Bridging the DeFi and CeFi Gap to Bring the Next Trillion Dollars On-Chain / Mona El Isa

Transcript

hi everyone cool so yeah today we're going to talk a little bit about um Bridging the Gap between D5 and C5 so um as many of you may or may not know um avant-garde is probably most well known today for being the core contributor to the enzyme protocol we have been the core contributor for about four years and more recently we got into the asset management space with helping out with our treasury management and today we look after about 30 million dollars in tvl for Dow treasuries for those of you who are not familiar with enzyme it's the first decentralized Asset Management protocol in the space

it's been live for about four and a half years on mainnet and um today I'm going to talk to you a little bit about the protocol and the core benefits and I'm also going to talk to you a little bit about the work we've been doing to bridge defy and C5 so the four core benefits of enzyme for those of you who don't know we focus on really sorry I feel a little bit faint um Connor are you able to take over a little bit or actually do you know what I'm back I'm back it's all good okay so the four core benefits of enzyme are basically being able to tokenize fund shares um actually the protocol enables anyone

to manage on-chain Asset Management funds indexes Dow treasury management but in particular today I'm going to focus on funds the first key benefit is being able to tokenize fund shares and you probably heard a lot about headlines in the Press about asset management companies tokenizing their fund shares but the key benefit here is that the fund shares actually are redeemable for the underlying assets which is not the case in a lot of the headlines that you see in traditional Finance the second core benefit is that we offer a lot of transparency so we have data pipelines which are very sophisticated which don't just look at the current state of what's in a vault but also look at the Historical pipeline

of data every event that's emitted from a smart contract which enables you to have 24 7 reporting so this is I think the only asset management protocol that can do that on chain and D5 today the third really core benefit is automation if you don't come from Trad fire you probably don't appreciate the level of automation that goes into operating and administrative administrating funds um probably you require four to five operational staff per investment professional to look after a fund operation and um and uh that's obviously very costly and very time cumbersome so uh what the

protocol actually enables you to do is codify a lot of those operations which um frankly removes a lot of headache um and streamlines operations and lowers cost uh so as a as an example when you set up a fund on enzyme we're talking about a digital fund you can configure things like management fees performance fees uh actions that uh determine Investments redemptions uh you know so whitelisting investors or minimum investment size you can configure rules around redemptions uh what are the assets that are you know do you want redemptions in kind or redemptions in a single asset um and so on and so forth so um there's there's no like standard Vault every

vault is easily configurable and all the operations and administration is fully automated on chain and last but not least security I think this is probably again one of our strongest value ads as a protocol um the the benefit of um enzyme was always created so that the manager of a fund or a vault is always assumed to have a trustless relationship with the end investors and that means that you can um like very securely or securely we hope delegate trading to an asset manager um uh whilst giving them very clear

permissions on what they can or can't do um and uh like things like you know whitelisting which protocols they're allowed to trade with which assets are allowed to trade with or not allowed to trade with um but very specifically and you likely to enzyme because the vaults have an Unchained knowledge of price we're also able to put in much more sophisticated risk management policies which can prevent um you know maximum slippage loss over a certain period of time cumulatively or a p l stop loss if you want to delegate trading to members of your team so you really kind of reduce the different ways that a manager can intentionally or unintentionally misappropriate assets so

hopefully I've given you a little bit of background around enzyme and the core features and why we're so excited about it however um sorry um however uh despite us being so excited uh about it one could say that it hasn't really taken off as a as a protocol uh in terms of not one of the top used protocol protocols I think we have around um 85 million dollars of tvl today maybe at the peak we had 300 million so you know we've been asking ourselves um a lot the last 12 to 18 months why why is it you know like this is like you know really solves the problem from our eyes um and uh today we're just going to focus on the fund use case

but um you know we identified a few reasons um for for kind of Unchained funds um the first is that um active fund management is uh especially when you take money for more than from more than two people uh as investors is typically qualified as a collective investment scheme which is a very heavily regulated activity the second problem is when you look at the regulations involved with Collective investment scheme they are definitely not fit for purpose they certainly don't take into consideration uh you know the fact that D5 is is ultimately trying to remove the need for intermediaries reduce friction cost

