, but the real value of DeFund and the dETF infrastructure they are building lies in how the protocol leverages the power of the Cosmos open-source ecosystem and toolkit.
Through the Cosmos-native Inter‑Blockchain Communication Protocol (IBC), any token in the Cosmos ecosystem can be accessed through the DeFund protocol, including via bridges such as Evmos, meaning ERC20-standard tokens, and also fractionalized Ethereum-based NFTs. Additionally, DeFund utilizes Cosmos Interchain Accounts (ICA) to establish price data and maintain ETF price stability without having to move or lock assets in liquidity pools.
Following the Passive Investing Revolution
With the formation of the first ETF in 1993, passive investing became an accessible reality for millions around the world. ETFs were initially lauded for their convenience and wide coverage, enabling individual investors to gain exposure to an entire industry or market with a single tradable asset. This irrevocably changed the investing landscape and attracted a new generation of passive investors seeking to put their money ‘to work’ rather than gradually succumbing to the depreciating grind of inflation.
Since the turn of the 21st Century, ETFs have been regarded as a relatively safe haven for volatility. Considering the natural ebbs and flows of markets within short-to-medium time frames, ETFs proved to be a profitable option for investors looking to invest long-term, following age-old adages of ‘time in the market vs. timing the market’ and ‘diversification.’
Before now, however, the layering and composition of ETFs have been exclusively reserved for large financial institutions that earn a significant income from fees arbitrarily claimed from investors. The structuring and brokering of these complex baskets of financial assets to hedge funds, pension funds, and individuals have been extremely profitable for these organizations and allowed them an ever-growing thirst for capital, as well as the power to control global markets. As their power has grown, so too has their risk appetite, which has led to an over-extension of capital, generated significant volatility, and rendered investors with a top-heavy system on the brink of collapse.
Not-so Stablecoins
As one of the most high-risk and volatile asset classes in the world, crypto has largely turned to stablecoins as a way to create some semblance of safety and stability. The prevailing risk-on, risk-off mindset of crypto to stablecoins has been shaken in recent months, however, with numerous stablecoins losing peg and TerraUSD (UST) dramatically falling by over 99%. This artificial stability created through supportive market forces means risk-off is no longer truly risk-off, and that stability must be found elsewhere.
Additionally, stablecoins significantly limit an investor’s earning potential by capping yield to under 5% APY on Curve finance, not even enough to cover losses due to inflation. With the inherent risk of collapse, inflation-losing yield, and no exposure to market upswings, stablecoins are not the answer for passive investors looking to put their money to work by buying and forgetting.
Calling All DeFi Builders
Far and above the best investment strategy over the past decade has been to buy and hold Bitcoin. The earlier and longer, the better. For new entrants, however, the leading advice is also to invest in Ethereum and then a few other things, and before you know it, your portfolio is split 8 different ways across 4 wallets and not generating maximum returns during each market cycle.
The goal of DeFund is to give portfolio-building experts the tools to build baskets of tokens to grant sector-wide access to investors depending on their risk appetite. Think GameFi is the next biggest thing but not sure which of the 100s of new projects to buy into? GameFi dETF. Like memecoins but don’t know which to roll the dice on? Memecoin dETF. Believe zk-rollups are an innovative scaling solution to prominent Layer 1’s but don’t want to make wallets and transfer assets to each individual one? Zk-rollup dETF. Like NFTs but don’t have the time to investigate every single new project on OpenSea? Fractionalized NFT dETF.
By giving developers access to permissionless tools, the market for transparent dETFs is set to naturally expand, with market forces dictating which dETF architects are capable of layering their financial products optimally. Currently, the project remains in alpha but is quickly developing into one of the more interesting DeFi projects in the cosmos ecosystem.
