While many investors believe that the decentralized finance ecosystem is suitable only for those who want to manage their finances personally, the reality is that this particular sector of the fintech industry is quite diverse and offers a rich selection of instruments suitable for anyone. Active portfolio management is a service that is easily obtained while engaging with DeFi protocols.
Potential returns in decentralized finance beat anything that the world of tradfi can offer. For instance, a single USDC-AERO pool on Aerodrome (Base) offers over 42% APY in AERO tokens which can be easily sold for massive profit. Since the token has been doing fine recently, early investors managed to triple and quadruple their capital in just a couple of months.
A variety of efficient capital allocation methods can be employed to reach sky-high profits. The issue is that the onboarding process is very difficult for newcomers and the sheer volume of information one must process to make informed decisions is overwhelming for an individual retail investor. The decentralized finance sector has over 5,000 protocols and over 11,000 pools to choose from excluding thousands of other investment opportunities.
A fund is a great solution. The DeFi ecosystem has DAOs that manage massive assets gathered from the community and centrally managed funds offered by industry experts, established investment companies, and fintech startups. These funds make it easier for newcomers to approach the DeFi ecosystem and get started without feeling completely drowned in information.
A typical individual investor has a variety of ways to manage their holdings in the DeFi ecosystem. Here are some of the most commonly used ones:
The improvements in app development within the DeFi sector led to the emergence of many services including investment DAOs. These fully decentralized organizations raise funds from the community that can vote for suitable investment targets, technological improvements, and more. Usually, these DAOs issue utility or governance tokens to represent your share in assets under management.
DeFi protocols that rely on community-driven decisions can perform well under certain market circumstances when the general consensus of the market is clear (a strong bullish or bearish trend) but may completely fall apart once the market starts fluctuating as DAO members start panicking.
A large number of protocols and centralized platforms offer funds that are focused exclusively on DeFi instruments. In a sense, you are investing in a group of assets instead of trying to pick a certain token that may go to the moon.
Here are some options that you may consider:
In all of the above, community involvement and its impact on the outcome of investment activities are the most important factors. However, many investors who are interested in a hands-off approach to DeFi investments may be more interested in working with centralized service providers. All these products represent a solid chunk of the DeFi ecosystem with managed token pools and indexes forming a category of 72 tracked protocols managing a combined TVL of $2.1 billion.
One of the difficulties that many investors inevitably face is that assessing the quality of any given fund is challenging due to the chaotic nature of the DeFi ecosystem where investment instruments behave unpredictably. Is a 15% return good? Is a 100% return good?
A good rule of thumb is to consider anything that beats US treasury yields (roughly 4%) satisfying and anything that beats the stock market return excellent.
Many yield farming strategies used by funds can look good on paper and produce outstanding results in the short term but investment is a game of long distances. Funds may promise exorbitant APYs yet fail to deliver such results. The vast majority of funds prefer less volatile strategies.
A good example is the DeFi fund offered by Numeri. The target goal is a 20% net return over a 5-year period. The minimum investment is $100,000 and the fund becomes operational once the team gathers at least $300 million. The company collects a 2% management fee and a massive 20% performance fee effectively reducing net profits to 15.6% which translates to roughly 3.12% per year, a figure lower than what the US treasury bonds will yield in the same period.Numeri promises to use advanced risk assessment methodologies and informed analytical approaches to identify undervalued DeFi tokens that can be invested in with a high degree of confidence. Similar products are offered by Grayscale with its decentralized AI fund with a 2.5% management fee.
The DeFi sector is positioned to have one of the best years in its history due to the growing involvement of institutional investors in DeFi and the introduction of novel investment instruments by startups and existing protocols. Some funds are taking advantage of the hype by focusing on specific assets that have the strongest potential.
We strongly recommend avoiding funds that invest in a range of AI products since the social media sentiment is starting to shift away from artificial intelligence and only projects with strong foundations will remain profitable and deliver high-value products. Select funds for long-term investments based on which assets they target.
For instance, Solana and its many memecoins may be a good destination for day traders and short-term investors but will be detrimental to a portfolio that plans to remain profitable within a longer period of 5 — 10 years.
Future trends in DeFi investment funds are unclear but staking, lending, and yield farming look like the most popular instruments for the vast majority of DeFi investors. Working with funds that plan to invest in tokens that are issued by such platforms can be a good idea for capital holders interested in long-term gains.
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