um increase transparency Etc so trying to fit into the regulations actually ends up putting in all these inefficiencies again so it's it's really frustrating the third problem that we saw is that users would come fund manager specifically they'd hear about the platform or the protocol they'd get really excited and then they would like suddenly realize but wait how is this a regulated activity what do I do and then when they realize that the burden is on them to find out the solution they lose interest because they know it's going to be a lot of money and a lot of time to figure that out um and last but not least um you know when we've talked to more regulated funds who already regulated

funds their concerns are just the compliance processes around D5 altogether so around 12 to 18 months ago we took a decision to try and solve for this fund use case because it's increasingly one that we think is necessary on chain fund management it's one that if anything after Celsius three arrows FTX Etc we think more on chain is the solution not less so for the last 12 to 18 months we started to try and figure out how can we make it as easy as possible for someone to launch and actively managed fund on chain without having to worry about all of these things and how do we do this in a way that doesn't compromise the values of D Phi

can we preserve as many of them as we can um and can we bring this in a way um that is a very low cost solution to people and also an easy solution so to put it into context you know setting up a fund in traditional Finance typically takes around 200 million dollars in AUM to break even that's obviously a very high barrier to entry we want to bring that down drastically with defy can we do that while still kind of enabling an environment where people who manage funds can feel safe um and then last but not least we we want to kind of get more regulated players uh comfortable with the compliance aspects many of which by the way are already built into the protocol

and are optional um so we came up with a concept that we refer to as the avant-garde platform this is a platform which should be going live in a few weeks but already avant-garde Asset Management has been licensed as of May 31st it's built on top of the enzyme protocol so enzyme as a D5 protocol remains permissionless open completely decentralized Etc and this is a thin layer on top that basically um uh adds the licensing capability for managers to plug into it enables uh clear kind of it has a clear framework for trading

um now depending on where you're based you might not need kyt but something my regulator players for example that we've spoken to definitely required it they want to use Dex technology to trade but they need to know their counterparty so all the options are available and in order to make this Tech enabled you know Asset Management platform work we had to unfortunately unfortunately partner with a fund services provider offshore this fund service provider was was very open-minded and actually uniquely very open to the idea of cost in the industry coming down and the fact that they have to adapt and survive or you know they

will eventually be displaced and we came up with a framework with them where we rewrote your typical subscription documents for a fund to be compatible on chain for a protocol like enzyme this took a really long time because try to explain that to lawyers that um you know it's it's challenging and and then we had to come up with a way where um the fund administrator typically looks after checking the nav independently making sure that the fund manager doesn't reach any risk management parameters calculating the fees Etc but let's face it most of this stuff is actually done by the enzyme protocol so a large part of their job actually most of it is

automated on Chain by smart contracts so ultimately what was left of their role was independently verifying the nav that's a legal requirement so what they do is they we needed to get their system to be able to call our smart contracts independently and verify uh the nav and that's all up and running smoothly now we also needed to make the investment Redemption mechanism compatible with their legal requirements but we also got to automate that um you know there will be a necessity to you know sign subscription documents and do kycml that's the compromise here as far as you know as far as kind of D5 goes but on the flip side

um we also achieved a lot of major benefits together and did get to preserve a lot of D5 values so the major benefits were um are much lower cost so um this partnership this um whatever you want to call it experiment partnership enables us to lower costs by more than 80 for a fund manager and actually that only increases with scale so the break-even for a fund uh on this setup is uh now around four or five million dollars instead of much much higher before the there's a much quicker time to Market we anticipate that rolling out new funds um on this kind of structure probably take two to four weeks instead

of uh six to 12 months especially now that it's been done once should be easily replicable um uh oh well sorry um because uh there are you know uh there's like things put like you know thoughtful documents put in place like a ddq due diligence questionnaire subscription docs Etc um hopefully we're able to attract a new kind of investor into D5 that appreciates the transparency the automation the lower cost Etc the Institutional Investor which we probably uh still have not tapped in D5 um and we have been able to preserve

