Automating Portfolio Management with LayerZero
LayerZero is an interoperability protocol connecting all DLT types that will increase the efficiency of wealth managers by 3000 times. Here’s how.
Introduction
Project Guardian is a proof-of-concept organized by the Monetary Authority of Singapore that explores banks and governments utilizing blockchains to automate portfolio rebalancing.
This article briefly summarizes how Onyx by J.P. Morgan used LayerZero in Project Guardian to communicate across private blockchains. It then extrapolates the proof-of-concept into an analysis of how LayerZero can be used to automatically rebalance portfolios across any type of DLT — private or public — going forward.
Project Guardian: Onyx and LayerZero
Project Guardian is an initiative spearheaded by Onyx, J.P. Morgan’s Digital Assets unit, Apollo, and WisdomTree that experiments with blockchain technology for asset and wealth managers.
In Project Guardian, LayerZero was used to automate portfolio rebalancing over a diverse range of assets and across disparate blockchain environments.
Here’s a summary of LayerZero’s role in Project Guardian:
- Private-to-private blockchain Communication: LayerZero facilitates Project Guardian's core functionality by enabling cross-network messaging between J.P. Morgan’s private blockchain, Onyx Digital Assets, and Avalanche, a high-speed, EVM-compatible private subnet.
- Programmatic Order Routing: LayerZero serves as the interoperability infrastructure to enable automated communication and transaction execution between disparate blockchain networks. This allows for the dynamic routing of orders from the Onyx Digital Assets (ODA) blockchain to an Avalanche subnet, guided by predefined rules and conditions. LayerZero is used to programmatically ensure that asset managers on these networks are promptly and accurately informed of incoming orders. It also verifies that all necessary conditions, such as adequate cash positions for settlement on ODA, are satisfied before transactions proceed. This automation not only streamlines the order routing process, reducing the need for manual intervention and the potential for error, but also significantly enhances the efficiency, security, and cost-effectiveness of managing assets across multiple blockchains.
- Automatic Settlement: LayerZero is used to confirm and communicate the settlement of transactions across networks. After orders are approved by asset managers and fund units are issued to investors on the Avalanche, confirmation messages need to be relayed back to the orchestrator on ODA. LayerZero facilitates this by transmitting the confirmation messages from Avalanche back to ODA. This ensures that the orchestrator smart contract on ODA receives confirmation that the transactions have been successfully executed. This reduces manual intervention and operational risk, ensuring timely and accurate rebalancing actions. In addition to the automatic settlement, LayerZero also decreases confirmation times to that of the slowest blockchain it connects — allowing for almost immediate portfolio adjustments in response to market dynamics.
LayerZero and Portfolio Rebalancing Going Forward
Traditionally, portfolio rebalancing has been a cumbersome, manual process marred by inefficiencies. It involves the adjustment ofa portfolio's holdings to maintain a desired level of asset allocation and risk, a task that’s time-consuming and prone to errors. Settlement periods can stretch over several days, transactions require multiple layers of verification, and the overall lack of transparency complicates real-time tracking for investors. The involvement of various intermediaries further escalates operational costs, eroding portfolio performance.
Blockchains offer a new environment for financial institutions to build portfolio products that minimize middlemen. As explained by J.P. Morgan in a Project Guardian summary, moving portfolio rebalancing into a blockchain environment should lead to leaps in efficiency.
Furthermore, blockchains ensure that every transaction is recorded transparently, providing a tamper-proof audit trail that enhances stakeholder trust. The immutable nature of blockchains offers clear audit trails, bolstering trust and accuracy in rebalancing operations — even between two heterogeneous networks.
Interoperability Makes Portfolio Rebalancing More Powerful
In the context of portfolio rebalancing, LayerZero could potentially be used to send and receive instructions automatically across tens, hundreds, and perhaps thousands of blockchains, allowing for the programmatic execution of asset swaps, transfers, etc. Portfolio management in the blockchain context has the potential to scale in a way that is hard to imagine being possible in traditional finance.
LayerZero is designed to solve the challenge of interoperability — a term that refers to different blockchain networks communicating and working together seamlessly. It is a protocol that allows for the development of applications that work the same across all blockchains.
Where traditional finance is known for silos — each bank has its own database, each country has its own currency and regulation — through LayerZero, digital assets innovation will be known for its composability.
In other words, LayerZero is a way to combine the different strengths and weaknesses of blockchains into giant financial applications that can interoperate and compose across any environment. It is a way for genuinely open, new financial applications that are natively digital.
Through LayerZero, any blockchain can communicate, any type of token can be issued, and any type of smart contract can be created — it enables truly universal finance.
As more and more finance is moved onto blockchains through tokenization and digital assets, LayerZero’s potential grows, as it allows for truly universal use cases for wealth managers — especially in the context of portfolio management.
Tokenization Makes Portfolio Rebalancing More Powerful
Speaking of tokenization…
As finance and digital assets mesh further, the use cases for LayerZero and the blockchains it connects become more apparent as tools to unlock better financial experiences for wealth managers and users alike.
For example, we previously analyzed how the tokenization of alternatives on top of blockchain environments through LayerZero could be a $400 billion opportunity for wealth managers. Since publishing, this trend has only accelerated, with multiple Bitcoin ETFs being approved by the SEC, along with BlackRock CEO Larry Fink coming out with the following quote:
“I believe the next generation for markets, the next generation of securities, will be tokenization. If we can have a distributed ledger where we know every beneficial owner and every beneficial seller. Where we all have our code of who is buying and selling and…instantaneous settlement. It changes the whole ecosystem.”
As banks progressively tokenize assets on both private and public blockchains, asset management is poised for an unprecedented overhaul, making portfolio rebalancing far more efficient.
LayerZero aims to be an important piece of infrastructure at the disposal of traditional financial institutions as they move assets from centralized, siloed databases to decentralized, composable blockchain environments.
This shift towards tokenization, coupled with the LayerZero-enabled interoperability between banks’ private blockchains and public chains, should dismantle the slow, laborious portfolio rebalancing processes endemic to legacy systems and replace them with efficient, automated experiences on blockchains
Conclusion: LayerZero and the Future of Portfolio Management
J.P. Morgan’s implementation of LayerZero in Project Guardian represents a forward-looking approach to portfolio management, utilizing blockchain technology to achieve unprecedented efficiency, speed, and automation. The lessons learned and challenges identified serve as valuable insights for the broader adoption of blockchain in asset management and beyond.
Imagine a world where all assets, from stocks and bonds to real estate and art, are tokenized on blockchain networks. Banks, asset managers, and individual investors manage these digital assets through interconnected private and public blockchains. Rebalancing portfolios, once a labor-intensive task confined to financial markets' working hours, now occurs autonomously around the clock, automated via smart contracts.
The thought experiment of a fully blockchain-enabled asset management ecosystem offers a glimpse into a future where portfolio rebalancing is no longer a manual process, but is instead streamlined. As we move closer to realizing this vision, the financial industry obviously must navigate the challenges of integration, regulation, and adoption. Nonetheless, the potential benefits — enhanced efficiency, improved liquidity, and greater transparency — paint a promising picture for the future of asset management.
We at LayerZero Labs are excited about the future and look forward to working with major financial institutions to bring about a tokenized future.
