Derisk Finance Technology-Based Asset Management

Yield Opportunities

DeFi offers plenty of opportunities for yield generation. Commonly, these include staking to secure blockchain networks, providing liquidity to asset pools on decentralized exchanges and farming for yield using aggregation services. As seen in Fig. 1 below however, there are risks associated with each of these opportunities- validator risk, volatility risk, loss or theft of funds, extended lock-up period, reward waiting period, liquidity risks, counterparty risks, impermanent loss, composability risks, rug pull projects, smart contract risks and overall project risks. Care must be taken to circumvent these pitfalls.If derisked appropriately however, the return on investment makes DeFi worthwhile.

Fig. 1 Typical DeFi yeld generation opportunities- staking, liquidity mining and yield farming

Another yield generation DeFi opportunity is overcollaterized lending as shown below using collateral-based rewards to inventivize borrowers and lenders. Such a scheme can pay lenders high variable rates of return. However, as seen in the case of Terra and Anchor, Protocol one must be vigilant to market manipulatiors and understand the viabiliy of collateral used to avoid losses.

Fig. 2 Interest from overcollaterized lending

During periods of intense volatility and to circumvent the problems of impermanent loss exhibited by liquidity mining, one can use crypto futures known as perpetual swaps. Perpetual swaps are special purpose crypto futures with no expiration period. The futures price is determined by exchange of contracts between long and short holders. Funding fee is paid regularly (every 8 hours) when future price diverges from spot. It is possible to collect funding fee on arbitrage between spot and future prices. Appropriate use of futures can mitigate impernanent loss when reaping liquidity mining rewards.

Fig. 3. Perpetual swaps hedge against crypto price fluctuations

Risk Mitigation

Technology to mitigate risk in DeFi must address the vulnerabilities listed in Fig. 1. Furthermore, to avoid the risk of collateral moving from one blockchain to another (Terra to Ethereum for instance), it is necessary to constantly monitor the flow of assets across blockchain networks, and to and from user wallets and centralized exchanges. Also, patterns of fund flows between wallets and exchanges must be ascertained to discern the association between wallets and individuals involved in suspicious transactions.

Fig. 4 Required risk mitigation techniques for effective utilization of DeFi

Derisked Asset Management

A fund (or individual) managing their digital assets can leverage monitoring sofware that examines transactions across various blockchains for holdings in their wallets. The derisked asset management software constantly examines blockchain transactions and liquidity pools associated with token holders to identify suspicious activity. Alerts are sent right awayto users and portfolio adjusttments can be made immediately (and automatically). As a byproduct of the analysis, portfolio risks can be identified and reported. Furthermore, extensions of the software to identify arbitrage opportunities are possible.

Fig. 5 Secured Asset Management Strategy Using Derisk Finance Technology

In summary, risk assessment and management are a key requirement for effectively using and investing in the world of decentralized finance. The peer to peer nature of DeFi transactions and software-driven decentralized autonomous organizations (DAO) creating DeFi markets today necessitates the use of sophisticated algorithms and computational software for secure asset management.