many of the D5 values uh smart Contracting for security the transparency the non-custodial aspect because as I mentioned the fund tokens are still redeemable for the underlying asset and the removal of centralized counterparty risk because you're only dealing with decentralized exchanges oh and I think there's one more and and the automation also not just reduces cost but reduces headaches so in summary um the flat the the platform has kind of formed major Innovations around it removes uh counterparty risk with respect to on-chain funds uh or enables the way for uh centralized counterparty risk to be removed from funds it enables

non-custodial setup a way to invest in funds non-custodially um it's the first I think ever set up to invest in a compliant and regulated on-chain fund and uh just to be clear we've seen a lot of asset management products on chain but most of them are passive and those are much less complicated from a regulated perspective um so here we're only talking about actively managed which is much more complicated and actually don't think has been done in D5 for that reason and last but not least we can give investors 24 7 transparency at all times to be able to track what's happening in in the vault and exit if they don't like it so I think with that

I'll wrap up if anyone has any questions I don't even know if we have time for questions but we're around later you can contact us um yeah oh there's a question hello can you clarify a little more on the non-custodial part so um the I saw that the underlying assets were represented with erc20 tokens is there like a lock-up period or what kind of mechanisms are you guys using for like when they can claim the underlying assets at any time um or yeah how do you guys handle that yeah so actually every like the way enzyme is built is that when you create

a vault it's super highly configurable so you can determine that the only um recommendation that we make is that there is at least a one second lockup period and the reason for that is to avoid flash loan attacks uh in terms of arbitraging the share price of the Vault um obviously that can still be done with a one second time lock but it's more expensive so you know it could be advantageous to have a one hour or 24 hour lock-up period just for that reason but really we don't decide that for anybody um it's a it's a protocol which anyone can use anyone can use to set up and anyone can determine their own rules

around that any other questions thank you uh do the investors need to have their web 3 wallet so to uh deposit whatever like stable coin oh that's a really good question um so there's two ways Roots into this type of fund um the first route is because we we actually don't necessarily want to impose self-custody on everybody we just think it should be our basic right and an option that people have but some people are not comfortable with it so there's two routes into a fund um you

can either go in with crypto or Fiat um if you're starting with Fiat that's another role uh minor role I guess at the fund service provider does they'll they'll do the OTC trade into crypto and invest on your behalf and then you have the option to hold the fund shares in custody with a bitco as an initial starting partner if you are crypto Savvy then you can say I actually want to take self-custody um that's something that you specify when you sign the subscription docs if you're going to be taking self-custody or not you specify which it has to be the wallet that sends the funds um you know will obviously receive the The Vault token and it's going to be non-transferable so um in that case once you have signed a subscription docs and

passed the kyc email you will be whitelisted on the Vault by the fund admin and then you can directly invest into the world just by call you know just from the interface so you don't need them at all My Demo then like a redeeming back against that world or am I not switching or selling it on on taxes so this erc20 token I'm holding it's not like freely like marketable is it so uh the transfer the transferability of the funder The Vault token is actually also something that's configurable at setup for this specific product we've decided to keep the tokens non-transferable because it creates a regulatory complications but for other types of products that are not

as complicated from a regulatory perspective it's totally possible to have transferable Vault tokens um and then for the I think your other question was on Redemption um again that's something you can specify at Vault setup you can specify whether you want redemption in kind as the only option or whether you want uh to allow investors to redeem in a specif specified asset or assets and up to how much because you don't want to um have an unlimited amount probably because it would mess up the balancing of your Vault but you could say uh investors can redeem up to 1 million usdc and 1 million usdt for example um and when that is uh reaches and reaches a limit you sort of get a

notification you know you've you've got to reprogram that or top up your usdc or whatever rebalance your portfolio cool if there are no questions I think we can wrap up thanks very much guys [Applause] [Music] [Applause] and thank you thank you for your attention guys and we continue getting uh into the topics which are very serious and uh in a couple of minutes we

will meet stanislav shimek and he will be talking about regulatory outlook for D5 so stay with us [Music] thank you one two three can you hear me yes okay hello everybody and thank you a lot

for being here my name is here in Prague and blockchain is my main area of focus on internet and expertise and next to my legal practice I'm also running a blockchain advisory business in a company called rummy where we provide complex services to blockchain projects in this talk I would like to talk about what regulation actually apply on D5 I believe this is a hot topic now with the SEC being frenzy uh is there do the application do the regulation actually apply on D5 then we will see what's going to be the future of the regulation of D5 and then we will find some conclusions based what's going to be

