A New Risk Focused Investment App: SmartDeFi 🤓

Kieran Daniels

Published in

SmartDeFi

4 min readSep 26, 2020

SmartDeFi is introducing a net-new value layer: DeFi Risk Assessment.

What is DeFi?

DeFi (Decentralized Finance) is a democratized alternative to the current system CeFi (Centralized Financial), where individuals can take control of their finances without the cost and risks of relying on intermediaries.

Is DeFi Riskier than Traditional Investing?

All investments have underlying risks and understanding the spectrum of those risks is important.

Decentralized Finance and Traditional Finance have many things in common and many of the vehicles are similar at first glance.

The main difference between DeFi and CeFi is that in Decentralized Finance you are normally trusting the security of a Smart Contract, instead of trusting a bank or a third party organization.

This is often referred to as Custodial vs Non-Custodial.

Decentralized finance has introduced a totally new paradigm. However, even though third parties are eliminated, it does not necessarily mean that it is less risky.

Smart Contracts have other risks, such as hacking or bugs and being able to understand these different variables is important before investing.

What is SmartDeFi?

SmartDeFi is an easy to use, non-custodial investment app which fulfills the needs of traditional investors who want to make their first DeFi investments, but don’t understand the risks involved or how to take the first steps.

The founders, Kieran Daniels (CEO) and Dziugas Butkus (CTO), believe the #1 reason that traditional investors haven’t entered new and exciting DeFi markets is the absence of an easy to understand and transparent Risk Assessment Layer.

The SmartDeFi infrastructure is powered by Idle Finance (DeFi Protocol), Gnosis Safe (Multisig), Wyre (Fiat Onramp), and Torus Labs (Web3 OAuth).

The core investment products are comprised of digital assets and Decentralized Finance protocols, such as Idle Finance.

The underlying assets are vetted and approved by the SmartDeFi team to offer risk-adjusted yield with minimized exposure to risks.

SmartDeFi leverages both Wyre and Torus Labs to integrate with Apple Pay and Google Pay for user login and asset purchasing. The end result is a quick and seamless onboarding experience for all user experience levels.

To generate user wallets, SmartDeFi chose to partner with Gnosis Safe which is the most secure Multisig available. Gnosis currently holds more than $1B in digital assets.

The goal of SmartDeFi is to obscure the complicated and often confusing parts of blockchain, behind a clean and modern user interface.

What is a DETF or Decentralized ETF?

The SmartDeFi DETF products are “smart baskets” that represent investments into a combination of underlying digital assets and Decentralized Finance protocols.

After a new user downloads the SmartDeFi mobile app, they are prompted to complete a DeFi Risk Assessment Quiz, which is similar to the quiz that the popular robo-investment app Robinhood offers their 13 million users.

There are x4 DETF products which are matched to users based on the DeFi Risk Profile they receive after completing the quiz:

Conservative
Balanced
Growth
Aggressive

At launch, each DETF will not be an ERC-20 token, however our plan is to move towards full decentralization, by implementing incentivized token and governance models.

What’s Inside the Baskets?

Initially, each DETF will consist of combination of the digital asset $ETH and a different allocation of the following robo-investment products, provided by the Idle Finance protocol.

The currently eligible DeFi protocols are included into each Idle strategy based on their rating scores, provided by the protocol risk assessment framework DeFi Score.

Idle Best-Yield allocation strategy aims to maximize the interest rate returns by detecting the interest rate changes on different lending protocols.

Idle Risk-Adjusted allocation strategy aims to earn the best rate at the lowest risk-level.

How the DETF Risk Model is Calculated:

The calculation of asset structure for each of the DETFs, is primarily based on the risk criteria: Historical Volatility.

To calculate Ethereum volatility we use historical daily pricing data, starting from 07/08/2015.

Idle Finance asset data is collected directly from the protocol for all available periods.

Because DeFi is comparatively new, returns and volatility data is extrapolated to match the Ethereum lifetime timeframe.

How Annual Asset Volatility is Calculated:

These allocations are based on the historical volatility of each basket.

Calculate daily returns
Calculate standard deviation of daily returns (volatility)
Calculate annual volatility

The assets are then balanced in order to meet required levels of total portfolio volatility:

Conservative: ~5% volatility
Balanced: ~10% volatility
Growth: ~15% volatility
Aggressive: ~20% volatility

The models were designed to replicate time-tested “Risk-Basket” markets, such as those offered by Morningstar, Fidelity, and Charles Schwab.

DETF Eligibility:

Current Approved DeFi Protocols: Aave, dYdX, Compound, and Maker DAO. These protocols are included in the Idle Risk-Adjusted and Idle Best-Yield strategies.
Current Approved Token Assets: Ethereum.
Future Eligible DeFi Protocols: Set Protocol, Zapper, Yearn Finance, and Nexus Mutual.
Future Eligible Token Assets: YFI, SNX, Aave, and wBTC.