Understanding dHEDGE in One Article

Introduction

Asset management refers to managing a client’s assets according to the terms, conditions, requirements, and restrictions stipulated in the contract. This service typically involves providing securities, funds, and other financial products while charging certain fees. In traditional asset management, securities and funds are predominant. As the manager operates the assets, investors lose control over this portion of their funds, which means traditional asset management imposes certain entry barriers on investors and fund managers, including requirements for investors’ funds and backgrounds, and basic qualifications for fund managers. Additionally, the involvement of a third-party custodial bank is necessary to prevent rash actions by the fund manager, limit fraudulent behavior, and resolve trust issues between the fund manager and investors, thus ensuring the safety of both parties’ funds to a certain extent. However, this also leads to increased costs and longer transaction processing times.

As the DeFi market expands, many investment institutions enter the scene and gradually transfer traditional financial operations to the blockchain realm. Currently, the total value locked (TVL) in the DeFi market is up to $100 billion, with asset management projects accounting for about $600 million, indicating significant room for growth. For investors, the DeFi market offers lower entry barriers and higher returns than traditional financial products, but it also presents high risks due to information asymmetry. For fund managers, building their investment products on DeFi generally does not require entry qualifications, and there is greater scope and freedom in investment strategy. As a result, asset management projects have emerged, mainly using smart contracts to address trust issues between investors and fund managers, reducing the regulatory and auditing costs of traditional financial markets but also increasing on-chain costs such as GAS fees. dHEDGE, launched in 2020, has gone through several iterations over the years. This article will explore its product strategy and analyze its economic model and current development.

What is dHEDGE?

dHEDGE started as a decentralized on-chain asset management protocol based on Synthetix, aimed at providing a third-party asset management platform for fund managers and investors to lower the barriers to investment. The official product, v1, launched on the Ethereum mainnet in October 2020 with asset liquidity provided by Synthetix; in May 2021, v2 was implemented on Polygon, later expanding to Optimism. The v1 version was recently announced to be officially closed and undergoing asset migration, with current product support for Polygon, Optimism, Arbitrum, Ethereum, and Base networks.

The team was established in July 2020, and by November of the same year, they completed a seed funding round of $1.8 million led by IOSG; in October 2021, they also received $2 million in funding led by Synthetix. Having developed for over three years, the protocol initially attracted a significant amount of funds and a user base, but its growth has stalled, holding a small market share and facing developmental bottlenecks.

Technical Architecture

The dHEDGE protocol primarily consists of Factory and Funds contracts. Fund managers must use the Factory contract to create asset pools, and the Funds contract for operating within these pools. Investors interact with the Funds contract to join or exit asset pools. Besides these two core smart contracts, the architecture includes front-end and back-end components responsible for interaction and data processing.

Source：dhedge docs

Product Strategy

On the dHEDGE platform’s main interface, there are six functionalities: (1) Investors can browse information about various asset pools and choose to invest through the “Explore” module, where asset pools are Vaults created by fund managers that execute specific investment strategies; (2) Investors can view the status of their investments in the “My Deposit” section; (3) Fund managers can freely create and manage their asset pool products via the “Manage” module; (4) Participate in DHT staking activities and Performance Mining through the “Legacy DHT” module; (5) Holders of DHT can participate in community governance through the “Governance” module.

The following will detail the strategy features currently launched on the dHEDGE platform:

Creating Asset Pools

Fund managers can create asset pools on the dHEDGE platform via the Factory contract capable of executing certain investment strategies. Most asset pools are open to all investors, but fund managers can also set whitelists to restrict specific investors from entering. Fund managers can customize the name of the asset pool, the token symbol, and the fund manager’s name during creation and set the performance fee for the asset pool, which can range from 0-50%. These parameters can still be changed after the asset pool is created.

Source: dhedge

Upon completion, fund managers automatically participate in dHEDGE’s ranking competition, with results published on the Leaderboard. Rankings are based on the fund manager’s score (Score), calculated using the platform’s formula, primarily based on risk-adjusted returns to rank the top managers first.