said so D5 is increasing in popularity constantly over over the periods of time we can see it in this chart is the share of the decks on the spot dexis on the spot trading volume so now it's about 15 of the overall uh trading volume share and now it's going to be much higher because since SEC sees binance and coinbase the the trading volume index is actually skyrocketed and now it's like 50x so it's very interesting and what are the reasons why people use D5 or dexis well is it mainly to trade low caps right to make millions

on Pepes to lose Millions for me ladies another reason is anonymity because now it's being harder and harder to find a centralized exchange a solid centralized exchange that you can that you don't have to comply with kyc and then it's bankruptcies I think many people learn their lessons during 2022 and unfortunately it's probably not over yet because FTX and Celsius will most likely claw back their users which means that the people who withdraw their crypto in the three months before the bankruptcy can be called back and they will have to return the crypto back to the bankruptcy estate so like in using uh centralized providers there is a huge uncertainty if

you if you do one swap on a centralized exchange and then you take your crypto back you don't know if in the three months uh I mean you have to wait for the three months and to see whether the the provider doesn't go bankrupt and to see whether you will you will not have to be forced to return the crypto back and this trend is most likely to continue because the centralized providers will be and the centralized exchanges will have stricter rules uh for admitting coins to trade now we can see that the US binance stop trading more than 100 pairs after the SEC lawsuit uh decentralized providers will also

probably Bank users from some states where it's going to be strict regulation because they will not be able to comply because it's going to be too harsh and obviously anonymity because soon especially in Europe there is going to be travel rule implemented which means that the centralized exchanges will send all the information they have about you uh straight to the state authorities so we can see that most likely D5 will grow in the future and as it will grow the strict the regulation level must be what's the current regulatory landscape so usually financial institutions exchanges and crypto providers service providers

need to comply need need to operate under license need to comply with aml's law and consumer laws defy and decentralized protocols usually argue that they don't have to comply with this regulation mainly on the two grounds first of them is that they are decentralized that there are hundreds of people deciding about the future of the project so there is nobody who could force the protocol to do something the authorities want to and that there is no legal entity that could be regulated or licensed because the users interact directly with directly with the protocol and there is no classical relationship service provider and the client so what does the USC uh what does the

SEC and the U.S Regulators Regulators say about it they don't agree they think that the automation of certain functions through smart contracts doesn't have any effect on the legal obligations and decentralization uh is the same so it means that however whatever the project however is decentralized for a decentralized you still need to comply with all the regulation as the centralized providers moreover uh The Regulators kinda agreed that uh practically all D5 projects need to implement kyc I mean Implement amlos and do kyc to its clients which almost no project no no D5 project does for now

uh it's the it's the theory and what's the what's the reality well SEC during a history conducted 118 crypto related enforcement actions but only two of them aimed D5 the the cfdc and the commodity Futures Trading commission Focus now more on crypto with over two or with over 20 percent of all their enforcement actions being related to crypto but only again two of them during their history aim on D5 so there are only four enforcement actions so far so even though they are saying that D5 have to comply they are not really enforcing it however

against or the protector he says that actually every decks should comply with the security laws therefore there is a big chance that after he's done with the centralized exchanges he goes uh he goes after taxes so if you if we make a summary of the U.S regulatory landscape D5 needs to comply with everything as a centralized providers but still we don't enforce it that much how is it in the EU well the EU has a different stance rather than saying uh you know D5 needs to comply with everything they are admitting that they are some regulatory

uh that it's unclear who should actually comply with the regulation or it should be the dowel the the the interface the website the provider of it or the company that develops the protocol so they choose the way of implementing a new laws that should make it clear however so like recently the European Union approved Mika which which will become effective in one and a half year in all the European Union and what does Mika the regulation That was supposed to make everything clear says about D5 it says that where crypto Asset Services are provided in a fully decentralized manner without any intermediary they shouldn't follow it in

