In at the shallow end. DeFi users limit risk with pooled funds
By Paul Golden
Updated
Crypto investors who feel unable to keep up with developments in the DeFi space can access a growing number of investment clubs where assets such as USDC are pooled and insights shared.
Legendary American comedian Groucho Marx once wrote that he wouldn’t want to belong to any club that would accept him as a member.
But then he wasn’t trying to negotiate a highly volatile financial market where values are impacted by everything from influencer tweets to rug pulls.
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Investment clubs have sprung up to ease investor concerns, promising to share the burden of monitoring shifts in the DeFi market – as well as fees and gas costs - across large groups.
Ramon Recuero is the founder of Babylon Finance, which claims to be the first decentralized asset management protocol where funds are owned and led by the community and has its native token BABL.
He says the benefits of investing through an investment club compared to going it alone include tax consolidation.
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Tax benefits from pooled DeFI investment
Investment clubs can execute hundreds of DeFi operations searching for returns and in certain jurisdictions, members are able to consolidate all of these taxable events into just two transactions - deposit and withdrawal.
“Investors also get access to active management handled by experts,” he says.
“It is literally impossible for any individual to stay up to date with all that is happening in DeFi.”
Joining an investment pool where capital is pooled and market insights are shared is beneficial because it helps to cushion risks or losses, adds Brian Pasfield.
He is CTO of decentralized money market Fringe Finance which partners with a number of blockchains including Polygon (MATIC).
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“With many investors researching each product, less work is required from each individual investor and the chances are that more beneficial opportunities will be earmarked across the board,” he says.
“It is also possible to jointly accumulate capital that will exceed the minimum threshold for entering early access opportunities, which is difficult for private investors to do on their own.”
According to Ryan McCall, CEO of crypto asset investment platform Zerocap which offers a number of strategies including a Bitcoin (BTC) Fund, shared experiences can be a great way to learn and understand complex strategies.
In addition, depending on how big the community is, individuals will get a general sense of market sentiment from the perspective of other investors, which can assist in making decisions.
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There are several platforms on the market that help investors create on-chain investment clubs, such as Syndicate which uses tokens including ETH and USDC.
“When joining a DeFi investment community, investors need to look for investors and projects with legitimate and validated experience as there could be a lot of misinformation/manipulation in these unregulated markets,” he adds.
“There are many benefits for DeFi investors in using these services as it allows them to create an unlimited number of on-chain investments clubs run as DAOs on Ethereum with a wallet (Metamask, Gnosis).
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This creates a legal entity for off-chain investments and compliance,” says Tarun Gupta, founder and CEO of crypto treasury management platform Coinshift.
Grayson KYC, vice president of growth at DeFi protocol Weave which recently played a critical, if unwilling role in the UST saga, agrees that investment clubs are a more efficient means of reaching new projects and collecting different views on how to do it as a group.
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You also get to hear people from different backgrounds and thus understand sentiment,” he says.
“The downside is that you might be hearing a financial recommendation from a random person or receiving lots of paid-for recommendations.
My advice would be to find a group of people you can trust and debate with and conduct your own analysis on each investment suggestion from the community.”
There are many open and closed groups on platforms such as Twitter, Telegram and Reddit that are used to share information and pose genuine questions (good), promote particular strategies and/or tokens (good or annoying, buyer beware), and host pump and dump groups (bad, potentially illegal).
“Investors should look to join communities with open dialogue, a great community manager, and where promotional activity is kept to a minimum,” says Manuel Rensink, head of DeFi strategy at Securrency, a blockchain-based financial markets infrastructure company.
For a next level investment club, investors could consider buying votes (tokens) in an investment DAO.
Several investment DAOs have prominent venture capitalists as members and submit detailed proposals for communities to vote on.
However, DAOs also come with their own governance challenges so once again the importance of investors doing their own research cannot be overstated.
Gupta agrees that it is important to look into the quality of other members in the club and also recommends checking the framework and security of the platform in terms of where the club was created as well as historic returns and quality of investments to date.
“The big advantage when going through your own due diligence process in this space is that all the data is available since funds and transactions are verifiable on-chain,” he adds.
In a trustless ecosystem, the community’s decisions must not be authoritative and should consider all members’ suggestions. “Two good heads are better than one and the more come together to invest, the better the chances of success,” says Pasfield.
“However, the organisational structure is fairly important for this, as are incentives to make sure that action is taken in an unbiased fashion that benefits members.
A ‘green flag’ to be on the lookout for when joining these communities is a group that educates its less experienced users about the risks and potential downsides of investing.”
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