On-Chain Asset Management
Why funds and portfolio managers will be moving on-chain in the next 10–30 years
Historically, the financial industry has been very slow-paced when it comes to innovation.
Asset management, in particular, had been relatively static since the emergence of banks and, subsequently, funds, with its custodians, administrators, auditors, and compliance departments.
Inherently, asset management has been intermediary-heavy, which made it a slow and inefficient endeavor.
As an investor, you have to file a considerable amount of paperwork, comply with specific requirements (e.g., accredited investor), and pay substantial fees (of 2–3% per annum) just to give your money to manage to a third party. The process of investing took weeks.
Yet, in recent years, the web2 revolution and the appearance of fintech apps like Robinhood, Revolut, and eToro allowed entry-level investors to participate in money markets directly from their smartphones.
However, on the backend, the funds were still controlled by a designated entity (e.g., bank), and users mostly traded numbers on the screen.
The ease of access was simplified, yet, users had to undergo often lengthy KYC processes and still pay hefty fees to brokers. In addition, if users haven’t provided updated information in time or for another reason, they might have been suspended.
With the advent of blockchain technology, the need for financial intermediaries is dramatically reduced. All 3rd parties involved in financial management and administration are getting replaced by the new technology.
- Custodian is replaced by a smart contract — a program that holds assets accessible only to a pre-programmed owner address.
- Administrator is replaced by a smart contract — a set of rules that determine how the assets are being managed.
- Auditor is replaced by the blockchain technology itself, which inherently makes all transactions transparent and publicly verifiable.
With all those intermediaries removed from the loop, financial management becomes much cheaper and transparent.
Traditional fund managers must pay 1–1.5% per annum on capital managed to fund administrators for their work. With blockchain, this number is reduced to ±0% or simply network gas fees.
With a fraction of the cost of setting up a TradFi hedge fund, you can create your web3 treasury with multi-signature permissions and manage the assets immutably.
You can also build custom smart contracts that execute transactions based on complex rules, for example, bots and algorithmic trading.
With the development of DeFi insurance products like InsureAce, managing assets on chain will become safer and more reliable.
You can go as far as compartmentalizing each strategy and smart contract you’re running at your treasury for limited risk exposure.
With more people becoming aware of the benefits of decentralized finance, blockchain will truly enable the next generation of asset managers.