Messari interprets the new generation of crypto asset management platform dHEDGE

Author: Ryan Swanson

Original Title: 《A New Generation of dHEDGE Funds》

Compiled by: aiekjdns

Today, traditional asset management businesses manage over $100 trillion in client assets. The investment managers responsible for all this capital sit atop the skylines of major financial centers. While fund managers earn substantial returns, it is a well-known field that is difficult to enter: one typically needs an Ivy League background, a strong network, and deep relationships with existing and potential clients—prerequisites that most people in the world cannot meet, regardless of their actual investment skills or abilities.

Enter blockchain, a technology designed specifically for trustless activities. In theory, blockchain is particularly well-suited to address the challenges mentioned above. Investors are anonymous, so they are judged purely on their results or merits, without qualification factors such as family, race, or gender; performance is transparent, meaning investment returns can be easily assessed without the risk of fraud; and even if fund managers decide where to allocate funds, clients can retain ownership of their assets.

1. Want to Become a Hedge Fund Manager?

dHEDGE is a decentralized fund manager platform that eliminates the barriers to active fund management. The project allows individuals to build funds on a peer-to-peer basis while maintaining a compensation structure that benefits all parties. Utilizing smart contract technology, dHEDGE enables managers to create non-custodial pools where investors can allocate funds without giving direct custody rights to the managers.

Essentially, fund managers control the fund's investments without direct access to investor funds, eliminating the risk of theft by managers. Fund managers can be anyone—individuals, teams, or programmatic investment strategies.

The first iteration of dHEDGE began with a platform built through integration with the Synthetix protocol, allowing for zero-slippage trading through synthetic assets. Fund managers could direct client funds into a large number of Ethereum-based assets, similar to how investment managers invest in stocks, bonds, or other securities. Unfortunately, as transaction costs on the Ethereum network rose, this became inaccessible for most. Therefore, the recently launched dHEDGE V2 introduced multi-chain asset management starting with support for Polygon, using redesigned smart contracts. These new smart contracts support easy deployment on EVM chains, allowing the protocol to easily whitelist new protocols or assets for integration. dHEDGE plans to continue adding additional chains to support the goal of trading any asset anywhere on the platform.

2. Navigating dHEDGE Pools

Mining pools are smart contracts where clients can deposit funds for dHEDGE managers to invest. Ownership never changes hands, as assets are locked and stored in the smart contract. Besides security, this model simplifies liquidity since funds do not require a lock-up period. Investors can deposit and withdraw assets at any time without the discretion of the fund manager or dHEDGE.

When establishing a pool, managers create a fund name and a corresponding token, which is distributed to investors when funds are added to the pool. These tokens represent a proportional share of the total assets in the pool. The pricing of each token is based on the net asset value (NAV) of the pool's assets divided by the total number of fund tokens. Fund tokens can be redeemed for their share of the pool's assets; however, future updates will allow for single asset withdrawals.

This token mechanism can be illustrated with an example. Let's assume a $100,000 fund mints its Fund A token at a price of $1, with a maximum supply of 100,000 tokens. Now suppose the manager's investment strategy pays off, and at some point in the next year, the fund's NAV is valued at $175,000. At this valuation, the Fund A token is now worth $1.75 each. Investors can then redeem their tokens for a proportional allocation of the fund's underlying assets. Notably, dHEDGE plans to enable investors to redeem fund tokens for single assets (such as USDC or ETH), not just their investment share in the fund's portfolio.

Just like in TradFi, strong performance is profitable for top investors. When a high-performing manager's fund value exceeds a previous high-water mark, they become eligible for performance fees. Each time the fund surpasses its previous peak, that benchmark is set to ensure managers do not earn fees for underperformance. When the fund does exceed its high-water mark, the manager will charge fees as new tokens in the fund. Thus, astute observers may notice that as performance continues to rise, fund managers increase their ownership of the fund; meanwhile, investors face slight dilution offset by larger investment gains. This also helps managers—though there is no better way to say it—"put their money where their mouth is."