Fund managers’ income comes from performance fees, which are charged as a percentage of the total returns generated by the asset pool and paid as asset pool tokens. This means that performance fees are only effective when the value of the asset pool tokens exceeds the High-Water Mark; if it falls below this value, no fee is collected. Additionally, top-performing fund managers can receive DHT rewards. Performance Mining Rewards are DHT rewards given to investors in well-performing asset pools, which are locked for three months. This mechanism is designed to incentivize participation.

The dHEDGE platform collects a 10% management fee on the performance fees earned by fund managers, and these fees are used each quarter to fund the platform’s DHT rewards and Performance Mining Rewards.

Investing in Asset Pools

The dHEDGE platform offers a variety of investment products and corresponding information to assist investors. Investors enter the “Explore” section, where the platform’s top-ranking asset pools (Top vault) are initially displayed, including the size of the asset pool, return rates, and risk coefficients, with a risk coefficient of 1 set for pools with smaller downside fluctuations, and up to 5 for those with greater historical volatility.

Source: dhedge

Next is the Leaderboard section, which ranks asset pools based on performance scores. In addition to seeing the rankings and scores of the asset pools and fund managers, investors can also view the total value of the asset pools, returns over different periods, risk indices, and fee details. By clicking on a specific asset pool, investors can see its size, return performance, and fee information.

Source: dhedge

Economic Model

The native token of dHEDGE, DHT, was launched in September 2020 with a total supply of 100 million tokens. According to its token allocation, about half of the tokens are still to be distributed, accounting for 51.1%. Of the allocated tokens, the core team received the largest portion, 18.5% of the total supply, followed by seed round investors at 13.01%; tokens sold at auction make up 6.69%; 5.4% of DHT is allocated for the protocol’s future strategic development; trading partners received 3.75%; and advisors were allocated 1.5%.

Source: dhedge docs

In DHT’s unlocking schedule, tokens allocated to the core team, seed investors, and for strategic development will be linearly released over three years; tokens sold at auction have no lock-up period; tokens distributed to partners will be linearly released within one year; and tokens held by advisors will be released over two years. The following table shows the DHT unlocking schedule, not including future rewards or other incentive plans:

Source: dhedge docs

DHT primarily serves two functions: holders can collect platform management fees and earn staking rewards (voting rights and quarterly rewards). The platform management fee is 10%, and staking token rewards vary depending on the lock-up period (ranging from 1 month to 3 years), with longer lock-up periods providing greater governance influence and profitability.

Users staking DHT and Vault tokens DHVT (dHEDGE Vault Token) will receive vDHT, which increases linearly over time. Users can add to their DHT stake at any time. The amount of vDHT affects governance rights.

To maximize DHT staking rewards, the governance rights protocol for vDHT has set up total rewards for staking positions that meet the following conditions: (1) the staking period is at least nine months; (2) the returns from the DHVT since staking began to exceed 50%; (3) the USD value of vDHT relative to the initial DHVT exceeds six times.

Current Development

Currently, the dHEDGE platform supports networks like Ethereum, Optimism, and Arbitrum, with a total locked value of approximately $38 million across 2605 asset pools. These pools are mainly distributed on the Optimism network, accounting for over 50% of the TVL with 587 asset pools.

Source: dhedge

The protocol has over 1700 fund managers who have collectively earned $4.43 million in performance fees, while the platform has collected less than $500,000 in management fees. This demonstrates the platform’s profitability, although it primarily comes from Ethereum (v1), with earnings from other networks not even reaching $10,000. The current business performance data is not optimistic, indicating a development bottleneck.

Conclusion

dHEDGE primarily serves as a third-party asset management platform for fund managers and investors, allowing fund managers to create investment products freely. The platform has a relatively objective evaluation system, enabling investors to find well-performing and suitable asset pools based on the platform’s rating system. The asset management track is still in its early stages of development. Since its launch in 2020, the protocol has captured only a limited market share, struggling to attract new users and facing a growth impasse. Looking forward, it needs to find breakthroughs.