Portfolio Manager: building with 1inch
We’re developing a Portfolio Manager on Aqua with 1inch to help managers provide liquidity while keeping their portfolios close to their chosen allocation.
For someone to swap one cryptocurrency for another, the assets need to be available for trading. On many platforms, they come from reserves funded by people and organizations that allocate their assets to provide liquidity and, in return, earn fees from trades.
Trading and price changes can move a portfolio’s composition away from the manager’s target allocation, unintentionally increasing exposure to certain assets. Providing liquidity therefore comes with the work of monitoring and rebalancing the portfolio.
We’re developing a Portfolio Manager on Aqua with 1inch to help portfolio managers use their assets in liquidity pools while keeping their portfolios close to their chosen allocation and reducing the need for manual adjustments.
What is a liquidity pool?
When someone swaps USDC for ETH on a platform that uses liquidity pools, the ETH they receive comes from a reserve of crypto assets. The USDC they pay goes into that same reserve.
This reserve is called a liquidity pool. It holds assets deposited by people or organizations and is managed by a smart contract: a program on the blockchain that carries out swaps according to predefined rules, including how prices are calculated.
Pools are used by many decentralized exchanges, also known as DEXs. These exchanges are part of decentralized finance, or DeFi, where financial operations are carried out by programs on the blockchain.
Who provides the assets and what determines the outcome
Those who deposit assets are called liquidity providers, or LPs. They contribute to the reserve to receive a share of the fees charged on trades that use the assets they provide.
For a portfolio manager, providing liquidity is more than a way to earn fee revenue. It is also an allocation decision: which assets to hold, in what proportions, and with what exposure to risk and potential appreciation. The strategy’s outcome therefore depends on the combination of fees earned, asset performance, and changes in portfolio composition.
In an ETH and USDC pool, for example, a manager can allocate some of each asset. When other users buy ETH with USDC, the reserve holds less ETH and more USDC. Swaps in the opposite direction reverse that movement.
As the strategy earns fees, trades also change the proportions of the assets corresponding to the manager’s share of the reserve.
Why portfolio allocation needs monitoring
A manager can set a target allocation for the assets under their management. For example, keeping half the value in ETH and half in USDC. Trading and price changes can move the portfolio away from that ratio.
If ETH’s share rises from 50% to 60% of the total value, the portfolio becomes more exposed to that asset’s price movements. A drop in its price, for example, has a greater impact than the original allocation allowed for. Similarly, reducing exposure to an asset can limit the portfolio’s participation in a potential price increase.
Evaluating the strategy therefore requires considering fees earned, asset performance, and changes in portfolio composition together. Monitoring balances and making the necessary adjustments takes attention.
What changes with shared liquidity on Aqua
Aqua, from 1inch, offers another way to provide liquidity. Instead of depositing assets into a separate pool, the provider authorizes their use directly from their wallet. The assets are only transferred when a swap is executed.
The same balance can support different trading strategies. That is the idea behind shared liquidity: using wallet assets in more than one strategy without having to divide capital among separate pools.
As a result, trades in one strategy can change the balances available to others. Managing the asset mix needs to account for the combined wallet balances used by those strategies.
How the Portfolio Manager aims to help
The Portfolio Manager we’re developing with 1inch considers the manager’s target allocation and current wallet balances to calculate the prices offered for trades.
The aim is to favor swaps that bring the portfolio closer to its target allocation, allowing assets to be used in liquidity strategies with less need for manual adjustments.
Execution depends on order flow and market conditions. The product therefore does not guarantee an exact allocation within a given timeframe, financial returns, or protection against losses.
The project is in development and focuses on portfolio managers using 1inch Aqua.
