The Rise of Robo-Advisors in DeFi: A Game-Changer for Investors? | by Max Yampolsky | February 2023
How AI and robo-advisers are the future of DeFi investing: an insider’s look
Robo-advisors have become hugely popular over the past decade, with some of the biggest players like Vanguard having 1.1 million clients with total assets under management of $206.6 billion. Other leading solutions like Wealthfront and Betterment have deposits of $31 billion and $33.8 billion, respectively.
Robo-advisors have helped millions of investors build better portfolios in traditional markets. But how about having a robo-advisor for cryptocurrencies and decentralized finance (DeFi)?
Robo-Advisor is a computer program that helps to make better investment decisions. Using formulas and algorithms, robo-advisors select the right asset portfolios (stocks, bonds, indices) for you.
Historically, such investment advisory services have only been provided by human experts – financial advisors – who have historically been quite expensive. Robo-advisory technology changed that narrative, significantly reducing the cost of financial planning, making it more accessible to a broader market.
The advent of blockchain and cryptocurrencies has created a new sector for robo-advisory applications. Not only has it created a new economy, but also the technology that can further enhance the capacity of traditional robo-advisors.
Here are the main differences between traditional and DeFi robo-advisors:
1. You do not have to share your personal information
In order to use traditional robo-advisors, you have to give them a lot of personal information (name, address, date of birth, etc.). This is because they have to perform various KYC/AML checks on you before accepting your money.
Wealthfront onboarding process
This is not necessary with DeFi. With no centralized body holding your funds, the collection of personal data is no longer mandatory.
2. Easier onboarding and UX
Since you don’t have to answer tons of questions about your personal information, onboarding users becomes much faster and easier.
Onboarding UI at One Click Crypto
The onboarding process is reduced from 11 screens to 3, drastically reducing friction and making it more accessible to users.
3. Cheaper fees (limited to gas fees)
Traditional robo-advisors charge an annual fee, typically between 0.2% and 0.5% of the investment amount. In addition, you may also have to pay trading fees and what’s known as an “expense ratio,” or management fee, for the ETFs your robo-advisor chooses to invest in, typically between 0.17% and 0.42% per year. So the annual gross fee for using robo-advisors can add up to 1%.
Expense ratio for each asset category (Source: WealthFront app)
When you use blockchain, you don’t have to pay various third parties (e.g. custodians and administrators) to store and manage your funds. There are no brokers and ETFs. Instead, your wealth is managed through smart contracts. Therefore, with the help of blockchain, robo-advisory fees can be further reduced and limited to gas fees.
4. Farm and earn instead of keeping
Aside from dividends, there’s not much you can do with your stocks — you just hold them and hope they go up in price.
DeFi and blockchain technology allows you to perform various interesting actions with your investments that are simply not available in traditional finance.
You can stake, lend your coins, provide liquidity or become a validator – all activities that bring additional passive income.
Examples of yield farming protocols on the BNB chain. Source: https://oneclick.fi
In DeFi, instead of holding your wealth and being exposed to the market beta, you can stake your money and earn more returns with different DeFi protocols. This concept is called yield farming.
5. More aggressive about risk and reward
Given the inherent volatility of cryptocurrencies and the variety of yield farming options, crypto investing carries increased risk but can yield much higher returns.
Achievement for the risk score of 10.0. Source: WealthFront app
If even the most aggressive stock portfolios are projecting you an 8.77%-12.54% annual return, you can earn 19-23% APR in crypto by trading blue-chip coins like ETH/BTC/USDT/USDC on Curve or breed GMX.
Tricrypto2 pool on Curve Finance
GLP token on gmx.io
Some farmers can achieve potentially higher APRs of 40-80% with riskier protocols by actively managing a portfolio.
And remember, this is just an additional return you’re getting on top of your existing investment. It does not count towards the change in price of an underlying asset, which may offer an even more significant return.
6. Greater range of options
The portfolio recommended by traditional robo-advisors consists mainly of stocks and bonds.
However, in DeFi you have much more variability and optionality to create an investment portfolio. This is because there are just so many different chains, coins, and yield protocols to stake your assets on.
However, this aspect can be a nuisance for many investors. Huge variety can be overwhelming and cause decision paralysis. This is why robo-advisers like One Click Crypto help create a personalized DeFi portfolio in just a few clicks.
OneClick website
7. Shorter investment horizons
By their very nature, most DeFi returns are variable rather than fixed, meaning they change over time. And most of the time, the returns just get smaller.
This is mainly because DeFi protocols tend to incentivize early investors and liquidity providers with higher rewards that decrease over time as the protocol grows and liquidity increases.
GMX’s yield has been reduced from 25% to 8% in 90 days. Source: Exponential.fi
Variable returns mean that DeFi investors are constantly looking for new and better investment opportunities and “hunting” for higher returns. This aspect shortens the average investment horizon and the holding period of the assets.
8. Use of On-Chain Analytics
When you use blockchain, all of your transaction history—your digital footprint—becomes public.
This opens up a creative use case for AI technology to help a robo-advisor create even more personalized investment portfolios based on your on-chain profile. Some DeFi robo-advisors like One Click offer such an AI-guided portfolio creation process.
One Click Crypto Onboarding user interface
9. You are in control of your wealth
The benefit of decentralized technology is that it allows for self-custody: you are no longer dependent on banks and you do not need to transfer your funds to an outside party for management. With blockchain, you are free to choose all of DeFi’s investment opportunities, and you retain sole control of your wealth and decisions.
Of course, this aspect comes with advantages and risks. Funds are only as secure as your private keys. Find out about self-custody and how to protect your assets.
10. DeFi Risks
Aside from losing private keys, there are various risks posed by DeFi: smart contract hacks, governance, Oracle exploits, stablecoin de-pegs – each of which is important to understand when evaluating investment opportunities in DeFi.
Decentralized finance and blockchain technology created a whole new investment sector that attracted many investors and speculators worldwide.
Proven robo-advisory products in traditional markets can offer an even more significant advantage when applied to DeFi.
Investing in DeFi is prone to higher risks and rewards, a shorter investment horizon, and a wider range of options — all aspects where robo-advisors bring the advantage.
By simplifying the yield discovery process, providing personalized recommendations, and automating rebalancing, robo-advisors are on track to become an indispensable tool in the hands of crypto and DeFi investors.
Disclaimer: This is not financial advice. This report is for educational purposes only and does not constitute investment advice, a solicitation to buy or sell any assets, or encourage the reader to make any financial decisions. Please use caution and do independent research
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