Mona El Isa: Enzyme – The Future of Asset Management #452

Transcript

welcome to epicenter the show which talks about technologies projects and people driving decentralization and the blockchain revolution i'm frederica anz and today i'm speaking with monae alisa who is the founder of enzyme finance and the ceo of avant-garde finance and enzyme is a protocol for unchain asset management and delegating this trustlessly to other parties and we will go into detail in just a bit but um before before we do let me tell you about our sponsors this week our first one says teddy ho telly ho is redefining the wallet as a public good you can think of it as a community owned alternative to metamask

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chains and this summer's sake wallet is upgrading and to provide you with even more functionality and to highlight their transformation um it will be renamed to omni the next generation super wallet join thousands of users on this next generation wallet by downloading it today on ios or android at stake wallet dot fi and stake wallet is spelled like the meat okay mona it's a pleasure to have you on again after all this time pleasure to be back thanks for having me federica i recently listened to the episode you recorded ages ago um it it must have been late

2016 or early 2017. um back then you came on with your then co-founder um rachel trinkler um and most of the episode actually revolved around polka dot and the white paper that had been published in the weeks prior so obviously lots of things have changed um you're now built on ethereum and polygon not parker dot vito has disappeared you've changed your name so tell her tell us about the the last five and a half years the protocol has changed its name my name is the same oh yes yes yes but back then you you guys were called melon yes exactly yeah yeah yeah so oh god it does feel like ages ago

since i was uh i was here um and certainly was very different times i mean um it you know if it was uh first you know very very kind of less experienced founder i guess uh we were um we got into a phase where we were um uh gavin and utah were advisors to our our company uh melonport that built melon v1 um and uh we were we were very close to them still are uh close to them um and at a point at a point we were just uh uh talking about polka dot and melon now enzyme and um we we got excited about kind of

possibility future possibilities and uh i think it was gavin suggested that we consider doing a joint token sale and for a while that idea persisted um but actually a few months in we decided that it would maybe make more sense to do our token generation events in a in a separate and more independent way um we we never actually committed to building on polka dot back then because things were so early i mean it hadn't even really been built we just had a white paper at the time um and our intention was there you know to see how things developed and to make sure that it was going to be um a chain that we could build on and that had all the infrastructure that we

would need but um to this day we've actually been quite slow to roll out on other chains we even polygon deployment that we recently did i think it was in april may it started off actually as an experiment we were at an off site and we just had a free day of of of hacking and a few of the devs got together and said let's just try to deploy enzyme on polygon and um unlike many other protocols enzyme is a is a is a complex protocol it's made of 25 contracts it has a very complicated subgraph infrastructure that underpins it so we we run seven sub graphs to collect all the data emitted we have a dependency on um on chain link for

price feed so that we can give our users real-time historical reporting and um and yeah and this this kind of experiment just kind of yeah got some momentum and before we knew it we were inserting it quickly into our product roadmap and making it into a deployment but yeah actually usually we're much more slow and cautious when we deploy on on new chains and and we're definitely looking still at the polkadot ecosystem with special interest in what akala is doing and what moonbeam is doing uh speaking to those teams very closely but still i would say um not quite at a point where we're we you know we've decided on a time or or a commitment to deploy anything yeah

why didn't you end up um changing your name from melon to enzyme don't get me wrong i think enzyme is a much better name i still miss melon actually but yeah it wasn't um so so in the middle of the bear market the last bear market we were approached by bny melon which is a large fund administrator in the us for those who don't know and even though the the spelling even though their full name is bny melon spelled with double l um they felt that we were infringing on their trademark so we we tried to push back and every single

legal letter that we responded to them with was costing us sort of uh you know five fig five figures in terms of legal fees um and we felt that we we had a strong case but we felt that we would be outspent in the courts if we persisted it and because of the bear market situation and because we were actually caught on um on a pretty bad treasury management i would say in the last bear market we decided to preserve our capital and take the opportunity to rebrand actually in the market um to take an opportunity to rebrand and freshen things up a little bit as well cool um so tell us about um the vision for enzyme from the get-go has it

changed over the years yeah i think it hasn't really changed i i think um it's mostly uh it's actually stayed very consistent i would say that there's a slight subtle difference between the vision behind enzyme and avant-garde which is the company building one enzyme today um in in terms of of of enzymes vision i think the the idea has always been to be giving um simplicity simplicity transparency to investors by enabling them to have you know three key things one is transparency um we've seen with recent market events um you know what happens when there's opacity in the financial markets and

uh the contagion impact that can happen when you don't understand the risks or the leverage or the or you can't see through the lies that certain counterparties are telling you another aspect that we felt very strongly about was that people having control of their own assets through non-custodial solutions so we don't actually advocate that non-custodial is good for everybody i think that's a personal user choice but i think having the option um to to to have custody of your own assets in control of your own assets should always be a possibility and that has always been part of the vision and then last but not least we were quite excited and still are about

decentralized systems uh decentralized governance systems versus centralized single points of failure um and again just this week we've seen an interesting story in the financial times where the london metal exchange just on its own decided to cancel i think six or seven hours worth of trades just because they were afraid people couldn't make margin requirements and this was just like and it was actually they think it's an illegal decision that was made by a centralized um single point you know single single kind of party uh they rolled back transactions and uh they caused i think they're being sued for 456 million dollars in losses that they caused and

