The ETF Market Is Broken. Can Decentralization Fix It?

key takeaways

Traditional ETFs fail crypto markets with inefficiency. ETFs have an expiration, and thus funds must “roll” into a new ETF if the investor isn’t ready to withdraw, which can incur average fees of 13% annually, if maintained for a year.
It’s a community-based investing model that mitigates risk and solves the TradFi-induced problems with traditional crypto ETFs.

Some would say it’s only a matter of time before the entire financial industry is decentralized. With new crypto ETFs coming out frequently, it would seem that ETFs are doing perfectly fine, offering risk-managed exposure to alternative assets. However, I sat down with the team building D-ETF, and they feel differently.

The Problem With ETFs

Ask a DeFi (decentralized finance) enthusiast what their vision for the space is, and chances are they’ll suggest everything will one day be decentralized. But as TradFi organizations attempt to integrate digital and decentralized assets, it’s becoming increasingly clear that the two paradigms don’t always blend well.

Trying to use a traditional ETF to capture crypto price movements is a great example of this.

According to the D-ETF team, “Most of the approved ETFs are futures based, meaning the ETF issuer is not actually holding the simulated asset. So these products are in theory not adding value to the crypto industry as a whole. Furthermore, we see an issue regarding trading hours in general, especially on crypto products; most news happens outside of trading hours, making investors potentially vulnerable to drastic changes while markets are closed.”

Beyond logistical and ideological incompatibility, traditional ETFs fail crypto markets with inefficiency. With futures-based ETFs, funds must “roll” into a new ETF when the futures expire if the investor isn’t ready to withdraw, which can incur average fees of 13% annually, if maintained for a year.

To top it off, crypto ETFs face numerous roadblocks, including excessive regulation, high minimums and expensive and inefficient KYC.

Decentralized ETFs

The team at D-ETF proposes to solve these issues by decentralizing ETFs. The project uses a DAO to invest in a range of cryptocurrencies and offers users the ability to invest in a single token. By holding the D-ETF DAO (decentralized autonomous organization) token, investors gain both diversified crypto exposure as well as the ability to vote on which currencies make up the DAO’s portfolio.

It’s a community-based investing model that mitigates risk and solves the TradFi (traditional finance) problems with traditional crypto ETFs.

DAOs are changing the way the world organizes, and the finance industry can profit from these changes, too. When asked whether a DAO was necessary for a decentralized crypto ETF, the D-ETF team said, “In the traditional world, you might have one or just a few people making decisions on behalf of all the investors. With a DAO, you can include the investors in the direction of the fund. Investors, both retail and institutional, gain much more autonomy and influence in their investment decisions.”

Keep in mind that having a DAO only benefits a protocol when that DAO is truly autonomous. Unlike some DAOs in the space, the D-ETF DAO smart contract automatically executes the results of community votes, ensuring both transparency and efficiency.

Come One, Come All

Another key difference between traditional ETFs and a decentralized crypto ETF is ease of use. With D-ETF, all a potential user needs is a MetaMask wallet and an internet connection. In the near future, TradFi onramp processes will also be released.

Barriers to entry are low, according to the team:

“D-ETF is making it more convenient for crypto investors to get a wide exposure with less effort and lower costs. With transaction fees across DEXs sometimes as high as 100-800 USD per token swap and slippage decreasing the value of your investment, a relatively high investment is required for a trade to be worthwhile.
When buying the D-ETF, on the other hand, you pay a gas fee once and get exposure to 10-20 different tokens.”

Investing is a very personal decision that requires entire communities to transform markets. As old centralized paradigms shift to new decentralized ones, markets are likely to see more personal influence over investing processes. Paradigms change, but risk is ever-present. Participate with caution, whether in DeFi or TradFi.

This article was sponsored by D-ETF. To learn more about D-ETF, explore their whitepaper and follow them on Twitter. They are holding a limited community sale this month, which you can learn more about here.

The content of this webpage is not investment advice and does not constitute any offer or solicitation to offer or recommendation of any company, product or idea. It is for advertising purposes only and does not take into account individual needs, investment objectives or specific financial circumstances.