Building the First Omnichain Asset Management Marketplace

Our previous write-up shows that on-chain asset management is an emerging industry with massive potential. While current solutions have made commendable progress, none have fully capitalized on the available opportunities, as most existing platforms are limited to a single blockchain. As we move toward a multi-chain future, web3 native traders will prefer chain-agnostic protocols to establish their strategic portfolios. Built on top of LayerZero’s interoperability infrastructure, Valio will provide seamless omnichain access.

Security and trust requirements remain significant concerns for all stakeholders, especially depositors. Valio addresses this by introducing a novel security architecture called CPIT (Cumulative Price Impact Tolerance), which eliminates the need for trust between managers and depositors.

In this follow-up installment to our initial blog post, we’ll dive deeper into how we intend to support managers, provide a safe platform to depositors and touch on some fundamental protocol mechanics.

Omnichain Accessibility

Valio’s omnichain accessibility is enabled by LayerZero, an omnichain interoperability protocol that allows dApps to connect across multiple blockchains. LayerZero has developed a proprietary messaging architecture for trustless and efficient cross-chain functions between protocols.

By integrating LayerZero, Valio grants portfolio managers access to various trading platforms and instruments on multiple networks, such as 0x on Ethereum and GMX on Arbitrum at launch. Access to numerous other chains and asset classes is expected shortly. This flexibility allows managers to make more informed decisions regarding trading strategies and asset allocation. Managers can switch between platforms and chains effortlessly without compromising security or performance. Furthermore, omnichain dApps significantly reduce user friction, as depositors can participate irrespective of what blockchain they are connected to. Omnichain access defragments liquidity, inevitably helping managers attract more capital and increasing the growth potential for portfolios on Valio.

Portfolio Monetization

Another benefit for managers is that they can set up their fee structure and how they monetize their portfolios. Managers can choose between two types of fees: management fees and performance fees. Management fees are accrued for each deposit over time. The manager can claim the fees at any time or wait until the depositor adds to or reduces her position; then, the fees will be automatically distributed. Performance fees are charged as a percentage of the portfolio’s profits and are calculated based on a high watermark. A high water mark (HWM) is the highest value the portfolio has ever reached and ensures that managers only get paid for incremental performance above and beyond the HWM.

Transparency, Communication, and the Social Aspect of Crypto Trading

As Valio attracts talented money managers to its platform, it will be a marketplace for depositors looking to allocate their capital. Valio assists portfolio managers in building a reputation and fostering a community around their portfolios. Managers can link their Twitter accounts to their portfolios, so followers can easily find their favorite trader’s Valio portfolio. Managers can also create private whitelisted portfolios that are only accessible to those they invite, such as friends, partners, or clients. This will allow Valio to serve the entire market for on-chain asset management, from retail investors to firms and treasuries.

Valio also offers unique communication channels between portfolio managers and depositors. Private Discord channels are automatically created for each portfolio, where depositors can chat with the manager and other depositors, ask questions, give feedback, or share ideas. Depositors can also view the manager’s social accounts, such as Twitter, where they can follow their updates and announcements.

Safeguarding Depositors

Valio provides depositors with a safe and convenient platform to bet on traders without needing to trust them. Depositors can achieve diversified exposure to the decentralized asset management industry: from short-term leverage traders to long-term capital allocators and everything in between, the possibilities are endless.

One of the core innovations Valio introduces in its novel security architecture is Cumulative Price Impact Tolerance (CPIT). CPIT is a mechanism that protects depositors from nefarious portfolio managers attempting to steal portfolios by creating artificial market displacement.

How do malicious portfolio managers try to steal user portfolios?

1. Send portfolios to a wallet in their control → Easy to solve; portfolios can only be sent to whitelisted protocol addresses

2. Transfer portfolios to a protocol that may be susceptible to exploitation, either intentionally or unintentionally → Easy to solve with strict due diligence before integrating new protocols

The third and much more difficult problem to solve would be done by a manager taking the following steps:

• Obtain a stake in a lower market cap crypto asset using a private wallet

• Utilize the Valio portfolio assets to increase the token’s value via market buys

• Sell the crypto from the private wallet, effectively transferring wealth from the portfolio depositors to the manager by impacting the token’s price.

This is akin to a pump-and-dump scheme; to mitigate this risk, the portfolio manager sets a CPIT limit. Essentially, CPIT is a way to measure how much the price of an asset changes due to the trades made by the portfolio manager. The higher the CPIT, the more the price is affected by the trades. For example, if a portfolio has 1 million USDC worth of assets, and the CPIT is set to 5%, then the manager can create 50,000 USDC in price impact across all trades on that given day.

In summary, CPIT limits the price impact managers can create with the capital they manage, expressed as a percentage of the AUM for any given day. The CPIT value is established on portfolio creation and cannot be changed.

Here’s a quick rundown of the mechanism at play.

CPIT Mechanics

The portfolio manager evaluates three primary variables before every buy or sell transaction, namely:

1. InitialPrice (the price before the transaction)

2. Amount (the trade amount)

3. ExecutionPrice (the price at which the trade is executed)

For each transaction,

PriceImpactLoss(USD) = (Execution Price - InitialPrice) * Amount

PriceImpactLoss provides a simple way to determine the loss incurred in each trade due to price impact. The value is smaller in highly liquid markets such as ETH/USDC spot and more significant in more illiquid ones.

Next, the total amount lost by the manager due to adverse price impact can be determined for a given period (in the case of portfolios, each day) by summing up the individual PriceImpactLoss values, which is known as TotalPriceImpactLoss(USD).

TotalPriceImpactLoss(USD) = SUM(PriceImpactLoss)

To express the daily loss in USD as a percentage of the total net asset value (NAV) in the portfolio, the resulting value is called CumulativePriceImpact. The maximum cap for cumulative price impact, CumulativePriceImpactTolerance, is an instantiated variable set upon portfolio creation that ensures the daily limit is not exceeded before executing any trade.

CumulativePriceImpact = TotalPriceImpactLoss(USD)/NAV

It is expressed in percentage terms relative to the portfolio size.

Instant Withdrawals

Crypto-natives prioritize instant liquidity, especially concerning recent insolvency issues on major CeFi platforms. At Valio, we understand this need and ensure that depositors' capital remains accessible: after an initial 24-hour period, users can withdraw their portfolios at any time.

Depositors have two withdrawal options: in-kind (receiving a proportionate share of each asset in the portfolio) or converting their stake into a single token, such as USDC or ETH. Moreover, Valio enables users to establish automated exit strategies based on stop-loss, take-profit, and CPIT parameters.

Instant withdrawals are a priority, and specific criteria must be satisfied before integrating a protocol with Valio. For example, suppose a user wants to exit their position in a portfolio. In that case, the entire portfolio will be liquidated pro-rata, up to the amount the user wants to withdraw, to ensure that there is never a higher liquidation risk for remaining depositors. You can learn more about instant withdrawals here.

Conclusion

In summary, Valio is a platform that caters to various use cases of asset management, such as treasury management, trader portfolios, individual trade strategies, social portfolios, etc. Think of us as a super dApp for all your decentralized asset management needs - serving managers and depositors of all sizes and different risk tolerances.

Valio is the first on-chain asset management platform to take full advantage of blockchain technology by being omnichain, non-custodial, trustless, transparent, and flexible.

Stay tuned as we’ll explore the future for Valio as we approach the launch on Mainnet.