um you know who who who decided that that was okay that decision was out of their remit um you know what conflicts of interest did they have um in making that decision you know obviously they would have been the the worse off party if the margin payments couldn't have been made um and so you know we we have always believed that that's just one recent example but we've always believed that decentralized governance if done right and we've obviously seen you know some some growing pains with that and but if done right we believe that it can bring some balance and some objectivity to the way decisions are made and you guys um you're very much at the forefront of decentralized governance so i think you

you were one of the first projects to have fully decentralized and i want to talk about this a little bit later in the episode um but before that let's um let's maybe talk about um what the protocol offers to users so say um i am a retail investor and i hold crypto assets um in itself cassidy them um in a way enzyme finance enables me to delegate the active management of those assets to someone else right so so the the power of enzyme is that you can um so we i we we didn't actually talk about the trustless aspect that's

um uh another actually very key principle around the enzyme vision is is is keeping this trustless relationship between investment manager and investor and this is something that over time we've actually um has slowed us down and actually created a lot more work for us but we've been very passionate about that value or that that vision that we want to be able to automate that you know in traditional finance you need financial intermediaries to give trust between the different counterparties and in a traditional fund or any financial product you would typically have a custodian a fund administrator an auditor etc those those people play the role of making sure that

the investor is or the manager is managing the funds in a way that was promised to the investor and we believe that you can do away with all of those financial intermediaries through just using smart contracts and that's how we've always built enzyme with this in mind and it becomes very challenging the more complex d5 becomes uh the more types of assets and the more types of standards that we we see it becomes more and more difficult to adhere to those uh promises but we have always um avoided taking the shortcuts to to not compromise on those promises today and hopefully you know for years to come it will always be possible for an investor to invest

in an enzyme vault um in any kind of a financial product built on enzyme with the full knowledge that the manager can only behave in certain ways for example only interact with certain protocols or only interact with certain assets or not act with certain or not trade against certain assets not trade with certain protocols um you can also have um prohibit prohibitions like or or stop losses embedded in the smart contracts if if for example somebody use loses five or ten percent in trading slippage over a very short trading period um you know you can actually pause their restrictions trading restrictions until

the the the the sort of board or the i say board but typically in in this space we we we refer to we think it's um uh uh you know there's a manager but there's also like a group of people who own the vault or on the product and and govern that product and usually that's done through a higher layer uh um the most common one we see is with the gnosis safe um and these people can like review okay well why did he breach the the trading slippage or why did she breach trading slippage was it a valid reason or were they trying to do something inappropriate malicious and then and then kind of reassess whether they want to give back the permissions the trading

is still possible at the at the at the safe level but temporarily gets halted and so before you invest you can see up front you know what you're getting into what the risks are what you are and are allowed to do um you know is it sometimes could be comforting to know that if you're investing in a in a in a yield vault uh with which is not allowed to take any leverage for example because you're not comfortable with leverage or has a maximum leverage ratio this is something that you know suits your particular risk profile um and you might want to protect against you know for example assets below a certain liquidity being touched or being traded um in a vault so that you know that if you redeem because you can always have

the right to redeem you will always be able to find liquidity in the underlying assets so there's a bunch of different protections um we talked just now about the asset management policies in particular but there's even um protections uh thought about and built in at a governance layer so with traditional financial systems if if an update or an upgrade is pushed it's usually forced on you with enzyme if you you know if we decide to upgrade from v4 to v5 um all we do is uh signal and upgrade but it's up to the vault managers to actually opt into the upgrade and in order to protect investors maybe they don't want to do this upgrade

maybe the upgrade is going to include changes that they don't like increased fees or change of risk management policies there's always a seven day cooldown period where they're notified about any changes upfront and that they have um a possibility to opt out within a seven day period before they're forced into this new paradigm so you see everywhere we worked we've tried to think about how to preserve that trustless relationship there's a lot to unpack here obviously lots of food has gone into the system maybe let's stay with um the retail customer the user um for a bit so i mean obviously your your background um is in trading you

were a goldman sachs star trader for in your previous life so um obviously to you are these investment vehicles they're not scary because you understand them um what about so basically as someone who's not deeply knowledgeable um about how financial instruments work how do i decide which volt to buy into yeah i mean i think traditionally this is something um enzyme hasn't been able to display very well um and what's interesting is like enzyme is really all about the core

uh infrastructure um it you know we think about it sometimes as an operating system for asset management something that enables you to build any asset management products on top of it in a trustless decentralized way but um we they've never really enzyme the council around enzyme have never been particularly um concerned or focused on the user experience or making investment or even the products that are built on enzyme these are all built by third parties after we decentralized enzyme melon enzyme we um a few months later we've you know we formed avant-garde finance and avant-garde finance's um vision has been much more about um

enabling so basically um you know sure we have the infrastructure now to build products easily but what do you need to think of outside of the code and then education and discovery so like if you're a retail investor coming into the platform right now it's very overwhelming there's hundreds and thousands of vaults and uh yeah sure we have filters and we have data and we have we're about to roll out api so you can filter that data but you know it's really not an experience for a retail person coming in and so avant-garde is is much more focused now on how to filter the different vaults or how to display

the different vaults how to categorize how to educate around the risks of the different vaults and how to make accessing them confidently much easier do you expect that parties to kind of build um retail user-centric front-ends to this maybe even with like a rating system or recommendations or approved by this uh by a committee or something that basically that that kind of gives the user more to go on yeah absolutely um i mean we um we have been in some discussions people who want to build that and also we have been

