OpenFi: dHEDGE
dHEDGE is an asset management protocol that connects fund managers and investors on Ethereum. Asset management is an area that has been slow to see blockchain disruption. How does dHEDGE score under OpenFi?
Disclaimer: The following piece is simply a summary of my opinions and should not be construed as investment advice.
O: Opportunity - How large is the Total Addressable Market? Does the project disrupt an existing market, or does it create a new market?
SCORE: 4/5
dHEDGE offers a digital asset management platform for synthetic assets, powered by Synthetix. It adds value by cutting out the middlemen in traditional asset management systems and increasing yield for fund managers and co-investors. The project takes aim at a $100+ trillion segment of the financial services industry that, so far, has proven resistant to blockchain innovation.
Synthetix is a derivatives exchange that primarily serves cryptocurrency investors and traders. While users primarily trade derivatives of crypto assets, derivatives of commodities and fiat currencies (FX) have recently become available. With enough time, I fully expect to see creative fund managers on dHEDGE take advantage of all types of assets on Synthetix to optimize their investment strategies.
P: Product - How innovative and differentiated is the product? Is there product-market fit? How easy is it to use the product (i.e. good user interface and experience)?
SCORE: 4/5
dHEDGE offers a new asset management model that is more decentralized and disintermediated. I’ve always heard of projects promising to disrupt asset management but rarely see them come to fruition in practice. dHEDGE’s mainnet platform went live in October and is very easy to use. I was able to connect my MetaMask wallet and invest in the existing pools on the site. The platform also offers ancillary tools to manage pools and track rewards from providing liquidity.
dHEDGE is a relative newcomer to the space and faces competition from projects like Set and Melon Protocol, which have been around longer. Comparatively, dHEDGE offers more flexibility in terms of assets supported (as long as they’re on Synthetix) and less slippage.
E: Experience - Does the team have any previous experience building software and technology? Is the team well-versed in blockchain? What previous experience does the team have to ensure success?
SCORE: 3/5
Founder Henrik Andersson hails from a traditional finance background and currently serves as CIO of Melbourne-based crypto fund, Apollo Capital. Founders, Radek Ostrowski and Ermin Nurovic, have deep engineering experience and both have founded their own startups.
Investors include prominent crypto VC’s such as Framework Ventures, Blocktower, and Three Arrows Capital, who have been very active in investing in DeFi projects.
N: Network Effects - Will more people in the network benefit when others join? Are there high switching costs and stickiness in using the platform?
SCORE: 2/5
dHEDGE’s business model emphasizes permissionless, decentralized investment pools, but its success seems predicated on its ability to attract talented fund managers who do not have access to traditional means of fundraising. In an effort to retain managers, the platform incorporates social aspects like leaderboards and co-investments.
Leaderboards make it easier for users to find the best managers. Over time, the best-performing funds that consistently rank on the leaderboards will grab a larger share of assets. Visibility on the leaderboards can also feed into larger crypto communities on social platforms. The performance of a highly ranked manager can be shared on social media, taking advantage of both the meritocratic nature of dHEDGE and crypto’s innate network effects.
Switching costs to go to a different asset manager are minimal. Opportunity costs are abundant when people consider where to put their money, in both traditional and DeFi allocations. As a first step, I’d like to see consistent results in user acquisition, followed by an ability to convince users to stay with value-add features.
F: Fundamentals: Do the underlying unit economics make sense within the current network? How quickly are users growing? How much value has been transacted or locked up?
SCORE: 3/5
Since dHEDGE’s platform currently does not have as many users as other well-known DeFi applications, I’ve based my score in this category on the structure and economics underlying the platform.
As of November 2020, the largest investment pool has about $200,000 in assets under management (AUM). In the current bull market, most funds have done well. What will be most telling is how these budding fund managers endure market cycles and scale their portfolios as assets on the platform grow.
Being built on Synthetix potentially limits the types of investable assets that managers can access. dHEDGE may integrate assets and platforms outside of the Synthetix ecosystem but that could require significant rework of the platform. New assets are frequently added to Synthetix, so there seems to be sufficient runway for the time being.
I: Incentives - Are there proper cryptoeconomic incentives in place for network stakeholders and users to support blitzscaling?
SCORE: 3/5
dHEDGE is governed by a decentralized autonomous organization (DAO) and issues DHT as its native governance token. Active users are rewarded tokens for providing liquidity to the platform. Additionally, the project hosts trading competitions regularly to attract fund managers. Going forward, users will vote on proposals to adjust staking rewards and token issuance. There are also plans to introduce yields on idle assets through integration with a lending platform. The current structure and go-forward plan are commonplace for crypto platforms like dHEDGE.
Similar to most other governance tokens, it is difficult to determine the value of the DHT token. However, using the token as a mechanism to attract more users is a sensible strategy and can create blitzscaling effects.
As an example, there was a recent capital injection from the dHEDGE DAO and dHEDGE investors to fund budding managers in the ecosystem. It seems that the decentralized governance of cryptoeconomic incentives is working.
Overall Score: 19/30
The ultimate vision of dHEDGE is to democratize investing. In crypto, retail traders may have better data or insights than institutional investors. Any aspiring manager can start up a fund on dHEDGE. Investors have complete control over which funds to add to their portfolio and when to cash out their investment. dHEDGE’s platform is designed to realize this vision as AUM scales.
The biggest risk that I see is the platform’s critical dependency on Synthetix, which is a bet on Synthetix itself. It will be important to see how dHEDGE ultimately evolves and addresses this dependency.