Decentralized Finance & Risk-managed Yield Portfolios: An Overview

Blockchain technology has introduced new technologies and advancements to the financial industry. This article will explore some interesting developments taking place within the crypto space.

Decentralized finance (DeFi) has grown exponentially since its early days in 2021. DeFi offered a way for investors to earn interest on their cryptocurrency holdings using traditional financial tools in a decentralized fashion.

Yield farming, for example, was one of the most popular DeFi protocols, enabling investors to make money by providing liquidity to upcoming decentralized exchanges (DEXs) and crypto projects. Other tools in the DeFi space included collateralized stablecoins, crypto loan platforms, liquidity pools, and stablecoin staking.

To engage with DeFi tools, investors don't need to sign up for a centralized exchange or submit personal information. Instead, all investors need are their non-custodial crypto wallet (one that lets them control the private keys) and some tokens related to the network they want to use.

For example, an investor will need Ether (ETH) to engage with DeFi apps on the Ethereum network to pay for gas (i.e., when transferring ERC-20 tokens) and as a medium of exchange when using swapping dapps. As the crypto market grew, DeFi's popularity grew with it.

Digital assets have the potential to change how people invest and build wealth. But the difficulty in getting accustomed to DeFi processes slows adoption. Cryptocurrency can be confusing to navigate on its own, and adding in the complexities of financial strategies and technology often stifles curiosity and exploration. Traditional institutions and individual investors interested in entering the DeFi space may find it grueling to build and manage comprehensive yield-generating portfolios.

Spool, a DAO creating a platform to build seamless DeFi products for investors of all backgrounds, launched its Smart Vault creation tool. Smart Vaults enable individuals and institutions to create customizable and diversified yield portfolios. Through a 5-step Smart Vault, or “Spool,” creation process, users can tailor all aspects of their portfolio, including assets, risk models, strategies, and allocations, to their goals.

Spool enables investors to easily participate in DeFi by simplifying previously inaccessible investment products. Through its non-custodial platform, users have access to multiple yield generators while maintaining control of risk appetite and portfolio diversification. 

Built as a toolbox for institutions and individuals exploring decentralized finance, Spool reduces the complexity that often characterizes DeFi product creation. The Spool Smart Vault creation pathway grants user agency over every key parameter of their DeFi portfolio, including:

Users can select from 3 stablecoins, including USDC, DAI, and USDT, to start building the portfolio.

Spool’s native risk model analyzes key facets of yield generators, including APY, TVL, time deployed, code audits, bug bounties, and depth of smart contracts to generate a comprehensive risk score. External risk model providers can create additional models implementing their own assessment criteria, which can be added to the platform once approved by the Spool DAO. This allows capital contributors to choose which model to utilize based on parameters that best suit their needs.

Creators can select and combine multiple strategies to build a diversified yield portfolio. Currently, available strategies use key yield farming protocols and liquidity pools such as Aave, Curve, Harvest, Convex, and Yearn, among others.

Capital contributors can set an adjustable risk appetite for their chosen investments using a sliding scale from 1 to 10. Each setting automatically updates fund allocations to each strategy and the projected APY, which reflects the risk appetite.

Once all the yield generators are selected, Spool creators can set a performance fee to a maximum of 20 percent, generating additional profit from other investors choosing to deposit in the Smart Vault. Spool creators can then name their Spool and connect their crypto wallet, activating the Smart Vault.

The Spool creation feature opens the door for further developments. This includes a Software Development Kit (SDK) built for seamless white-labeled front-end integration by third-party developers, projects, and businesses to utilize Spool’s Smart Vault solution. Additional integrations to Spool’s native infrastructure include user-generated risk models and additional strategy protocols.

“We are incredibly proud to launch our flagship service to any investor or institution ready to make the leap into DeFi,” says Philipp Zimmerer, Core Contributor at Spool. “DeFi is the future of finance, but making its infrastructure accessible to everyone is vital to help it grow to its full potential. Opening our creation toolkit puts Spool at the forefront of becoming the hub for decentralized financial products and services.”