In traditional asset management the reward structure is based on the following two pillars:
- management fee
- performance fee
Such fees are calculated by an administrator (an independent third party), charged to the fund and sent to the manager.
We change the paradigm by offering one reward to traders:
The Traditional Paradigm
Management and performance fee are a pretty standard framework which fund managers love (it is very rewarding). Just as much as investors hate them.
The golden rule is 2% management fee, 20% performance fee, even though they have been decreasing during the last few years.
Such model has been highly criticized by prominent investors for the following reasons:
- a performance fee is a strong incentive for short-term risk taking, which is a negative for long-term investors.
- when a fund gets big, the manager has incentive to collect the management fees and little incentive to take risk.
A good mix of the two can create a better structure of incentives, but no standardized framework for it has been built around it.
The RigoBlock Paradigm
We at RigoBlock have been building the Protocol for Investment Funds on Ethereum and, from my professional career as a trader and fund manager, I have always aimed at improving the incentives structure and giving greater visibility to emerging talent.
That’s why, on top of the RigoBlock Protocol, we have designed the Proof-of-Performance algorithm to reward traders.
How does it work?
Traders create and run their funds through our protocol, and receive a reward in Rigo tokens based on an algorithm which takes into account their medium term performance. This can be further generalized to other investment networks, which can leverage on the RigoBlock protocol-as-a-service.
The use of the Rigo tokens allows investors to have their money managed without fees, and we’ve added one more protection for investors: the Highwatermark.
What is a Highwatermark?
It is a rule which prevents managers receive any reward unless the price of a fund is at an all-time high.
This prevents undue duplication of rewards.
What is the scope?
We aim at creating a meritocratic environment for traders, and believe the proof-of-performance algorithm will allow traders to come together in a new fashion, without regulatory pressures as our incentives mechanism is built on the Rigo token: no money is taken from the funds.
Similarities with PoW, PoS concepts:
a. Proof of Work allows miners be rewarded for securing the network based on their work.
b. Proof of Stake allows stakers be rewarded for securing the network based on the size of their stake.
c. Proof of Perfomance allows traders be rewarded for contributing to the network based on their performance.
Our algorithm is built on top of the Ethereum blockchain and allows a community of traders come together.
Proof of Performance does not substitute or compete with existing Proof of Work or Proof of Stake algorithms, but leverages the concept of consensus mechanisms in order to create a better incentives mechanism around a network of traders.
Further to that, it allows the community of Rigo token holders (the traders and the investors themselves) to set together the rules for optimal managers’ rewards.
This is an explanation of how tokens have the potential to radically change the structure of organization as we know them, and that the full potential is still unknown to most.
If you want to be among the first ones to test our proof of performance algorithm, please subscribe to our newsletter on our website.