The Power of Diversification
Welcome Longdrinkers, new and returning! My pseudoname is Wonder and for those who don’t know, I’m part of the bar staff at Longdrink Finance. We know asset diversification can be a bewildering concept to fully understand and make use of, so we want to take you on a deep dive that we can explore together. Pull up a seat and grab a drink!
In this series of regularly released reports we’ll peer into the fascination and value of asset diversification! The industry of asset diversification, both TradFi and DeFi will be investigated through an informative story telling narrative amalgamating existing literature, backed with novel empirical arguments and graphics where none yet exist. This written series will investigate the ins and outs of asset diversification. Our trip together is split up into 6 parts, and 13 chapters.
Part 1 offers an introduction to what asset diversification is, how it differs from holding specific assets, and how investors can amplify their market exposure through participation in index products.
Part 2 is where we’ll investigate the asset management industry as a whole. Before we discuss the innovation of asset management being blazed by on-chain builders. We’ll take a look at traditional capital diversification products; where they came from, their recent growth and how they came to dominate 10% of global financial markets since their inception.
After part 1 & 2, we’ll have explored the concepts and case studies pertinent to understanding how index products work. We’ll also take a trip down history lane to uncover the then and now of the TradFi asset management industry. In part 3 & 4 we will hone an intimate understanding of when index products work the best, and some specific items of vulnerability implicit with index products.
Part 5 is solely dedicated to what we and the on-chain titans before are doing—on-chain asset management as a service. This section will dive deep into how on-chain asset management is categorically different from TradFi products. Here we’ll lay it out and ask questions that there may not yet be an answer to. In this section we’ll begin the process of putting the concepts explored in each Part together into the unified picture in which they exist; this will start not by how we’re alike to what’s come before, but how we’re different. This is the place where we will perhaps ask questions that are beyond the reach of any single specific DeFi protocol, yet pertinent to all. Together, we’ll ponder the theoretically transparent macroeconomic determination of trade balance that the ledger allows in an on-chain economy. How might this impact the products we build? How might this change the temporal coupling of the market <> product cycle? What does this mean for equilibrating capital flows? This section is close to home on the frontier of finance in which DeFi makes its home - buckle up!
Finally, part 6 is where we’ll bring it all back, summarize the highlights, and wrap it all up. In this ultimate section we’ll hammer down the takeaway points from each section into a unified frame of reference—who we are, where we came from, and the bright future of where we’re going.
Along the way, we’ll learn about a plethora of statistical concepts, equipping you with the tools to conduct some statistical research of your own in the cryptosphere and nurture sophistication in this new asset class.
Will you join us?
The preliminary schedule of the PoD series looks as follows:
Part 1: Introduction
- Chapter 1: What is asset diversification? (Friday, 29th October 2021)
- Chapter 2: How does asset diversification work? (Monday, 1st November 2021)
Part 2 Then and now — asset management
- Chapter 3: Economic Origins with a side of theory (Wednesday, 3rd November 2021)
further chapters tbd