beta testing a white label for enzyme which should make it much easier for people to display the vaults they want to display on their interface and give their own recommendations to their own branded company or through their own branded could be either their own products or the products of others um and this i think will be a really interesting stepping stone towards um making bringing more transparency and awareness around suitable investments for different people okay cool yeah that that makes lots of sense um so let's let's um stick with um the investor for one more second so um i i have decided on a vault and i've

invested in it in some sort of asset um how do you make sure that i can always redeem because obviously the vault manager is allowed to kind of undertake certain actions on that so do i need to give a heads up that i want to redeem or how is liquidity handled we try to flag up front on the interface which vaults are 24 7 redeemable and which vaults might not be 24 7 redeemable in the past they've all been 24 7 redeemable but as um the complexity of d5 has increased over the last year or two um we've seen new types of um non-fungible or illiquid positions come into play like nfts or like

um you know when you borrow or when you when you uh when you borrow on ave or compound or when you create a cdp um you're not always getting back a divisible erc20 token which can be redeemable at all times so this has added this added complexity and we saw a lot of demand for this product so we couldn't completely ignore them but ultimately this the the the use of these products does negate a little bit on the 24 7 redeem ability because of course if everybody wants to redeem at once and um the vault is tied up a hundred percent in the borrowing there's no way to force the unwind of that position in order to be able to redeem it

so um so we we try to flag on the front and which ones are 24 7 redeemable and the way that you can guarantee to the investors that 24 7 redeemable is there is a policy that says that this vault is not allowed to interact with any external positions uh external positions being these more complicated um less liquid types of positions then there's another type of fault which is allowed to interact with external positions but we flag in our documentation and we're trying to make it clearer on our interface as well that these require this these kind of vaults require different level of trust assumptions so typically you might require um

maybe illegal terms and conditions you might want to know who your manager is whereas in the other case you might not care because you have 24 7 redeemability for control um so so we we have actually now started to think about enzyme it's highly customizable customizable highly configurable and we provide templates for people to create different types of vaults with different trust models associated with them that makes a lot of sense um so if if i invested say ether i might not get you know either back i might get like some collection of um erc20 tokens when i redeem right so i there's no way to kind

of just cash out in the whatever actually there is a way so so um when managers um a manager can can give his or her investors the option to redeem in a single asset or several single assets um they just have to go to the settings page and say okay i want to make eth a redeemable asset and they can also configure that they can put a cap you know because you don't want all the east to be drained without rebalancing the portfolio so you can say i'll allow up to 10 of the aum to be redeemed in in eth um if that's if if that's something that the investor wants but then they there's a period of time which allows them to

rebalance the portfolio then they can re you know go to their settings again and put a new rule that says you know a single asset redemption is possible so again we leave that up to the manager but the default and as long as you're invested in one of these vaults which is 24 7 redeemable the default is that you get a slice of your assets back the underlying assets back do you have any idea um what kind of market segment um the user of this um is so basically what kind of people um i mean because you kind of you have to know your way around defy at least a reasonable amount to kind of say to specify um what kind of protocols you're

comfortable with and what kind of policies you would like to have your void manager adhere to um so what who are your users yeah i mean i think that the the type of users that we tend to attract are typically um um it's quite broad-based to be honest because there are so many different things you can build on enzyme one use case what we originally set out to build was for for the hedge fund use case and um um we saw a lot of interest in that but also a lot of fear and this kind of hindered growth for a while and the fear came from you know hedge fund law is very complicated am i doing something wrong if i raise money if i

market the fund and there was just too much um complication and lack of clarity around the regulations so we we see we saw that growth somewhat stunted and that's something that we as avant-garde finance known as enzyme have been researching in a lot of detail to be able to provide um you know more like more advice and more solutions around that to prevent you know this this technology which offers huge amount of automation and lowers barriers to entry and really you know everybody including the habit regulator should be celebrating this really because it gives transparency it gives control um if if the regulator's job and mission

is to protect the investor that's exactly what enzyme was built to do um so you know if if the if the barrier to entry is now just the legal side of things um we have to solve that and so that's something that we have been working on solving the other interesting use case we we've seen is um interestingly something that we never set out to to target but dow treasuries um and the reason is that um the the the same protections that investors look for for investment managers are the same things that uh government stakeholders in a in a decentralized governance system should be looking for for the people that manage the the funds

so um i i think it's no secret that most dows struggle to manage their treasuries unless they fully outsource and fully uh trust um a third party um we have seen some dows um even you know giving full control and blind trust to a single wallet for example to to manage things more efficiently um and really that that compromises on the values of d5 really like you know the whole idea is it should be transparent it should be fully um accountable it should be uh it should be trustless to the extent it can be and so we have seen a lot of interest in people using gnosis with enzyme so that a they can give full

transparency and reporting to their community at periodic intervals and even in real time b so that they can delegate trading efficiently they're going to agree as a dow on the investment policy like this is what we want to achieve but they can delegate the execution of that strategy to an individual or a team knowing that that team have to stick within those parameters certain parameters and three they can monitor uh and evaluate the team um and kick them out at any time if if they are breaching any of the parameters that they were given so um so dow treasuries is another use case that we've we've seen a lot of interest in um and those are really the the two the two main ones

so basically your goal is to kind of achieve a user experience that is good enough that people are no longer willing to sacrifice on security just to kind of make it workable yeah and i'd say that the customer the user experience uh work is largely coming from avant-garde finance um through building various services or researching the legal stuff or um you know building out the interface um developing you know developing further the interface super interesting so let's talk about the vault managers um so let's say i

