Portfolio strategies are a family of autnonomous structured financial products, similar in features to open ended funds such as exchange traded funds (ETFs), enabled by technological advances in Automated Market Making.
These strategies are implemented through portfolios of two or more crypto assets, deployed onto the blockchain via AMM pool(s) imparted with a set of pre-defined parameters, which define the asset composition and risk management goals throughout the lifespan of the strategy.
Unlike other structured financial products, portfolio strategies are designed to run continuously without active management from a human or other piece of software. Issuance and redemption is performed automatically via the Portfolio Protocol and executed instantly via the Ethereum Virtual Machine. Portfolio strategies do not rely on price oracles or protocol dependencies beyond the Portfolio Protocol.
AMMs, like Uniswap, Balancer, Curve, and others, can be loosely defined as pools of assets being deterministically controlled by what is reffered to as a trading function. Trading functions determine, at any given time, the marginal price of the assets within each pool.
Traders and abritraguers then autononomously swap liquidity providers assets at prices determined by the trading function at any time, resulting in an auto-rebalancing portfolio of 2 or more assets.
The risk management strategy of an AMM LPs' portfolio is the product of this trading function. Given a specific portfolio objective, we may construct a trading function to best achieve the objective1 (opens in a new tab). If given a set of 4 or more assets, we may construct a series of liquidity pools that result in a single token that provides diversified, risk adjusted exposure to a variety of assets.
Replicating Market Makers (RMMs) are a further advancement in AMM technology, enabling the creation of custom trading rules derived from concave, monotonic payoff functions. RMMs can replicate simplier payoffs as well, providing a flexible framework for non-custodial portfolio management.
Read the RMM-01 Whitepaper (opens in a new tab) to learn about Primitive's inital implementation of RMMs, using covered call payoffs.
The Portfolio Protocol is the latest Primitive-authored open source AMM that implements these novel trading rules, designed from the ground up to best support the implementation of portfolio strategies.
Read more about the Portfolio Protocol here (opens in a new tab).
Arbiter is an open-source, agent based EVM simulation framework initially spearheaded by Primitive engineers, which now serves as the chosen economic modeling framework for various DeFi teams including Primitive.
At this time, only a select few engineers, some within the Primitive team, are capable of using such technology to parameterize the complex trading rules that define Portfolio Protocol liquidity pools.
Portfolio and its resulting strategies are ultimately permissionless software, but without tools for developers to interact safely it becomes challenging to use. It is our intention to eventually allow for the permissionless creation of portfolio strategies within the Portfolio Interface.
Read more about Arbiter here (opens in a new tab).