This startup is putting a DeFi spin on asset management
Blockworks exclusive: Valio’s developers think they’ve solved key challenges with a very crypto-native approach to bringing in new users
Phongphan/Shutterstock modified by Blockworks
In traditional finance, asset management is a huge and still-growing market segment, but it has yet to take off in the crypto space. A new cross-chain platform, launching today, is focused on tackling the technical challenges holding decentralized asset management back.
Playing to crypto’s inherent strengths of transparency and self-custody, Valio.xyz — which bills itself as “a talent discovery marketplace connecting traders to capital” — set out to solve problems both from the perspective of prospective investors and asset managers.
Investors on the platform are able to allocate capital to traders without trusting them, while traders have access to the myriad chains supported by LayerZero, to craft flexible strategies that can include long-tail crypto assets, derivatives and, eventually, the full gamut of DeFi decentralized apps (dapps) available.
The concept is developed by venture studio Openhedge, which previously contributed to options protocol Premia Finance. The six-member core team goes by first names or pseudonyms to preserve their privacy in a bid to avoid becoming the target of scammers. All team members claim to hail from backgrounds in software engineering, investment banking and DeFi.
Openhedge and Valio founder Karlis believes the unfilled market need that has kept the asset management vertical from developing in crypto boils down to a lack of flexible trader tools, coupled with depositor safeguards.
“We’re tackling this entire thing bottom up,” Karlis told Blockworks. “We are sticking to the ethos of decentralization, saying, ‘we’re not forcing any opinions on the market.’ We’re simply creating the marketplace where the next generation of asset managers and capital allocators can be discovered.”
A gated initial launch will give whitelisted managers access to trading via GMX on Arbitrum and 0x on Optimism, via Valio’s vault system. Users will manage their positions over LayerZero’s cross-chain messaging protocol.
By enforcing a deposit cap of $500 and a maximum vault size of $10,000, Valio hopes to iron out any bugs and limit risk to users of the new protocol, ahead of a public launch on Aug. 7. The use of Ethereum layer-2 rollups will cut down on transaction fees, enabling small position sizes.
Depositors can select vaults to enter, and follow the manager’s actions in real-time. Aside from an initial 24-hour lockup period, deposited funds can be withdrawn at any time, or programmatically when certain conditions are met, such as a stop-loss or profit-taking based on percentage change.
A key design innovation is Valio’s mechanism for preventing asset managers from trading against the funds they manage — essentially manipulating the price of small illiquid assets.
When a manager creates a vault, they have to define a daily limit on the price impact they can have as a percentage of their assets under management (AUM). Called CPIT (Cumulative Price Impact Tolerance), Karlis expects this will quickly converge to an “acceptable market level,” of around 3-4% that is “just high enough to prevent the nefarious managers from participating in the first place.”
Part of the gamified investing experience is social, and each Valio vault is accompanied by a private Discord instance for managers and their backers to keep in touch. But they can remain pseudonymous.
“A person is characterized by their performance, nothing else. If they so choose, nobody needs to know who they are unless they explicitly and willingly want to do otherwise,” Karlis said.
Managers can opt to be compensated via a mixture of management fees based on AUM and performance fees, triggered by their vault’s success above a certain threshold.
“For traders it’s a no-brainer value proposition to participate,” Karlis said, because traders effectively get free leverage and the chance to build their personal brand.
Upon withdrawal, depositors can choose between in-kind tokens — receiving a proportionate share of each asset in the portfolio — or automatically convert their funds to a single token, like USDC.
While in a vault, depositor positions are represented as ERC-721 NFTs.
Active vs. passive investing
Valio can be used to construct an index fund, putting it in competition with platforms such as Index Coop, TokenSets and Domani Protocol, but Karlis points to several differences: An index token represents a set methodology, or a manager’s views at a fixed point in time, and they are limited to spot markets. They also can’t necessarily be rebalanced trustlessly.
“What we really need to break through as an industry is the ability to have these experienced Web3 people act as Sherpas to the novel entrants looking to get in, so they can consistently convey their views on the market and let their backers follow them,” Karlis said.
He pegs “complexity” as the “number one limiting factor in Web3 adoption — whether it’s gaming, finance, whatever,” and looks forward to developments in account abstraction and cross-chain communication that will make DeFi more accessible to newcomers.
Valio has not yet undergone third-party audits, and the team is going for an incremental approach using a restricted launch and bug bounties, with third-party audits to come later after the platform has added more features, dapps and chains to its offering.
“One of the things that we’ve learned, throughout the audit process, is that audits tend to mostly be just reputational risk hedges,” Karlis said.
The aim is to remove investment caps in the fourth quarter this year, alongside adding additional protocols to the vault system.
“It’s not just sufficient to give someone the code and say, hey, can you find bugs?” Karlis said. “We pioneered the standard where first we have the initial technical audit, then we have the system behavioral audit, and then we have another follow-up audit either in the form of formal verification or some other form before we release the system in an unrestricted fashion to our users.”
The platform does not have a token, but it is incentivizing participants through a competitive points system and “loot box” giveaways.
It’s not yet clear what the impact of regulations of DeFi will be for a product like this, but Karlis isn’t worried, saying, “we welcome regulation.”
The consumer protection aims of regulation is ultimately about dealing with the problem of asymmetric information, he noted. DeFi’s transparency tackles that head on.
“What we do is we provide infrastructure to ensure that the economics of backing these new managers simply makes sense,” he said.
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