TL;DR:
Decentralized finance, or DeFi, is basically traditional finance hosted on a decentralized blockchain; assets take the form of cryptocurrency. DeFi has become incredibly popular in recent years as another vehicle for trading and investing.
Staked just announced RAY, or Robo-Advisor for Yield. It’s a smart contract that automatically allocates a Staked user’s ETH, DAI, or USDC assets as collateral for three different lending markets (Compound, dYdX, and Fulcrum) optimally.
Prior to RAY, investors would have to constantly monitor the market manually, which is highly unlikely––meaning most investors just hold onto their cryptocurrency without profiting much. RAY finds the most profitable allocation strategy using smart contracts and helps investors maximize their returns.
When users deposit into RAY, they receive a non-fungible token (NFT) for the assets they invest. RAY then invests Staked’s collective pool of that asset in the optimal way to maximize returns; when a user wants to redeem their assets, they can exchange the NFT for the assets they invested, plus their fraction of the returns.
Users don’t have to pay additional for the RAY service; Staked profits by taking a share of the returns that RAY makes. Users only have to cover the gas for the investing.
Ultimately, RAY represents a major step forward in maturing the DeFi ecosystem and presents a very promising tool to help maximize investors’ returns on crypto lending.
What’s all this hype about DeFi, and what is it anyways?
DeFi stands for decentralized finance––essentially, everything you can think of in the traditional financial sphere but hosted on a decentralized blockchain. DeFi broadly covers when individuals invest in, trade, and hold cryptocurrency assets to make a profit or maintain value.
In recent years, DeFi has become increasingly popular as cryptocurrency and blockchain technologies become notably more mainstream; not everyone sees it as a replacement for the current system, but a good share at least see DeFi as a vehicle to make a profit, since you can trade and invest cryptocurrencies like any other financial asset. Thus currently, the biggest use case for DeFi is investing.
Cool. So basically, you can trade cryptocurrencies and make a profit, just like conventional financial assets?
Exactly! There’s a huge market for individuals who use DeFi as an infrastructure for trading and arbitrage. Admittedly, the landscape for this isn’t as mature as traditional financial assets like stocks, ETFs, bonds, etc. but there’s a lot of customer- and company-interest in this space so naturally, it’ll evolve soon.
So what’s the next big thing for DeFi investing and trading?
Staked is an institutional investing platform that allows investors to stake (essentially, use their own assets to fuel to activities of the blockchain) and lend their crypto assets to maximize their returns. It’s received a lot of attention among the DeFi community for being one of the premier platforms of its kind.
Staked just announced a new tool called the Robo-Advisor for Yield, or RAY. In a traditional financial sense, robo-advisors are what the name would suggest; automatic, software agents that help advise investments to maximize desired outcomes. RAY is just that, but specifically for yield-generating opportunities presented by DeFi.
How does it work?
When an investor puts funds into Staked, they might put any given number of units of a single cryptocurrency into a specific lending market. A lending market in this case is a DeFi app – like Compound or dYdX. Before RAY, the investor could leave their assets in that market and hold onto it without paying much attention; this might be a relatively stable and low-effort way to manage crypto but doesn’t necessarily optimize for the most profitable outcomes.
RAY runs a network of smart contracts that are constantly polling various markets to see where assets might produce the most return. So, if the investor puts $10,000 of ETH into a specific market, but later a different market might provide a higher return, RAY uses smart contracts to identify that discrepancy and move the assets to the most profitable place. Ultimately, a user can just dump their assets into Staked and trust that RAY will provide them with at least non-negative returns. It’s low management and has pretty good payoffs.
Currently, RAY supports lending for ETH, DAI, and USDC through the DeFi platforms Compound, dYdX, and Fulcrum. In the future, they hope to support staking, arbitrage, market-making, DAI savings, and anything else the DeFi ecosystem can come up with.
Awesome! But how does it really, really work?
From the user’s side, it’s not too complicated. Essentially, a user gets a non-fungible token (NFT) whenever they make an investment on Staked; the NFT allows the user to redeem their assets and any returns that RAY was able to make with it. The NFT token Staked uses is a standard ERC-721. The token allows RAY to be non-custodial in the way that it manages the user’s assets; it ensures that the assets can only be transferred back to the wallet from which they originated.
From Staked’s side, they have their own pool of assets, comprised of what investors put in and a bit of their own, which RAY algorithmically allocates in the most profitable way. Right now, that algorithm is essentially seeking out the highest return rates and moving assets; as RAY matures and more people start using the platform, this algorithm will likely mature as well and hopefully generate even higher returns. When users redeem their token, they essentially redeem the quantity of Staked’s assets that they invested plus their fractional share of the returns. The token itself doesn’t touch RAY, but rather serves just as a point of exchange between Staked’s larger asset pool and the amount that a specific user invests.
This technology is all open-source and is heavily based on smart contracts that are monitoring the different markets every 30 minutes and making decisions based on pricing metrics and various baselines. These smart contracts are openly available on Ethereum for anyone that wants to take a look, or maybe even play with them. It’s also all been reviewed for security and stability by several external auditors, meaning that RAY theoretically has a good, stable start, technically speaking.
What does it cost the investor?
Investors must pay for gas to help mobilize all of these transactions. But RAY itself doesn’t necessarily cost the investor anything; Staked makes profit by taking 20% share of the alpha (essentially, added return) generated by RAY. It’s a win-win situation.
Final Thoughts
The hype around DeFi is growing day-by-day, and cryptocurrency is becoming more and more popular as a vehicle for investing and trading. It’s time that tools for managing crypto assets caught up with the traditional financial sector.
RAY is an important step forward in creating tools to help investors optimize returns on crypto. By algorithmically allocating assets across different lending markets, RAY both provides higher returns to investors, but also increases the viability of crypto lending as a highly profitable modem of investing. It represents the start of an ecosystem where investors can track and use real-time market data to make informed and optimized decisions about their crypto assets.
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Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. The firm invests in equity, pre-sales/IEO rounds, and cryptocurrencies on the secondary markets. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.
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