In addition to performance fees, dHEDGE also runs a liquidity mining program aimed at encouraging the use of the protocol, driving staking in active pools, and rewarding high-performing managers. If all investors stake their assets with qualifying funds, they can receive these rewards. Mining pools must meet four criteria to qualify:

1. The pool must achieve a positive Sortino ratio—meaning investment returns exceed a specific risk-adjusted metric.

2. The pool must be active for more than four weeks, demonstrating some consistency in investment records.

3. The mining pool must be public and open to any participant in the dHEDGE ecosystem.

4. The pool must have at least a 20% annual return.

Manager Score = Sortino Ratio x sqrt (7-day average NAV)

dHEDGE's manager scoring uses the Sortino ratio, a financial metric that measures risk-adjusted returns by dividing the fund's investment return by downside deviation. In summary, this ratio describes the manager's performance relative to the risk taken. To qualify for scoring, managers must have at least four weeks of performance data. The scores of the top 10 managers on the overall dHEDGE leaderboard range from 1,500 to 4,500, with the top three performing above the average of the top 10, as shown below.

While dHEDGE's manager scoring measures fund managers' risk-adjusted returns, the most popular fund pools by AUM often choose less efficient strategies. On the Ethereum platform, dHEDGE's own top index fund is just $20,000 short of becoming the largest fund on the platform, while ranking 7th on the manager scoring leaderboard. In fact, pools created and maintained by dHEDGE consistently attract the most assets on the platform, even if they do not always generate the best returns for downside risk. This disconnect may highlight a continued lack of trust in anonymous fund managers, regardless of their ability to generate returns.

dHEDGE hosts pools on both the Ethereum and Polygon networks, each offering a slightly different set of assets and strategies to choose from. As mentioned, trades on Ethereum are propagated through synthetic assets with the Synthetix protocol. Meanwhile, Polygon pools achieve this through five core protocols: SushiSwap, Quickswap, Balancer, 1inch, and Aave. Unlike Ethereum funds, which limit pools to five assets, Polygon pools can accommodate up to ten assets. Both seem to be limitations, but it is worth noting that the vast majority of pools on the blockchain hold fewer than three tokens at any given time.

3. DHT Tokenomics

In addition to fund pool tokens, dHEDGE also has a native token called DHT, primarily used for project governance and the project treasury Uberpool. First distributed in September 2020, 7% of the total supply was sold through an auction on Mesa DEX. The current total supply of the token is 100 million. However, if DHT holders wish, they do have the ability to adjust the maximum supply. As shown below, the token distribution is relatively fair, with only about 18% of the total supply going to private investors and partners, and about 19% going to the core team, both of which have a three-year vesting period. Interestingly, over 50% of the total supply remains unspecified. Future use cases for the unallocated supply may be for future strategic partnerships, financing, or other initiatives aimed at increasing platform users and AUM.

4. dHEDGE Decentralized Funding Organization and Protocol Treasury

The organization launching the new blockchain is the dHEDGE DAO, managed by DHT stakeholders. Like many other DAOs, dHEDGE manages an internal protocol treasury. dHEDGE's treasury is funded by a portion of manager performance fees, currently set at 10%. As of November 18, the treasury has collected approximately $3.32 million in manager fees.

To stake DHT, users must first choose a time lock period between 1 month and 3 years. Then DHT is exchanged for vDHT on a one-to-one basis, which is burned after one month (i.e., 1 vDHT = 1 month lock). For longer lock periods, stakers will receive additional vDHT rewards to increase their voting power for staked DHT.

vDHT holders are eligible for three types of rewards:

