Overview  

Onyx by J.P Morgan, Apollo Global, and WisdomTree collaborated under the Monetary Authority of Singapore’s  (MAS) Project Guardian, showcasing a proof-of-concept (PoC) that marked a pivotal step toward revolutionizing the asset and wealth management industry. The PoC demonstrated the possibility of including tokenized alternative investments (“alts”) alongside liquid assets in discretionary client portfolios and leveraged a variety of protocols and infrastructure partners, including an Avalanche Evergreen Subnet.



Challenge 

Over the years, the alts market–i.e., private equity,  private credit, real estate, and infrastructure–has  experienced tremendous growth. Investments in alts  can offer attractive risk-adjusted returns as well as  portfolio diversification benefits. As a result, institutional  investors generally allocate a significant portion of their  assets to alts.  

Meanwhile, demand among individual investors for alts  continues to grow, but wider spread adoption via  investment has lagged that of more traditional, public  investments. Among the challenges precluding broader  participation are lack of investor and advisor education,  as well as limited access and liquidity of underlying  assets. Historically, because of their private nature, alts  are generally less standardized and transparent from a  reporting perspective and, as such, have been more  cumbersome and operationally intensive to trade and  administer. 

While building and managing discretionary portfolios for  individual investors has become a $5.5 trillion business,  wealth management firms’ ability to create innovative  solutions, offer new and novel products, and achieve  efficiencies on today's legacy infrastructure remains  limited. This includes offering ongoing alts exposure to  individual investors and incorporating them in  discretionary portfolios.

Opportunity 

Because portfolio creation and management with alts  involves manual, time-intensive processes requiring  various systems, multi-party reconciliation, and cash  allocation maintenance by portfolio managers, including  these types of investments at scale for individual  investors has historically proven infeasible.  

Blockchain technology, tokenization and smart contracts  could open a broader design space on which firms can  build the next generation of managed solutions,  including broader, systematic access to alts. By  tokenizing funds, representing discretionary portfolios  as smart contracts, and leveraging settlement rails with  comparable underlying standards, the PoC could show  how tens of thousands of portfolios could be  programmatically linked to representative models and  automatically rebalanced en-masse when changes to  those models occurred—even when these models  included alternative investments. This simplified  investment and portfolio rebalancing process could  ultimately lead to expanded business and revenue  opportunities for wealth management platforms and  ultimately better outcomes for clients. 

Notable Stats

• Onyx’s solution demonstrated how a wealth  management firm with 100,000 client portfolios could  automate its monthly rebalancing process from  3,000+ operational steps to a few clicks.

• Utilizing blockchain's ability to enable near-instant  settlement, clients could remain fully invested,  thereby limiting cash drag, resulting in a savings of  ~24bps per annum.

• On the investor side, eliminating cash drag through  programmatic rebalancing and near-instant  

  settlement could reduce costs by almost 20%.

• Tokenizing private alternative funds represents a  $400 billion annual revenue opportunity for fund  managers and distributors.

Let’s Get Technical 

For the Avalanche deployment, the Onyx by J.P. Morgan  team used LayerZero to connect their Quorum-based  system to an Avalanche Evergreen Subnet. The  Evergreen Subnet are blockchains customized for  institutional applications, specifically designed to  account for company-specific and industry-wide  considerations and requirements. Built-in and further  customizable features include EVM compatibility,  permissioning at the validation, smart contract  deployment, and transaction levels, as well as network  privacy and custom gas features. Overall, the Evergreen  Subnet reap the benefits of public network development,  innovation, and native integrations while enabling  embedded, blockchain-level features only possible in  enterprise blockchains.

The Subnet–built and managed by AvaCloud–is a  permissioned testnet, allowing Onyx to track fund unit  ownership, facilitate subscriptions and redemptions, and  facilitate the fund lifecycle. EVM compatibility enables  interoperability with other protocols, so wealth managers  can access funds tokenized on various blockchain platforms  without moving the underlying assets from their base ledger  of record.

Why Avalanche 

Through the Subnet deployment, Onyx can create and own its end-to-end execution environment, which means that  the economics of the Subnet are not dependent on any crypto token; transaction costs, gas fees, and network load  are also independent of the activity on the Avalanche C-Chain and other Subnets. This maintains that transaction  fees and throughput for Onyx participants are unaffected by fluctuations in activity and transaction fees across the  broader Avalanche ecosystem. 

In addition, Onyx used Biconomy's ERC-4337 infrastructure for gas-free interactions on the Subnet. Smart contract  wallets enabled the deployment of funds as smart contracts, facilitating subscriptions and redemptions through mint  and burn transactions, removing the complexity of fund managers needing gas tokens to cover transaction fees. 

"Our work under Project Guardian demonstrates a significant opportunity for the asset and wealth management  industry,” said Tyrone Lobban, Head of Onyx Digital Assets. “By leveraging the power of blockchain technology we  have shown how the construction and management of discretionary portfolios could be revolutionized.” The full PoC report from Onyx by J.P Morgan and Apollo Global can be found here. Click here for the Proof of  Concept video demo. 

"Our work under Project Guardian demonstrates a significant opportunity for  the asset and wealth management industry,” said Tyrone Lobban, Head of Onyx Digital Assets. “By leveraging the power of blockchain technology we  have shown how the construction and management of discretionary  portfolios could be revolutionized."


Get started with Evergreen today: avax.network/solutions/institutions