Grantfin Offering Update
Two years after founding Grantfin, we are now actively managing our investment strategy. We are investing in DeFi liquidity pools using a proprietary investment strategy. What makes this space interesting to us is that it is liquid (clients have weekly liquidity) and yields are high (36% APY target rate). It has been a long road and we are immensely appreciative to all of you who have continued to support our efforts. In the below update, we are going to share some background on what our investment alpha is, detail how our strategy works, offer some detail on the ‘smart contract,’ and offer some details on our plans going forward. For anyone who follows Cathy Wood and Ark Investments, you may have seen their recent publication Big Ideas for 2024 where there is a full section on smart contracts and it is a great primer if you are interested.
GrantfinxDatamint
Grantfin built out the GrantfinxDatamint investment strategy last summer. After several months of beta testing, we went live with a smart contract in October of 2023. The strategy is to capture alpha from providing capital to on-chain liquidity pools. For those who are not aware of the role of liquidity pools in decentralized finance, there is around $3 Billion of assets that trade each day through decentralized exchanges (DEXs) where investors are transacting one token for another. The transactions are not cleared in the traditional way – there is no DTCC or clearing company. Investors transact in a non-custodial transaction where through a smart contract, they pay one token and receive another. The settlement is instant and allows investors to trade 24/7 in an efficient and transparent way. The liquidity that investors access is provided by third party investors (like Grantfin). We are not lending but using assets to provide liquidity. We earn fees each time a transaction goes through but we can sometimes find ourselves holding assets that are falling in price resulting in a loss.
Our strategy uses advance technology and predicative modelling to opportunistically enter liquidity pools when fee income is accelerating as a function of volatility. We have built the rules-based investment strategy using historical trading and machine learning to optimize the investment in a risk-managed way. Our investment strategy is run through the use of a smart contract. As we mentioned earlier, the liquidity pools and DEXs are also run utilizing smart contract technology. Our smart contract deploys our investment strategy and moves our assets in and out of the liquidity pools while the DEX’s smart contract manages the ‘order book’ flow. The smart contract engages with the DEX’s smart contract and all transactions are recorded on the public blockchain.
The bet we are making is that the premium earned in specific pools outweighs the market risk of providing liquidity. And as the DeFi markets grow, we are seeing more investment opportunities where we can capture alpha. The key risk that we have is gap risk of an extended move with no pricing and this is a key consideration when we choose which pools we include in our investment strategy. As a result of the non-custodial nature of how DeFi markets work, we do not incur counter party risk nor do we have settlement risk which are two key concerns of traditional market makers. We take significant precautions to mitigate the possibility of any hacks on our own smart contracts and will continue to do so.
Another new term for many traditional investors is the smart contract. When we looked at ways for investors to access this market, we considered creating a new fund, however, the nature of the underlying investment and some of the regulatory challenges led us to instead create a smart contract. In October, we deployed our ‘Smart Contract’ on the Ethereum blockchain. The investor buys the smart contract and holds the contract in his/her digital wallet. The investor can see the underlying holdings of the smart contract. Liquidity to sell the smart contract is weekly. Although not everyone is comfortable investing or holding smart contracts, they are straightforward to hold, transparent, and can be traded 24/7 on-chain.
Anyone who has launched a back-tested strategy knows that past performance is not always a good predictor of future performance. The strategy we back-tested showed a performance of 36% per annum with some volatility. Since we went live, we have three full months of performance with a return of 62% annualized. Our better-than-expected performance is a result of higher trade volumes going through the DeFi markets in December and January due to ETFs that were issued. We are confident that 2024 will be an exciting year for DeFi and although it is difficult to predict where the price of Bitcoin and other tokens will be, we believe that the move to smart contracts is in its infancy. As Cathie Wood suggests, there is significant room for growth.
It is our view that most investors are focused on buying and holding tokens such as Bitcoin or Ethereum in hopes of earning returns through capital appreciation. Areas such as providing liquidity to DEX pools is somewhat new, but offers consistent returns, even in bearish markets, thus avoiding the peaks and troughs that investors of tokens can have. Grantfin has built a significant research effort with our partners Datamint and are well positioned for the opportunities that we expect to see in 2024 and beyond.
In closing, thanks so much for your support and keep an eye out for our investment rollout in the coming months. And if you are interesting in learning more about our smart contract, please get in touch.