1. Traditional staking rewards (25K DHT weekly)

2. Performance mining (5K DHT daily)

3. Platform bonuses

As mentioned, dHEDGE charges 10% of all manager performance fees for the protocol treasury. Each quarter, 10% of these assets in the treasury are either reinvested into dTOP or distributed as protocol bonuses to stakeholders. The decision to reinvest or distribute depends on vDHT holders. The most recent quarterly distribution vote ended on October 9, with approximately 81% of votes deciding to distribute half and reinvest the other half. If a decision is made to distribute dividends, as in the recent vote, they will be "paid" through DHT buybacks, meaning approximately $142,000 designated for distribution will be used to buy back 131,365 DHT. This approach rewards stakers without diluting the overall holdings of DHT holders.

dHEDGE is a relatively unique project in the decentralized asset management industry. While there are some competitors, they are not numerous. Let's take a look at two categories.

1. Broader decentralized asset management

2. On-chain active asset management

Broader decentralized asset management would include many protocols that investors use daily, such as names like Curve, Compound, and Yearn.Finance. These platforms offer decentralized lending pools, yield optimization, and asset aggregation, respectively. While not direct competitors, such projects provide a breakdown of the services dHEDGE offers, which can be seen as a compilation of individual parts of dHEDGE.

A few other on-chain active asset management projects are more similar to dHEDGE. In this sub-industry, dHEDGE has two main competitors: Enzyme Finance and Set Protocol.

The first is Enzyme Finance, formerly known as Melon Finance (MLN). Enzyme is built on Ethereum and offers active on-chain asset management similar to dHEDGE. The platform manages over $146 million in non-custodial assets across 919 pools and 2,344 identifiable investors. Managers can choose their portfolios from over 200 ERC-20 tokens and can participate in yield farming, staking, and liquidity provision. There are significant differences between the native tokens of the two projects. MLN provides applications when using the platform; MLN can be used to pay fees and establish funds, as well as trade and represent the value of investment pools, but trading is limited to Ethereum and does not support other L1 or L2 networks.

The second competitor is Set Protocol, another protocol active on Ethereum and Polygon. Set Protocols allow crypto assets to be bundled into a basket represented by an ERC-20 token, a premise similar to traditional asset securitization common on Wall Street. Managers responsible for each basket become effective asset managers maintaining product performance. Like dHEDGE and Enzyme, investors can choose to allocate funds with managers in exchange for a tokenized basket of assets. In some sense, Set Protocol offers a broader use case as it can help build structured products, such as various crypto-based indices from Index Co-Op, as well as social trading, such as active fund management. However, compared to dHEDGE, trade-offs include restrictions on asset classes (no synthetic asset system) and the inability to short assets in the token basket.

5. Roadmap:

To drive the next phase of growth, dHEDGE held a "Treasury Fund Diversification" event in October, raising $2 million, led by Synthetix, with participation from 0xVentures, Mask Network, Ellipti, Meld Ventures, and others. These funds are expected to be used for additional protocol integration projects, product development, and technical and marketing expenditures. Significant upcoming developments include the introduction of single asset withdrawal functionality and non-performance management fees. Both proposals passed with 100% community support.

The project roadmap includes the continued evolution of dHEDGE V2 and its multi-chain asset management strategy. The introduction of Polygon is the first step toward achieving interoperability. The protocol recently launched on Optimism, and the dHEDGE team plans to continue with additional chain integrations, allowing investors to access all cryptocurrencies on a single platform.

While a crypto-native company is expected to start with crypto assets, dHEDGE V2's motto of "any asset, anywhere" sidesteps the question of whether the platform wishes to provide access to traditional stocks or other alternative assets. As crypto continues to gain mainstream adoption and traditional companies begin to tokenize their traditional financial assets, dHEDGE may be well-positioned to capture the demand for decentralized asset management across all asset classes, not just crypto.

With $300 billion in annual revenue at stake in the active investment management industry, it is not surprising to see decentralized asset management platforms like dHEDGE starting to capture market share from existing players. If clients manage to find a way to overcome their fears of investing in anonymous fund managers—perhaps by evaluating track records or highlighting other metrics—then those sitting atop the city skylines may need to be on guard.