First Mover: Pie Anyone? DeFi Pushes ETF-Style Investing Toward Decentralization

PieDAO's push to decentralize itself shows the fast-growing DeFi industry's efforts to retrofit investment vehicles for digital-asset markets.

AccessTimeIconJul 9, 2020 at 11:51 a.m. UTC
Updated Sep 14, 2021 at 9:28 a.m. UTC
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Entrepreneurs in the white-hot arena of decentralized finance have used cryptocurrency technologies to build automatic systems that might someday challenge or even supplant traditional banks and exchanges.

Now, DeFi is taking on the asset-management industry, and already launching a range of investment products designed to capitalize on its own success.

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One such project is PieDAO, a so-called decentralized autonomous organization conceived and developed by a group of DeFi developers headed by Berlin-based DexLab. Earlier this year PieDAO raised around 2,250 ETH (~$600,000) for digital token DOUGH in a pre-seed round. The network went live in March, just as bitcoin and most traditional financial markets like stocks were crashing due to the spreading global pandemic.

The PieDAO platform, a decentralized application built atop the Ethereum blockchain, produces its own incarnation of digital tokens called “pies.” They work like tokenized investment funds whose value is linked to a basket of other digital tokens, which in turn are sourced from a decentralized liquidity pool known as Balancer.

In April the project rolled out its first pie, called BTC++, which is backed by tokenized versions of bitcoin. And stakeholders in the project have since pushed out a second pie called USD++, backed by U.S. dollar-linked stablecoins.

But PieDAO's first real push toward full decentralization started last month, when investors were allowed to start buying DOUGHs directly from the project in exchange for ether, the native token of the Ethereum blockchain, with a minimum deposit worth roughly $500. For now, DOUGHs aren’t publicly traded.

Such tokenized vehicles have been described by analysts as the digital-asset version of exchange-traded funds, or ETFs, a type of investment vehicle in traditional financial markets that can be traded like stocks.

“It’s very fascinating to see more experiments to re-invent financial applications we have never seen before,” Soravis Srinawakoon, co-founder and CEO of Band Protocol, a cross-chain data oracle for the DeFi space, wrote in a Telegram message.

Pie chart showing assets in basket backing PieDAO's BTC++ tokens.
Pie chart showing assets in basket backing PieDAO's BTC++ tokens.

PieDAO isn’t the first ETF-like provider for the digital asset space. The Set Protocol, also on Ethereum, allows users to invest or even create their own baskets of assets called “Sets,” which like Pie are fully tokenized. Another option, according to a report Monday from the cryptocurrency analysis firm Delphi Digital, is the sDEFI token from Synthetix.

But PieDAO takes the tokenization concept a step further, since the DOUGHs give holders the ability to influence the investment vehicle’s management - on matters ranging from the weight of the underlying investment indices and methods for asset-rebalancing, to the level of fees charged and when to pay out a cut of those fees.

The issuance and transfer of the DOUGHs works to democratize the governance of the investment vehicle, roughly analogous to the way shareholders can own stock in a money-management company.

So far, only 131 addresses hold DOUGHs, covering the original token holders - including founders, core developers and early investors - as well as new buyers, according to block explorer Etherscan.

DexLabs CEO Alessio Delmonti, who, according to his LinkedIn profile, previously worked as a mobile-app developer, told CoinDesk in a direct message via Twitter the plan is to sell DOUGH tokens currently held in a reserve fund to new buyers. The goal is for 75% of the total supply to be distributed by early 2021, up from just over 50% now, he said.

“Ultimately it is up to the DAO to vote the proposal in for final distribution,” Delmonti said. The project’s white paper still hasn’t been published because it’s still in “active writing and currently under consideration of the community,” he said.

PieDAO’s community members are already holding discussions on plans for new pie tokens, according to Delmonti. There’s a Google spreadsheet that summarizes some of the proposals, including new pies backed by baskets of DeFi-related assets such as tokens from the ChainLink, MakerDao and Compound projects.

“PieDAO is an interesting solution which essentially combines DAOs and DeFi, to create a new way to manage and create crypto index funds,” analyst Alex Gedevani wrote in Monday’s Delphi Digital report.

While still small, DeFi is one of the fastest growing corners of the digital-asset industry. Total value locked (TVL) in DeFi applications – a proxy for how much money is actually put into the systems – has roughly tripled this year to the equivalent of about $2.1 billion, according to analytics site DeFi Pulse.

Chart of total U.S. dollar value locked in decentralized finance protocols.
Chart of total U.S. dollar value locked in decentralized finance protocols.

This market exuberance has contributed to a doubling this year in ether’s price. Lender Compound saw its market capitalization shoot up to $1 billion within a week of its public release last month from less than $10 million initially, according to CoinGecko.

Skeptics of the projects have also pointed to the risks of putting money into these little-tested tokens, which can be prone to malicious exploits along with rampant speculation and mispricing.

The PieDAO tokens already trading have benefited from this year’s gains in cryptocurrency markets; that’s true for BTC++, for example, because its price generally tracks bitcoin.

Price chart of PieDAO's BTC++ tokens
Price chart of PieDAO's BTC++ tokens

For now, the project is still tiny even by the standards of the nascent cryptocurrency industry; the market value of BTC++ is about $1.4 million currently, and it’s $2.7 million for USD++. For comparison, bitcoin, the oldest and largest cryptocurrency, has a market value of about $173 billion, and No. 2 ether is $27 billion. 

The cryptocurrency industry is replicating businesses long dominated by Wall Street and banks, from margin loans and derivatives trading in digital-asset markets, to blockchain-based payment and lending systems. Asset management is another frontier; the thinking is that many ETF-style investment vehicles will eventually be tokenized for trading in faster, cheaper and more customizable digital-asset markets. 

And the cryptocurrency industry isn’t waiting around, with the U.S. Securities and Exchange Commission having thus far refused to approve a bitcoin ETF. 

"Instead of ‘trusting’ a single authority like an asset manager, you are trusting the wisdom of the crowd with these decentralized autonomous organizations,” Srinawakoon said. “Is it proven? No. Is it interesting and can potentially be disruptive? Yes.”

Tweet of the day


Bitcoin watch


BTC: Price: $9,368 (BPI) | 24-Hr High: $9,475 | 24-Hr Low: $9,286

Trend: The path of least resistance for bitcoin appears to be on the higher side. 

The cryptocurrency is trading near $9,400 at press time, having jumped 2% on Wednesday to confirm an upside break of a falling channel, represented by trendlines connecting June 1 and June 22 highs and June 2 and June 15 lows. 

The bearish channel breakout indicates the downward move from the June 1 high of $10,429 has ended and the bulls have regained control. The cryptocurrency has also flipped the widely-tracked 50-day moving average (MA) resistance into support. The MA is currently located at $9,373. 

The breakout is backed by an above-50 or bullish reading on the 14-day relative strength index. Further, the MACD is now producing higher bars above the zero line, a sign the upward move is about to gather steam. 

As such, one may expect bitcoin to challenge the resistance at $9,800 (June 22 high) over the next few days. Acceptance above that level would expose the June 1 high of $10,429. 

The bullish case would be invalidated if the spot price drops below the 10-day SMA, currently at $9,373. 

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UPDATE (July 13, 13:30 UTC): A previous version of this article said PieDAO had already raised $5 million in a seed round, this has since been corrected.


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