Formation Fi is a startup aiming to revolutionize portfolio management in the world of decentralized finance (DeFi) by introducing risk parity smart farming.
DeFi’s current obsession with speculative yield chasing often leaves out the regard for risk. With risk parity inspired smart yield farming 2.0, users get to tailor their level of exposure while receiving guidance from the protocol, which is engineered to reduce risks posed by both bull and bear cycles.
Formation Fi’s risk parity protocol is guided by the principles of the risk parity movement adopted by top hedge funds on Wall Street, opening up a playing field that was once walled off to all but the richest few.
What is Risk Parity?
Risk parity is an investment strategy that aims to spread risk exposure equally across every type of portfolio asset.
The performance of an investment portfolio is largely dictated by the risk it carries. The riskier its assets are, the higher the portfolio’s upside potential. For example, compare a 100% savings account portfolio with a 100% stocks portfolio; the former has low risk and low returns, while the latter has high risk and a greater chance of large returns. “Traditional” portfolios increase risk by concentrating money in riskier assets, while risk parity portfolios have fixed asset allocations in order to equalize risk contributions. To increase risk, a risk parity portfolio uses leverage.
The fundamental theory behind risk parity strategies is that assets in a portfolio should be balanced by risk, not by dollars. In other words, instead of allocating more money to riskier assets to achieve a performance target, risk parity balances assets by risk contribution and then uses leverage to achieve the performance target.
Risk Parity Smart Yield Farming: How Does It Work?
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 tools in a clear and simple way.
This simplicity is key.
Chasing different yield farming strategies, different chains, and constantly changing technical layers is painful. 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 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.
Guiding Principles of Formation Fi
Early DeFi is a collection of protocols, chains, dapps, tokens, pools and other inventions. Some work together, most don’t. Most only work within their own vertical ecosystems. Investing optimally across them all, one at a time, is virtually impossible manually.
Formation Fi takes a holistic view — aiming to be chain-agnostic and all-inclusive. From the ideals of crypto and Web3 will come the internet of value, where all blockchains are seamlessly connected through a decentralized infrastructure of bridges and relays.
All types of DeFi assets will be able to move from point A to point B quickly and smoothly, with no barriers. Their goal is to make the network dependency irrelevant. In other words, ultimately all users of Formation Fi will be able to add any type of uncorrelated DeFi assets available in the world of Web3 to their portfolio, regardless of the protocols of the asset and those already in the portfolio and claim profits from the network of their choice.
Low Transaction Costs
DeFi investors have learnt that fees can eat into their capital at an alarming rate, becoming a barrier to entry for some of the more complicated protocols. Costs on Ethereum made it nearly unusable in 2020–2021 for many yield farmers, forcing them to move to other blockchains with different scalability, decentralization and security characteristics.
Formation Fi will minimize users’ costs at all opportunities. There are two types of costs to consider: fund management fees and the underlying protocols’ gas/network fees. Most Wall Street hedge funds traditionally charge in excess of 30% of fund profits as management fees and carries interest. Formation Fi will not only charge a significantly lower management fee (only 5%) but will also redistribute a share of the profits to holders of the Formation Fi token, $FORM.
Fees for gas/network and other on-chain services such as oracles will also be kept low. For example, when it makes sense, instead of using expensive price feed oracles, Formation Fi will call sets of APIs or build their own oracles to achieve the same results. Over time and with progressive decentralization, they expect on-chain costs to reduce. Formation Fi will always strive to reduce costs and pass the savings and profits on to their users and token holders.
Many of the first-generation yield farming protocols were thrown together as fast as possible to catch as much of the new booming market as they could. Aspects like the user interface and automation were not top priorities. As a result, 50% of yield farming investing is repetitive and requires a high degree of understanding and attention to detail. This creates a barrier to entry for novice investors, causing confusion and increasing the probability of costly mistakes.
Formation Fi will make the user experience as simple and efficient as possible. They will develop algorithms and bots to predict requirements and remove repetitive tasks. They will design the user experience to be simple and a pleasure to use. Formation Fi aims to allow users to focus on investing instead of battling a screen.
Investment over Speculation
First-generation yield farming was about speculating on the next coin to 100x and maximizing gains out of the latest scheme. Farmers rushed in, ignorant of the risks and in the long run will lose on gas, impermanent loss, slippage and other hidden fees.
Formation Fi is at the lead of the second generation. They will motivate and enable users to form coherent, sensible portfolios instead of collections of random coins. Second generation yield farming is about intelligent investing — calculating quantitative risk as well as reward.
This methodology was pioneered by Benjamin Graham in his book “The Intelligent Investor” and employed extensively by Warren Buffet. Formation Fi takes techniques and skills learnt over decades on Wall Street and applies them through algorithms to DeFi. They aim to generate personalized funds that not only catch the market highs but also provide protection from the lows.
DeFi is taking off because so many people can see the benefits of transparency and community governance over the centralized banks, which so often charge hidden fees and make secret backroom deals we’ll never know about. The community is what makes DeFi so compelling — but community governance is a double-edged sword. You can cast your vote and yield the reward, but you have to invest your stake and in reality, only the whales can achieve meaningful results.
Formation Fi is turning that around. Ultimately, through progressive decentralization, their DAO will achieve open governance by financially incentivising long-term engagement and offering exclusive original research and quantitative analysis. They will empower a new generation of yield farmers to take control of their assets, achieve better risk-adjusted results and become better investors.
Yield farming has been a fast-moving, get in and out quickly, type of business so far. The first generation of farmers were often risk-seeking ‘degens’ who loved the thrill of the 100x chase and if a coin failed, that’s ok — move on to the next one. That isn’t investing though and Formation Fi isn’t about short-term gambling.
Second generation yield farming is for investors who want intelligent, serious management for the long haul with safe exposure to crypto. Formation Fi’s algorithms will build personally risk-adjusted indexes for the long term that can automatically reinvest the yield across multiple chains so users can benefit from the laws of compound interest.
Future development, guided by the DAO community and taking advantage of progressive decentralization, will ensure a safe, intelligent and personalized haven for users.
Constant Innovation and Safety
Innovation is taken as given in DeFi but unfortunately, for many, is a buzzword that means hitching onto the latest craze and heading off on a dozen random paths. The biggest casualties are then the users when it all implodes, taking their invested capital with it.
Formation Fi has a strategic direction to build their vision of low-risk wealth for everyone. The force of innovation and safety drives the project, guided by the DAO community and regulation. The project will adopt progressive decentralization, not hide behind security audit reports, care for the TVL as if it were their own money and try to safeguard it to the best of their abilities.
The Formation Fi protocol will enable the minting of an index token, the $FORM token, to track underlying cross-chain DeFi assets and strategies. $FORM is a triple-utility token with the following functions:
- Governance Voting — $FORM holders vote on proposals for the FORM operational treasury.
- Staking & Liquidity Mining — $FORM will be awarded to a user who deposits or stakes underlying digital assets to generate Alpha, Beta, Gamma and Parity or swap among the index coins.
- Dark Pools — $FORM will confer access to investment liquidity pools which harness the wisdom of the crowd to incubate and fund the most promising new DeFi projects.
Every yield comes with risk. Formation Fi brings the risk mitigation strategies which let hedge funds conquer the stock market to crypto, for everyone to use.
Their focus is to better manage your risks while protecting your hard-earned yield through thick and thin. Imagine what can be accomplished 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. Follow Formation Fi’s development on their official channels:
Website – https://formation.fi/
Twitter – https://twitter.com/FormationFi
Telegram – https://t.me/FormationFi
Medium – https://medium.com/formation-fi