dHEDGE: The Decentralized Hedge Fund

Economics Design

Welcome, subscribers! Thank you for subscribing. What will be shared today and the days ahead are alpha from our Economics Design's researchers. Please keep these mails secret and do not share them with any one because these alpha are confidential. Enjoy your reading.

Catch the episode on YouTube

Disclaimer: This is not financial advice

Introduction

Today, we will take a look at a DeFi project called dHedge. It is an infrastructure that connects investors to fund managers. In the traditional world, access to certain financial products and investment tools were limited to high net worth individuals but now with the help of dHEDGE users can access a pool of investment opportunities.

What is dHEDGE?

dHEDGE is an asset management platform. It is an infrastructure that connects investors to fund managers. These fund managers can be active people who are running their own accounts or automated strategies or even bot managers. In the traditional world, you had to be an accredited investor or needed to have a certain amount of net worth to get access to certain funds or tools. DeFi and dHEDGE allow for this situation where anyone with an Ethereum wallet can connect to the platform, pick a manager and invest in a pool.

How does dHEDGE access risk of the asset strategy?

Risk is important when managing assets. Hence, dHEDGE highlights the risk of the strategies before users decide to be part of the strategy.

1) Risk of Strategy

They score each fund or each pool using a Sortino ratio which is essentially a ratio of the downside volatility that the pool has exhibited against the market. It is sort of the standard deviation and then they score that out of five. As an investor, you can come to the protocol and try to limit your investor range just to pools that have very low sortino ratios instead of picking a risky one.

2) Risk of the Strategy Manager

Often in DeFi people tend to be anonymous and it's hard to build up a relationship with someone you are allocating your capital to manage. So dHEDGE tries to make that a little bit less risky by increasing the transparency around that by having managers connect their accounts to their Twitter profile so that you can get a sort of a history of the person's Twitter.

Most Commonly Used Strategies in dHEDGE Pools

They see automated strategies the most. For instance, dHEDGE has its own software development kit that managers can use to automate strategies. The managers have the ability now to use leveraged tokens. dHEDGE incubated a protocol towards the end of last year called Toros Finance which provides tokenized structured products so you can quickly buy a 3x Ethereum bull token or a 2x Bitcoin bear token and add these to your portfolio. They also have integrations with protocols like Aave where you can have lending or borrowing as part of your portfolio so the whole suite of DeFi applications can be pulled into a dHEDGE fund.

Manual Strategies at dHEDGE

The nature of active management is that at any given time a manager can make a decision and if they back their instinct or if the decision matches their strategy then they can do that. You're as an investor allocating a certain amount of trust to the decisions that the manager is going to make and the way dHEDGE tries to give insight into the background of that manager's history is by showing the performance history. The manager can communicate with the investor pool through a direct messaging system on dHEDGE. There's also a public wall where they can make comments and there's also obviously the manager's twitter account.

Functions of $DHT Token

The dHEDGE token is $DHT and has two main functions. One is governance and the other is sort of a way to encourage good investing behaviour.

The way the token does that is the protocol aims to give incentives for specific funds that have demonstrated a good track record so that it's more lucrative for an investor to choose a fund that is getting the additional rewards in $DHT versus one that isn't. The way that they decide which pools will earn these rewards is based on their investing history, Sortino ratio, and other factors but ultimately it's a way of guiding and rewarding investors for participating in pools that are great investing opportunities.

On the governance side, dHEDGE being a DAO has a whole governance process that is similar to other DAO’s in a way that you can take the $DHT token, stake it and then have a governance share and vote on protocol improvements and how stakers are incentivized and rewarded on a monthly and quarterly basis.

Governance changes

At the moment dHEDGE has a product called the dHEDGE stablecoin yield token called dUSD. The pool takes the assets in the pool and farms stablecoin incentives on liquidity providing platforms on Polygon. Right now, it's limited to Sushiswap and Balancer and so they only allocate capital to stable coin yields. At the moment that token is a dHEDGE call on dHEDGE and there's a proposal in the forum to move that pool to the Toros protocol and so that's an opportunity for governors to decide whether or not that pool should sit in Toros or it should stay with dHEDGE. It's just an example of how the protocol is growing and how it's trying to be specific in its purpose and whether dHEDGE should be specifically a marketplace or it should offer a bunch of structured products internally to help investors with say pools that a manager isn't doing themselves.

Another example is that there's a quarterly disbursement of fees from the protocol treasury that have been earned from managers having good performance by taking a portion of that performance fee as a sort of protocol revenue and some of that gets dispersed to the staking community every quarter. You could think of the proportion of what's distributed as a quarterly dividend. A governance vote is taken every quarter to decide what percentage should be paid out and so that's a very direct way that a staking investor can have the influence on the protocol.

$DHT Staking

The performance mining that we went across before, goes to every investor that's in a pool and has qualified for performance mining rewards but if you're not staking a $DHT token then there's a maximum cap of only receiving 100 $DHT per month so a benefit of staking the $DHT token is that it increases the maximum cap of $DHT rewards that you can receive every month. There's a positive flywheel of trying to keep $DHT liquidity in the protocol through staking and rewarding people who are doing that via increased performance money rewards.

Conclusion

dHEDGE is a decentralized platform that connects investors and fund managers. These fund managers can be active people who are running their own accounts or automated strategies or even bot managers.