There’s a lot you can do in DeFi…if you know how. It’s this latter caveat that has, until recently, rendered decentralized finance so inaccessible to mainstream users. Some of the more sophisticated financial products DeFi offers are so complex that the number of users routinely using their numbers in the low thousands – while the number with true mastery of them runs into the hundreds.
The reasons for this are well-documented: web wallets, smart contract approval, and EVM-hopping isn’t for the average crypto investor armed with a hardware wallet and an exchange account. Thankfully, DeFi is becoming more accommodating to the masses. Improvements in UX, onboarding, and GUI, coupled with greater availability of financial products, is making it easier than ever to construct a diverse onchain portfolio.
Underneath the hood, there’s still complexity as smart contracts are summoned, APIs called, and oracles queried. But from the perspective of the end-user, the whole process works smoothly and intuitively. These improvements have made it possible for DeFi users to construct a portfolio that includes much more than governance tokens and a smattering of stables.
DeFi does diversity
In TradFi, no one holds their net worth in a single asset or even asset class. So why should crypto users be expected to place all their eggs in one basket? Until relatively recently, synths – tokenized assets that mirror the price of their real-world analogs – were available to decentralized finance users but off-limits to most.
Early DeFi experiments with synthetic assets required users to mint the tokens in a convoluted manner. The pricing of these assets was also erratic and the liquidity low. All of these issues have since been ameliorated through the buff and polish of an industry that’s been quietly improving over time.
Ecosystems such as DeFiChain have emerged as a place where an eclectic range of financial products can be invested in, all conducted entirely onchain. But what exactly does a diversified DeFi portfolio resemble? It essentially comes down to maintaining a balance of crypto-native and TradFi-native assets. The former takes care of itself, while the latter, in the case of DeFiChain, comes in the form of dAssets.
The ‘d’ unsurprisingly stands for decentralized, since these assets, despite mimicking the price of stocks and commodities, are not classified as securities. As a result, they’re accessible to the full spectrum of DeFi users. This means that in a couple of clicks, it’s possible to purchase the dAsset equivalent of a company share or a barrel of oil. There are dAssets corresponding to the S&P 500, Tesla, Apple, Alibaba, GameStop, Nasdaq 100, Nvidia, Amazon, Microsoft, Netflix, Meta, and many other stocks and ETFs.
While experienced traders can mint these assets themselves onchain, there’s also the option to purchase them on the open market as one would any other digital asset. When the time comes to sell the dToken, any unrealized gains on the real-world asset it represents will be reflected in the sale price.
It pays to hedge
Building a diversified portfolio is desirable because it helps to reduce risk by spreading investments across a range of assets. This means that if one particular asset performs poorly, it will hopefully be offset by the performance of other assets in the portfolio. This in turn can help to smooth out returns over time and potentially increase the overall return on investment.
Diversification can help to protect against specific risks that may be associated with a particular asset class or sector. Crypto is a prime example. For instance, if an investor has a portfolio that is heavily weighted towards protocol tokens, the drawdown during an enduring bear market can be severe; many crypto assets are down 90% or more from their highs of a year ago.
There’s the reason for confidence that many of these tokens will recover much of these losses when more favorable market conditions return. In the interim, however, it makes sense to avoid becoming over-exposed to one particular asset class that may be vulnerable to changes in the industry such as shifts in consumer demand or regulatory changes.
A diversified portfolio, on the other hand, is less likely to be affected by these specific risks because it is spread across a range of different assets and sectors. Diversification can also help to reduce the overall volatility of a portfolio. This is because different assets tend to have different patterns of returns, so a portfolio that is diversified across a range of assets is likely to be less affected by short-term fluctuations in the market.
For a long time, DeFi diversification was constrained by an absence of real-world asset analogs that could be relied on to faithfully maintain their price. Now, thanks to improvements in oracles and APIs, these problems have largely been resolved. For DeFi users willing to take the plunge, diversification is now just a couple of clicks away.