know something about defy and i think i can i have some alpha and can uh out trade other people so what do i do to become a vault manager so it's really uh really quite easy so you just go to create vault on our app and then you get taken through basically eight pages of questions of configuration you know for example what you want your vault to be called what do you want the token symbol of your vault to be do you want the shares to be transferable do you want to have a management fee a performance fee entrance free exit fee do you want to have risk management policies built in do you want to have rules around investments do you want to have rules around redemptions if so what

are they specify them and it's all just easy drop down menus which are easy to interact with and the last step is check your check your configurations and deploy to the blockchain it's one transaction to deploy your vault on chain once you've deployed it you then have an interface where you can manage all your define assets simply from one single unified interface your positions are aggregated in the interfaces updated in real time and you can build on top of that like various strategies without having to log in log out of different uh protocols uh you can because you know we're collect we're connected with other protocols at a smart contract level you can actually just stay logged in once

with your metamask wallet and do all your trading with the different protocols from one place um you can also do this programmatically through our sdk or through writing a bot you can delegate trading to someone on your team if you if you're a bigger company for example or or more people if you let's say you have assigned you give three three people on your team trading permissions you can assign different permissions and risk policies to each person uh depending on what they are and aren't allowed to do so the level of configuration um gets quite granular and the advantage there is really that um you don't have to build an infrastructure from scratch yourself you can focus on building on something that has been on mainnet for three and a half

years and somewhat um battle tested um it's received god knows how many audits in three and a half years so through some of the largest auditors in the space chain security open zeppelin and others and then also you save a lot of money and focus and time and energy by not having to build and maintain um infrastructure uh something that we've learned in our long time in this space is building is almost the easy part maintenance is really where it gets um painful and difficult yeah amen to that um so that sounds that sounds um incredibly powerful um but also incredibly expensive to deploy so basically if you

have granular permissions management on a smart contract level how does that play out in terms of gas on ethereum i don't have any stats for you right now uh i would say that obviously the more granular the permissions are the more expensive it becomes but i suppose that we now that we have other deployments we have an alternative deployment other than ethereum we're sort of less concerned by that because uh the the idea is that hopefully in in future years will will be deployed on much cheaper and more efficient chains as well like maybe gnosis chain or aurora uh chain or um one of the parrot chains on polka dot

and so increasingly we we think we're you know we'll move towards an interoperable world somehow um and we will this will become less and less of a problem but yeah of course it does add to the complexity today of course it's much less of a problem i was shocked yesterday doing transactions how cheap gas has become it's become super cheap so it made me want to stock up on like ens names and stuff i actually thought there was a mistake in the estimator for a second um because i don't remember the last time i saw i saw gas prices that low and um i almost couldn't believe it but yeah i mean comparing from where we were a few months ago um it's not a huge issue today but we all

know that it's not uh sustainable you know if if gas prices spike on ethereum again and that was something that was quite prohibiting actually um during um during the months where gas spiked it you know really um it did become very expensive to use enzyme and it did paralyze trading activity uh to a large degree yeah that i think uh lots of people on mainnet have have felt that so if you look at the vaults themselves so basically you just said that the integrations are on a smart contract level that that's that sounds great limiting in terms of integrating other protocols has this

been an issue for you yeah to a degree i would say it's limiting in a sense that we cannot always meet the the needs of everyone um in terms of you know when we're talking to a a prospect that wants to use enzyme and they say well we need to interact with these 10 protocols we might have eight of them but we're missing two and um although we can usually turn around the integrations pretty fast um you know some people prefer to have the full um full available options at all times and this was especially the case during um you know the the yield parties uh that we saw a few months ago when you know a new protocol would launch and there was

a yield farm that was 400 for a day or two and you had to be really quick to get in to get that 400 for the first few days and then it would fold quite drastically and obviously we cannot move that fast but um on the plus side i think it's those protocol it's those um integrations in that system and that pricing mechanism that also enables us to keep the trustless promise to be able to go give the 24 7 reporting and to be able to build a purpose-built asset management tool um that really considers the needs of i mean if you look at for example uh the the the platforms like gemini or other asset management platform what what gemini has done with bitria for

example they have 75 assets crypto assets in their uniform verse that hedge funds can interact with um which is you know i think a quarter of what we have so it's not that we are um it's not that we cannot provide a variety of assets but yes we cannot provide everything because every every time we add something we have to think about the risks that this would introduce to the pricing of the vault to the um attack vectors to the and to the risk management policies in particular the 24 7 reporting i assume this i mean this can't happen on chain right so basically you have to have like a back-end service somewhere that kind of you know runs the sub-graph

uh the sub-graphs that you have for people yeah um who runs these so um yeah i mean basically like the sub what the subgraphs do is collect emitted data from the contracts um and we have all of that emitted data collected on seven different subgraphs and then avant-garde will run a service that basically we have two types of pricing we have the on-chain pricing which we get from the chain-link historical prices and we have something that gives much more granular tick data which is centralized um and i think we use crypto compare for that um so sebastian

on our team is one of our ctos he has um yeah i think i think i'm not sure if this is still the case but at one point we were the largest consumer of the graph in terms of data um and uh he's actually now also on the graph council and he's he's been a very big influencer in terms of how the graph has actually developed its subgraphs to be more scalable to be able to handle larger amounts of data um for us in terms of the actual specifics of how it works uh on our end i wouldn't be able to go into details but that's kind of at a high level i mean even even um at a glance i mean kind of having 24 7 reporting on any on on shane vault i mean this is it's um

