Benefits of Asset Management Protocols for DeFi & DeFi 2.0

Marcel Deer
By Marcel Deer
Joel Taylor
Edited by Joel Taylor

Published August 1, 2022.

Graph chart on blue computer display

The DeFi space is full of noise. You’re often met with confusing terminology and words that may leave you scratching your head. Multiple protocols and projects come at you from every direction; it’s a hard decision. Knowing which one to invest in can be confusing and daunting; the same goes for buying crypto.

However, understanding asset management protocols and the key features of DeFi can help clarify quite a bit. What are asset management protocols? Let’s discuss.

Why Are DeFi Asset Management Protocols Important?

Asset management protocols are the consistent management, planning, and controlling of the asset lifecycle. They are essential because they offer a unique alternative to traditional methods. For example, asset management products in decentralized finance don’t require users to share their private keys or transfer funds. They are also automated, so anything needing to occur, such as collateralization, liquidation, etc., will occur efficiently.

DeFi protocols are unique, special automated programs created to tackle the concerns with the traditional finance space. Blockchain technology offers users increased financial transparency, security, and rich data analysis. In addition, anyone with a crypto wallet and an internet connection can participate, so there are no harsh, unyielding requirements, unlike traditional finance methods.

The DeFi protocol allows more people to do more with their money and make more of it.

Let’s Talk Protocols & Defi 2.0

Protocol-owned liquidity (POL) is an element of the DeFi 2.0 movement. Olympus DAO created this to solve the mercenary capital issues of Defi 1.0. Unfortunately, protocols seeking to incentivize users via trading fees or LP tokens make the mercenary capital problem wreak havoc on DeFi 1.0.

Mercenary capital is a form of self-serving capital provided by investors as a way to earn from short-term incentive programs.

Incentivising users to add value to your protocol sounds beneficial. However, users can easily change to the protocol offering better incentives, creating a domino effect for protocols as they increase their supply of governance tokens and ultimately decrease their value.

Offering protocol-owned liquidity takes the necessary steps to address these issues.

Key Characteristics of Asset Management Protocols

Some of the key features of DeFi asset management protocols include the following:

  • Automation Allowing for simple collateralization, liquidations, and rebalancing without intermediaries.
  • Composability Some of the best management protocols can integrate with various DeFi projects, giving users the full-blown DeFi experience.
  • Accessible Available to virtually everyone regardless of income level or background.
  • Non-custodial The underlying asset’s ownership will not be revoked and typically stay secured in the user’s wallet.
  • Pseudo-anonymous Frequently connect via a wallet address, implying that sharing your identity is optional.

Best Asset Management Protocols

Asset management protocols are unique, meaning different protocols offer different solutions. There are asset management protocols for private groups and users, meaning they assist private groups in specific actions or activities like investing, pooling, or managing funds.

Public asset management protocols are designed to assist users when developing investment strategies and proceed to make them available to the public.

Here are some of the top protocols in the DeFi ecosystem:

  • Aave
  • Uniswap
  • Sushiswap
  • Synthetix
  • Compound
  • Kyber Network
  • Babylon Finance
  • Set Protocol
  • Balancer

There are many options if you’re looking for well-established and trusted protocols; you will simply need to find one that best suits your needs and desires.

Looking for a more in-depth comparison? Read Aave vs. Compound to learn more.

Conclusion: Why DeFi Asset Management Protocols Are Essential

DeFi protocol uses smart contracts, which run on the blockchain network. The source codes for most projects in the decentralized finance space are public; for anyone to review or audit. DeFi protocols offer a heightened level of transparency and reliability to its users around the globe.

The automated element of protocols is valuable and simplifies collateralization, rebalancing, and liquidation. These protocols also prioritize financial growth and opportunity for individuals from all walks of life.