the scope of Mika so this Mika made it clear not at all because we have no idea there is no definition in the regulation of fluid decentralization and what does intermediary mean so the the EU members the the EU Parliament members say that now the authorities need to come up with guidelines and tell us what does it actually mean so for now we have no idea in what scope Mika applies to D5 and it would doesn't was about to apply on D5 then all the projects the D5 projects will need to be we need to operate under license and meet a lot of obligations like experience as

trustworthy personal uh Capital meet Capital obligations like Risk Management obligations IMO obligations and it would be very burdensome for the for the D5 projects uh so it is how it is now what's about the future well the SEC made clear that they really want to go after taxes and defy because they proposed this April to amend the The Exchange act the definition of exchanges that it was clear that uh dexes need to comply with Securities laws then from again from this April we have U.S US Treasury report about the crypto

assets saying that yes if I need to comply with all the rules and we should write awareness about this one and then also they suggest uh more tools like digital identity so they want a digital wallet to be connected to an identity of a person and then the smart contract smart contracts don't have to comply with kyc the MLS MLS then they suggest that there should be also a control on a smart contract level that because the smart contract will see who is the user and based on how experienced the user is he will allow him do the protocol will allow him to use leverage to trade certain coins and also the report wants the U.S

government to engage with developers to create ml tools for for D5 uh how is it in Europe so as I said at the beginning the the approach of Europe was quite quite reasonable but as soon as the Mika was approved the European Parliament assigned a committee uh to assess the regulatory challenges that stayed after Mika and you know they deal with defy a lot and unfortunately their findings and suggestions are very harsh for defy and practically they are also saying that D5 should comply with everything as the normal normal centralized providers so for example they suggest that Dao should have an

entities entity status status for licensing purposes regardless of whether they are incorporated or not so it means that if Dao operates a protocol it will need to get a license to be able to do that and also the Dallas should have a legal representative who will be like a connection between the authorities and the Dallas also the the entities and people uh developing the protocol and the intermediary providing the website should be registered to you then there should be bankrupt series about what happened when the protocol fails when there is a hack like with Terra Luna for example it also suggests that all crypto should be considered a security unless there is a there unless they apply for an

exception that also suggests that should be created an arrow wallet uh which should actually pave a way for cbdc there are like many interesting features uh suggested for example that there should be a metrics that will tell you how many uh how much energy uh consumptions uh you know how much your coins make in energy consumption how bad is this for the environment and then the bankruptcy administrators should be able to seize all your crypto when you go bankrupt and the committee also suggests to implement Trevor rule which means that when you do a swep swap on uniswap the uni swap will ft send the information to

the state authorities so we can see that uh the future will most likely be that all the D5 will be regulated uh in a way as the centralized providers are and everybody should prepare for that it's just the problem is that the laws and the guidelines take time and and uh you know they need to get resources for enforcement which take times however this is the reality of course like the crypto Community is

very uh very creative so they will they will come up with new ideas how to circumvent it but the trend is clear the regulation is going to increase and increase the same way as the the popularity of the D5 is increasing of course you can try to be anonymous and we can see it now that the many projects many projects Now launch their projects anonymously and it can work for some time because to reach out Anonymous people and projects it's much harder for the authorities but it's going to be more and more difficult in the future with the new regulations coming as travel rules and with softwares like chain analysis being better and better and so in the future it is probably

going to be a defy completely regulated and next to it there is going to be something similar to dark web uh where like Anonymous projects and people without regulation will operate uh and uh you know it's not going to be accessible for general public the same way for example is uh as it is with the tornado cache that you can still connect to the smart contract but there is no website where normal people can interact with it easily from Mika and some of the reports we can see that uh truly decentralized projects can have can be regulated uh uh like the regulation could be less strict however

we still have no idea about true decentralization mean and to be honest as we can we see for example on the case of arbitrim uh where the the governance the you know the the holders token holders voted in a way and the developers and Founders did something completely opposite there are not that many truly decentralized uh projects for now so to conclude I just want this talk to be uh Food For Thought uh not some legal advice this is this is where we are most likely heading heading and uh yeah I I bet that there's going to be many

questions uh so and we are short of time I think so you can reach me out whenever you want and very wherever you want I will be here for the two days so thank you [Applause] [Music]