this is basically unheard of i actually i know i i know um funds that kind of take screenshots of like that d bank or zapper portfolios at certain points to use this as a basis for reporting so kind of just having this as a continuous service have you thought about kind of just selling this on its own because i think people would eat it up yeah i mean we think the full package is really what's attractive but yeah increasingly worth it we're starting to think about where these kind of things could get interesting where else you know like we can we can use this infrastructure that we've built to um improve the experience of other

asset managers in d5 and beyond so um let's go back to the to the vault operator um so i'm putting on my world operator hat again um so now i've created this world and i've deployed strategies um how do i make this known to people so how do they find me so um i mentioned this white label product that we're in beta testing right now and the cool thing about that is like one of the pushbacks we've had from managers is i don't like um i don't like um sending the enzyme link to my vault to my investors because then they get to see my competition

which is kind of funny because we're trying to advocate for transparency as well um but i i kind of also see the i can see both arguments right i mean the data is there for any investor who wants to see this is like a big you know the enzyme map is like the big master database of all the funds that exist on all the vaults that exist on enzyme but um so there's two different ways as a you know hosting your own having your own website and being able to send that to your own network of investors and b you can just get the visibility from the enzyme app from the enzyme community and something that we want to do in future is actually help accelerate managers so we're working on a project which is

still in stealth mode which we'll hopefully announce in q4 this year which will be really pivotal to helping managers beyond just the tech but also in a much more holistic way whether that be um on the legal side on the fundraising side on the marketing side everything um and really the vision going back to the vision is that we want to promote transparency and simplicity for asset managers um and investors so you know that that goes beyond just having tech you know tech solves a lot of problems um but we really you know the problem in traditional finance the problem in even centralized finance even crypto

is um you know setting up a a crypto fund today you still need a custodian you need a fund administrator you need a lawyer you need several lawyers you need to research a ton of different service providers you need to understand the fee structures you need to do months and months of really boring really painful paperwork you need to um even even when you're halfway through usually you think oh shoot um there's a better way to do this and you start again from scratch and it's just like there's no one-stop shop that can help you from start to finish is something the angel list has done very well for venture funds for example just does not exist for hedge funds today so i think that um i think our our vision really eventually is to be able to

be that one-stop shop at the avant-garde finance level for investment managers um you know to to be able to just have everything they need in a in a very easy simple quick way so you're in close contact with um several of the world managers to kind of hear their pain points yes yeah cool um so the see is i i kind of i understand um how the world manager operates um how i mean you already kind of alluded to this so there's a management fee or the management fee can be set and the performance fee can be set and so on do you have any idea of um how much money the vault managers typically

make on a vault i don't have like aggregate data but there's like um i i know that there was a vault manager we were looking at last year um who really has been a very kind of exceptional example and a really prof you know one of the really has done really well has done really well through buyer markets and bull markets and so we've got a lot of our attention as a team and um you know we're almost like you know some of us have even invested in in that vault ourselves but i think you know the interesting thing about him is that at one point um i think you know last year's um fees for him we're looking kind of north

of 400 000 um which i think you know on a i think it was a two million dollar one and a half to two million dollar assets under management um you know that was a function of him a performing really well like having picked up the right assets in the bear market um and b um you know his fees were actually very reasonable but this just performance has been really consistent and really solid and even now you know every now and then i always when there's a big move in the market i always like to go and look into that vault to see what's or i have two or three vaults which i i really i like their styles and i love to go into those faults and and just look at did they they you know did they get out like before the last

sell-off you know did they did they go into stable coins or did they did they you know reduce their risk or did they or before if there's a big spike i'd like to see if they bought volatile assets to and if they you know and it's it's really interesting actually to have all that data at your fingertips and um and that's why you know as we start to discover more and more of these these talented people and we build bigger and bigger data sets on them i think the next step is is really trying to help them succeed you know our vision has always been about um related to lowering buyers to entry democratizing access to to finance but that also it doesn't just come with investors it also comes with investment managers if you look at the largest hedge funds in traditional

finance today they are all the biggest hedge funds really you know the the biggest hedge funds are the only ones who are allowed to succeed they don't have particularly good performance if you look at the new players coming into the market there's hardly any um even if they're performing much better they just they they often have to shut down because they're not able to scale in order to cover the costs and so it's it's actually very hard for new incumbents to break through and i think our our hope is that by lowering barriers to entry and providing this one-stop shop simplicity transparency to all we can help enable innovation at the investment management side and success so we really really

hope that that feeds through to investors too because that means that they don't have to you know they have they have better alternatives than whatever the you know the three or four options are available today thread thread needle fidelity etc which which are just you know not particularly bad but we don't know that they're the best because we don't they don't really have any real competition i see that on the flip side the transparency that you enable is that also dangerous to the vault managers because basically everything is inherently on chain and basically all trades can be seen in real time so what would prevent

me from creating um uh a bot that kind of has rep just replicates a popular vault but uh takes half the fee yeah no i think that's a a fair point i think privacy is probably an area that we want to research at some point we don't see it as a huge problem today um but you know exploring how we can use obfuscation layers to make certain parts of a portfolio only visible to certain permissioned people is is important that you don't want your competitors being able to see what you do we are also able to funds our faults and funds are also able to negotiate prices off chain with people

