Three Things from 2021: Part 2 - Decentralized "Asset Management"

April 22, 2022

Head of WisdomTree Onchain

At WisdomTree, we love ETFs. We truly believe these are one of the more, if not the most, consumer-friendly financial innovations of the past 30 years. At the core of ETF mechanics is a process called creation/redemption. Creation is the process by which new shares of an ETF are created from cash or an underlying basket of securities. Redemption is the inverse. If you’re a large financial institution (called an Authorized Participant or AP), you can go directly to the ETF sponsor to create or redeem shares of an ETF, which you can then (through other intermediaries) ultimately distribute to end investors.

In the crypto economy, some developers (like Index Coop and TokenSets) have started bringing these same creation/redemption mechanics to crypto tokens. A user can create their own “token of tokens” that will own a basket of underlying tokens. The user can do this transaction by contributing either the underlying tokens or a cash-like token (requiring a process by which the mechanism purchases the desired basket). A user can then hold that token to track the performance of the underlying basket.

While there may be a few off-the-shelf indexes, this can be fully customized from an underlying universe of eligible tokens (in this example, Ethereum-based tokens that trade on decentralized exchanges). There is no fund sponsor on the other side either—the only interaction the user would have would be with computer code (hopefully through a clean user interface). And instead of needing to be a large financial institution, any individual can do this. So, if you’re interested in buying a set of DeFi tokens (whether from an existing index or your own), that’s possible to do with this technology².

Today, this process can be hard for the average user to navigate, and with current Ethereum gas fees, it can be prohibitively expensive. Automated index rebalancing also presents issues at scale. And, of course, the universe is limited to not only crypto tokens but a subset of crypto tokens today. But with all this said, it is an undeniably interesting development, combining some of the great elements of ETFs and direct indexing.

[2] For a great, detailed discussion on these products from an ETF guru, please read Dave Nadig’s “Tokenize Absolutely Everything” (etfdb.com).

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Head of WisdomTree Onchain

Will Peck serves as Head of WisdomTree Onchain. In this role, he oversees WisdomTree’s digital asset, crypto and blockchain initiatives. These initiatives include crypto asset management products, tokenization and WisdomTree’s digital wallet offering, WisdomTree Prime. Previously, he served as Head of Strategy and Emerging Technologies for WisdomTree. Prior to WisdomTree, he worked in investment banking for Bank of America Merrill Lynch covering a range of financial services companies. Will serves on the Board of Directors of Securrency, Inc., a technology company focused on blockchain-based financial services infrastructure. He graduated cum laude from Harvard University.

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