FORMATION FI: The Torch Bearer of Risk Parity Movement in DeFi.
Prologue: The Journey to Absolute Return Starts Now.
LET’S FACE IT: EVERY YIELD COMES WITH RISK.
As another dawn breaks on a day of wild crypto swings, we’re all waking up to see the same tired DeFi memes. Diamond and paper hands. Buy the dip. Few understand.
Everyone loves to talk about their DeFi winnings, but hardly anyone talks about the losses.
Why?
Because losing money is painful.
Being rekt is even more painful.
Crypto is volatile. We all know losses are a real potential, even as the market goes from strength to strength. But we ignore it.
Then comes a day like yesterday, or the countless ones before it. Wild swings, profits wiped out. But that’s crypto, right? Just pick yourself up, spread some memes, then back to the same blunt strategies. Maybe next cycle you can get the timing right.
There must be a better way.
DeFi is supposed to be the future of finance. A new transparent and open world of infinite possibilities. So how does it manage to be so complicated and yet so simplistic? So advanced yet so rudimentary?
DeFi needs to start taking risk and loss seriously, or it can’t evolve to the next level.
Formation Fi is bringing the risk mitigation strategies which let hedge funds conquer the stock market to crypto, for everyone to use.
THE RISK PARITY MOVEMENT
The traditional stock market has always been dominated by huge players and been inaccessible and unavailable to retail investors like you and me. They claim it’s for our own protection, but it’s really to keep us out of the game.
The highest-performing hedge fund strategies are only available to large pension funds, family offices, governments, and school endowments, where they can both charge high management fees and receive the carried interest. It’s completely unfair.
But just because the game is rigged in their favour, doesn’t mean they aren’t playing it well. There’s plenty to learn, even as we try to make these institutions obsolete.
DeFi has revolutionized investing, opened up a playing field that was once walled off to all but the richest few. But in turning our backs on Wall Street, we’ve abandoned almost everything that we’ve learned about sound investment.
We’re not even reinventing the wheel — we’re stubbornly refusing to admit that wheels exist.
Traditional centralized finance might be unfair, but there’s decades worth of hard-won knowledge and strategy which shouldn’t be thrown out as we move on-chain.
One of the most famous and best-performing engineered investment strategies, used by traditional finance heavyweights like Bridgewater Associates and AQR Capital Management, is risk parity.
Risk parity is a strategy laser-focused on balancing risks. Instead of only considering APY, a risk parity strategy will invest in different asset classes and use leverage to improve returns while keeping risk under control.
Ray Dalio, best-selling author and founder of the largest hedge fund in the world, Bridgewater Associates, championed risk parity based on decades of research. He used it to manage the legendary All Weather fund, growing it to a whopping $150 billion AUM.
A traditional risk-parity balanced portfolio might look like this:
- 40% : long-term treasuries
- 30% : stocks
- 15% : intermediate-term treasuries
- 15% : precious metals and commodities
Obviously, the devil is in the details, but you get the idea.
The trick is to have a broad portfolio spread across non-correlated assets. That means that when a market drops due to environmental factors, it doesn’t take your whole portfolio with it. Some assets will drop, some will rise, others will stay stable. In this way you ensure long-term stability AND you maximize your chances of hitting every upswing.
YIELD FARMING 2.0
Applying portfolio management techniques, especially risk parity, to crypto has traditionally been impossible. That’s because portfolio management relies on selecting uncorrelated assets, which has been out of the question thanks to the behemoth in the room.
Bitcoin.
Bitcoin has been such a dominant force in crypto that for most of its lifespan *everything* has been correlated to Bitcoin. Sure, there were cycles when this correlation was weaker or stronger, when alts would break out, or ETH would rise or fall a little faster or slower. But these were just minor deviations.
Where Bitcoin prices went, everything followed.
In turn, Bitcoin has largely been correlated with the stock market. If the S&P 500 went up, Bitcoin prices would too and vice versa.
Until DeFi changed everything.