from a vault um and then settle on chain so um you know through something like a xerox adapter you can actually settle uh trustlessly through that vault is true through that um adapter but um nobody really needs to know about the trade until after the fact but yeah there are definitely some challenges i think they come more when you um they're likely to become a bigger problem as track records become longer and people are more convinced that someone is a really good performer and also as some of these products really start to scale you guys have a token it's called mln and as in melon what does the token do

so the the protocol has a fee embedded in it um it's um it's a 25 basis point fee um and it's mln is used to pay the fee the the the initial fee that is collected is as as a share of the vault but the the enzyme dow doesn't want to end up with lots of we actually would like to end up with lots of different shares of all the vaults but um the the the problem would then be redeeming all of those chairs and comfort you know and doing something meaningful would just be too gas intensive and labor intensive so the the system that we devised instead was that you can buy back your vault shares at a 50 discount by paying your fees in mlm

and so the the the token is used for paying fees on the network um and enables you to a discount on the flip side the protocol mints up to 300 000 new mln tokens every year and those tokens are used to incentivize developers around the enzyme ecosystem to build cool things uh and useful things more than cool and useful things um that will help improve and grow enzyme and this is also how avant-garde finance is financed yeah i mean uh avant-garde finances actually contracted some of the uh council work uh and that's that's as uh partly paid in mln

um and uh but we also um because we we're building sort of other services on top of enzyme at some point those some of those might be monetizable um there's also some equity vc funding uh at the navangard finance level uh so we consider enzyme as one of our clients but we hope in future that we will have um many more clients you just said counsel and enzyme basically if you look towards this path of decentralization that a lot of original d5 projects are on enzyme is at the very

spare head of that movement so um tell us about your past decentralization and what the council does and how the governance looks i think we were the first d5 protocol in history to decentralize our governments it was in february 2019 so so it had never really been done before and we i think wrote one of the first um you know proposals for how decentralized governance should look like in practice and actually implemented it so the way we did it is mellenport selected melonport a company that built v1 of enzyme selected an initial starting council i think it was composed of 11 people at

the time but the requirements were that all of those people had to be technically skilled or user representative we couldn't actually have user representatives at that time because we didn't have users so we just kept it technically representative um technically skilled sorry and we included people like people who had audited enzyme in the past or had interacted with enzyme quite extensively at a contract level um and so we had um 11 people who had some kind of technical expertise to contribute to the council and then from then on they were going to decide on how the council grew from there on we did eventually add the user representatives and

we have had some changes on the council i think we're 14 15 people today but in general i'd say that the really key area i think of differentiation that we have compared to other governance models that i see is that it's not a dock and holder governance and we got some pushback at the time for that like saying this isn't really decentralized because it's not token holder governance but we actually felt that it was because the the the parties on the council have to be known anyone who meets the criteria is eligible to join uh and become a member of the council you just have to prove that you're either technically skilled or that you're able you meet the criteria of being a user represented are nominated by the

user represented by other users so i think um you know the tokenomics like really the tokenomics really looks after the token holders and the um the security and future development of the protocol but no one in in our governance because nothing or nobody in our ecosystem was really covering the most important stakeholder which was the users themselves and when we thought about what do the users need in terms of their representation we decided that that would be you know people who know what they're voting on in terms of contract upgrades and technical decisions in general which is what the governance really looks after um and that they have to have some representation to prevent the council from doing things they want to do rather

than things that the users want to do and we think that that has been a good um balance but it hasn't been without its pain points i mean governance decentralized governance is definitely um much more challenging than when you run a centralized you know company um i think that you guys will be finding that out soon [Laughter] and but i think um but i think we've learned a lot from that and we've tried to iterate our governance along the way for example um you know getting people to to vote or participate can be in a timely manner can be quite challenging everybody's really busy and has other obligations and voting frankly it's a time-consuming thing you know you

have to go and get your ledger i'll get in look up check the votes it's the tooling around checking the votes is not you know the most easy it's getting much better now but it's not the most easy to to decode function data and and and actually decide to you know to be able to see what what you're voting on i think prognosis just released some tools that make it much easier but you know in the past we're talking three you know we're talking more than three years ago now three and a half years ago has been very challenging and some of the things that we found or we learned were that it's very easy to add people to a dao it's it's harder to remove people from adele especially when they know each other and so

we decided that we we should introduce minimum participation levels and measure kpis of various participants and rather than make it a a you know a kind of emotional decision make it much more quantitative and say well if this person hasn't attended more than x meetings or hasn't participated in more in exports and hasn't uh contributed certain number of expected hours then the decision to remove them should be almost automatic and so that that's kind of one of the iterations or an example of one of the iterations that we made again collecting that data is still a challenge and still quite manual um but i think dow tooling is getting uh you know better by the day

and if someone gets removed from the council um but because they haven't participated enough or similar it so the counselor gets to nominate someone to stand in in their place so what we found is actually that when we introduce these minimum participation suddenly the the participation shuts up people don't like to underperform when you know they're when they're being watched um so again it's it's another strength for transparency right and i mean where i would like to get to is that we automate the the measurement of these kpis and publish them monthly and we're working on that um but i think because that that's like

almost like a you know name and shame that that's like the ultimate you know um at least then is you don't even have to let go of somebody usually what you what you see and what we have seen is if people are not able to meet the kpis before we even have to tell them they come and put their hands up and say i've been really busy and i just can't um i don't think i can manage this with my other time commitments and and two or three people had to step down because they had to acknowledge that they just didn't have the time and the brain space headspace for for being on a dow and that's what we want you know we we need people who are able to commit time we need people who are able to contribute and add value to our stakeholders and so

