Into the Secret Garden or a Dark Pool? An Exploration of Whether DeFi Gardens/Pools Provide a Democratic Alternative to Principal-Agent Investment Products

This paper rejects the hypothesis that investment gardens, pools or sets present an imminent danger to the public. Gardens are eBay-style websites that allow anybody to create an investment product, and for it to be run on democratic principles rather than a principal-agent relationship. Gardens contain two inherent weaknesses: (1) no barriers to entry for the creators; and (2) retail customers being exposed to a highly niche and confusing area. This paper sources the limited research noting the opportunities for abuse that producer-managers of complex financial products can exploit against the unsuspecting public. This is considered against the complexity of DeFi products. This paper is a specific consideration of the underlying dialectic in the DeFi debate. How dare access to the riches of the finance sector be denied to anyone? Or is there an indisputable obligation for regulators to restrict DeFi access to protect vulnerable investors? Eight Gardens are regressed against the S&P 500, and Bitcoin and Ethereum prices. Additionally, the research compares the Sharpe Ratio of Gardens to 55 traditional investment fund products investing in DeFi. This leads to the paper proposing an extension of adverse selection from an agency-theoretic approach. The propensity in a Garden (and its circumstances) for adverse selection should determine whether retail investors are allowed to access a specific Garden.