With the introduction and wide adoption of collateral-based lending protocols, MakerDAO, Compound, and AAVE, we got a new crypto-asset class that not only produces a return (price appreciation) but also a yield (interest). Some DeFi assets behave much like a high-yield corporate or government bond with coupons.
This is why some people call DeFi the internet bond.
For the first time, the charts look radically different. Bitcoin is no longer an unstoppable force, dragging everything in its wake. The S&P 500 and crypto are no-longer in lockstep.
For the first time in the history of cryptocurrency, we have non-correlated assets within crypto, which means we’re within striking distance of the principles of risk parity.
Better yet, the tokenized nature of crypto, combined with the composability of DeFi, means we can capture a whole range of strategies under the umbrella of a single protocol, allowing people to tailor it to their specific risk appetite. Instead of hoarding the secret and charging the moon, like the hedge funds do, Formation Fi is open to everyone, harnessing the power of Open Source and decentralization.
And if all this talk of risk management sounds timid in the all-or-nothing world of DeFi, where APY is king, consider this:
Formation Fi’s risk parity protocol means the same or better APY can be generated at a lower overall adjusted risk.
So how does it work?
INTRODUCING RISK-PARITY SMART YIELD FARMING.
Formation Fi’s risk parity protocol is the first chain-agnostic, algorithmic, defi yield-management platform driven by the risk parity portfolio management strategy.
That means it’s automatic, transparent, can be tailored to everyone’s risk appetite and bag size, and won’t be tied to a single clogged chain.
It’s the latest and the most sophisticated attempt to create a DeFi risk-parity robo-advisor to algorithmically calibrate asset allocations across core asset classes such as stablecoins, alphas, and betas based on volatility and environmental changes. All under a single unified interface that finally connects all the different DeFi Lego in a clear and simple way.
This simplicity is key.
Chasing different yield farming strategies, different chains, and constantly changing technical layers is painful.
Who cares what layer you’re on? All that matters is making money. DeFi should be as simple as a single click to make money. And it can be.
You select your acceptable level of risk with a minimum amount of commitment determined by the algorithm in the top reserve currencies such as BTC, ETH, USDT, or BNB. The protocol will then automatically configure and recommend a chain-agnostic portfolio of yield farming strategies, tailored specifically to you and engineered to offset risks posed by both bull and bear cycles.
The table below shows some example strategies, but the possibilities are literally endless.
The protocol also uses a small amount of leverage to boost yield while maintaining the optimal level of diversification.
The protocol will then mint you an index token that tracks the underlying cross-chain DeFi assets and yield farming strategies. That’s all there is to it. No need to track and manage a million different assets. No need to go bankrupt from gas fees. Just let the index token do its work and track your yields in the dashboard.
Formation Fi will save you valuable time, headaches, and most importantly, money.
Best of all, the Formation Fi token is itself a potentially valuable crypto-asset. The index token can be sold, bought, or swapped like any other ERC-20 token. It can also be deployed into other yield farming strategies or added into a liquidity mining pool to further boost yield at the holder’s discretion. Because double dipping matters, and multi dipping is one of the things we love about DeFi!
Formation Fi is built on the following guiding principles:
- Chain-agnostic
- Low Transaction Costs
- Radical Simplification
- Investment over Speculation
- Communal Effort
- Long-Term Focus
- Constant Innovation and Safety
SMART YIELD FARMING VIA DAO
And that’s just the beginning. Our focus is to better manage your risks while protecting your hard-earned yield through thick and thin. But imagine what we can accomplish as a community of smart yield farmers. The Formation Fi DAO will harness the wisdom of the crowd to make the protocol more accurate and more powerful.
The risk parity protocol is just the first chapter of Formation Fi’s ever-expanding story.
And we have many more chapters to write.
Join us.
PS: Clap this out! This is the real stuff. Welcome to Chapter 1.
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***The above references an opinion, and is for information purposes only. It is not intended to be investment advice.