so this was a really good step so how do you make sure that the council members are incentive aligned with um success of the enzyme protocol because that's kind of the the where the token governance kind of comes from right so basically i mean the idea that people who um uh stand to see the most upside or the most uh damage to their positions they should be incentivized to make rational decisions no i mean the council members are all incentivized because they get paid in mln for their time and actually that's been another challenge in the bear markets those payments are worth very little and in the bull market

they're worth too much so how to strike you know how to strike like say the dollar value of a council's participation with the volatility we've seen over the last three four years has been really um has been really challenging um i think the the the interesting thing that we've learned from the last bear market is that people did you know people did stand by us even when our low point our market cap got to two million dollars i remember it very clearly in july 2019 and i think that um you know the i think they were i i i don't remember the exact number but they were probably receiving one or two thousand dollars of compensation a year for

pretty substantial amount of work you know and not saying it's a full-time job but you know the the the asks we had from the council were you know we're part-time part-time work part-time part-time jobs and um the following year i think um you know the mlm price went from two dollars to at some point 180 so you can imagine those same packages were um were worth you know over a million dollars and i think um i think you know at some point we had to actually self-regulate ourselves and say um you know this this could this could be seen as very bad and so we actually need something a little bit more measured and all the all the melon that's paid out to

the council is vested over two years so that aligns a bit for the longer term um but we need something that actually reflects the amount of work we put in so we're now pricing it based off a view up and we revisit whereas before it was a fixed amount that was that was dedicated to each council member we um those are a fixed pool of assets which is divided by the total number of council members members we now actually price it off a view up we strike it every year and what kind of decisions um does the dao make so what parameters are updatable um in in the protocol so this is really interesting so the the

we very naively when we when we um launched the dao um there's only three responsibilities the council has it's um upgrading uh overseeing the upgrade of the the any contracts so when we signal a new upgrade they have to verify things like that the contracts that we deployed are the contracts that were actually audited or that if we're adding an asset to the universe um asset universe they have to check that the price feed that's linked to the asset is the right price feed and um being calculated against the the right the correct rate asset so um if it's gross gnosis um you know we need to make sure that

we're we're we're reflecting correctly if it's priced against eth or usd so that there's no miscalculations in the knobs etc um so these are just a couple of examples but that's quite a lot of work to check when you're you know there's a standard operating procedure for every type of decision adding a new adapter adding a new curve pool adding a new um but but you know these these are quite thorough checks that need to happen and then the second kind of um thing that the the council has power over is fees so um the moment we mentioned that the fees on the protocol are 25 basis points per annum um any kind of tokenomics change or fee increases decreases come from a council level um it can be proposed by anyone

but the council ultimately has um the the final vote final decision and then the third thing is uh that they can vote on is is the distribution of grants um and these are the three main decisions i think something else that we have learned from governance is that not all technically skilled people like especially auditors want to be voting on things like grants or fees they just don't care they're very happy to vote on contract upgrade and in a similar fashion if someone is like a tokenomics expert they don't really want to be taking the responsibility of voting on a contract upgrade so another change that we're implementing we're in the we're halfway through

implementing this but we're um we're strong believers now after three and a half years of operating like this that there needs to we need to kind of um divide and specialize into subgroups and uh delegate certain powers to certain specialists so that's something that we've already started implementing and then the the the responsibilities that no one talks about because these are the three theoretical responsibilities that the dao talks about but the responsibilities that everyone who runs a dao or is involved in a dao knows about are the things that never get talked about that are um as a ceo i'm sure you're familiar with this but all the operational stuff that goes on accounting reporting you know payments

invoices um you know this is something we actually didn't even think of or account for in terms of people's time and who was going to do that and um ultimately it falls it tends to fall on one or two people who just want to get it done and you know this is that they have like ocd personalities and just want to get it done but there's there's uh this is something that you know again tooling could help with because it's at the moment very manual to go back and reconcile all your accounts from the last year mainly so that you can report to stakeholders transparently over what happened and how you spent the funds and um but then you know there's things that come up like when you give a grant you know should you have a contract with that party um what are the you know

giving grants without any kind of strings attached can be very problematic we learned and we've seen also other examples in the space um so you need to have milestones built in and you know and and trigger points and and this is this is all extra work that we hadn't really anticipated and um i guess i'd bundle that all up in operational stuff but i think it's something that people don't really think about or maybe they think about it more today but three and a half years ago we weren't thinking about that yeah so basically your take on a dao um is in a way more permissioned but basically excels at transparency is that is that um a fair way of putting

it it's um it's it's more permissioned in the sense that i mean any anyone who meets the criteria can apply i would say that in order to protect decentralization we feel that known parties and qualified parties have to be uh there has to be an eligibility and a criteria to let people into the dow and the reason is you know we've seen since our dao launched we've seen a lot of token holder governance models and um you know we we've always felt that that's dangerous because because you don't know the parties you cannot disclose or identify the conflicts that they have when making

decisions um you have no idea around their level of expertise they could just be voting because they you know blindly and that's a very dangerous thing um but the other thing is and and bear markets are a great time to talk about this like in bear market in bull markets it's hard to attack any kind of token holder governance but in a bear market a lot of protocols get very cheap to attack if they are token governance led so you can you know if if my competitor has a market cap of five million dollars today for example um i can probably quite easily erase you know the amount of talk let's say to whatever the threshold is to pass the vote let's say two million

dollars to buy up a bunch of tokens and basically um maliciously destroy them and do it all and honestly to do it all anonymously and so we felt that those risks were too high to you know as much as an open system we try to keep it as open as we can but i think the number one thing is having a robust governance system that is less susceptible to attacks and so um so the way we made it you can call it permission but i guess like the way i guess we think about it is still very decentralized but um i think the way we think about it is a good governance system has to be one that cannot be attacked and that can withstand um difficult situations um and

those some of those situations i just listed out um we are we are immune to because a all the parties are known um they have to adhere to certain uh you know we have to they have to adhere to kind of disclosing interests conflicts of interest up front the parties are known if those conflicts are discovered without them having disclosed it again automatically being removed from the council so um you know these kind of sound like boring old traffic things but but but they actually work uh they do work so you know we don't need to reinvent the wheel um for everything you know some things we can actually learn from the past uh absolutely and i think there's um also a lot to be said for having like

different approaches to the same problem just to see kind of what what because as kind of an arena for experimentation almost um i mean what we kind of see in the token holder governance projects is the rise of like the protocol politician right and there's also there's also the question of is this something that we want well exactly yeah well exactly and and also you know um without naming any protocols you know a lot of token holder governance if you go and look at um the distribution of the tokens they typically are owned by four or five of the largest vcs that the you know they're very it's very very concentrated and i would argue that um having 14 people on the council today is

more decentralized than having five hundred five hedge funds owning ninety percent of your token supply or eighty percent of your token supply especially if their reputations are attached to it and it's you can it's it's not it's known generally who voted on what so yeah yeah okay so maybe let's talk um about uh the current market situation so you were affected by like a little bit celsius was one of your clients right they were a user of enzyme yeah um they were actually our largest user until recently they ironically came to use uh i say ironically because of everything that

happened recently um but ironically uh they they were um trying to move towards a much more transparent um unchain process just before um everything unraveled a few weeks ago and they decided to do this via um enzyme or a subset of their team at least decided to do this via enzyme by launching a cross-chain liquidity product an enzyme and again this this this shows um how flexible enzyme is because that was a use case we we never really saw coming um but essentially what they did was they created faults for different assets um which they then um

used as um proof of reserve on ethereum for example they would create an eth faults on enzyme on ethereum they would deposit their users that theirs and their users eat into that vault and then they would milk mint eath on let's say polygon chain i think they called it cx celsius x eth on on polygon and um give back to their users cx eth but working with us and with chain links proof of reserve they were always able to prove to their end users that the cxe was backed one for one on chain through a mixture of chain links proof of reserve and enzymes transparency and um they did this for a number of

faults and the the second phase was going to be very interesting too which was um they were going to start managing the the assets within the enzyme vault to earn yield and i think split that between their users the cx eth holders and the um and themselves um to kind of have a win-win situation where you could be owning cx eth on polygon which owns your yield from ethereum and potentially also a yield from polygon which is kind of cool um so yeah the the the irony is this was like as transparent as you can get and as um it was it wasn't fully non-custodial obviously there was a c5 element in it but it was an interesting use case

nonetheless um that we have seen withdrawn because of recent events but it was it was really fascinating for for us to watch that that launch yeah it looks like celsius was moving in the right direction there yeah um yeah um so what what as someone who's been in this space um for a long time um what are the breakthrough breakthroughs you you anticipate um to happen in this space in the coming years because i mean it's changed so much since uh 2015 or so right um yeah i mean i i don't know about you because you've probably been in space as long as if not longer than me but

um i personally um i'm sort of a little bit relieved by this bear market in the sense that it's kind of just bringing everybody's um bringing some sanity back again um because i feel like the last year or two has been a little bit insane you know i feel like the the definitions of divine have been um abused a little bit and uh and and warped um and and that you know really the last year or two um has been everywhere i look has been my claims around innovation around d5 2.0 etc and actually all we've really seen is um increased risk and less transparency

from from newer projects coming to market that have um obviously don't like to generalize but a lot of a lot of what we've seen has been compromising the original values that that d5 were built on so in a way i feel that um this you know as soon as yield vanished so did all of those projects and and i feel i feel that that's actually a good thing for us to keep building on the original vision of defy and i feel um i feel that the the recent events whether it's three hours capital or uh celsius or um the counterparties that suffered as a result um have if anything strengthened the argument for defy you know they've um

all occurred because of too much opacity i'm pretty sure that nobody would have lent money to three hours capital if they had any idea of the leverage i did a quick back of the calculation um estimate and i you know from the data i could find and you know i think they they would have had at least 40 times somewhere between 16 to 40 times leverage um which is crazy i mean do you know i i can't imagine any of the lenders to three hours being okay with making a loan knowing that information or even anywhere in that range even if it was the low end so i think that transparency is something that's becoming more and more important um

i think people i think on the the hedge fund side on the investment side i think people will continue to resist transparency because um frankly but but also that the ones who resisted are also the ones you should be the most wary of because you know if you have something to hide then you don't want it to be transparent so um but i think all of this actually bodes well this this these events are are actually a great reminder to how important what we're building and not just for the transparency also because of the um self-custody possibility and again i want to emphasize i don't believe everyone should hold full custody of their own assets it might not suit everybody but i believe that everyone should have a choice and i also believe

that true diversification these days because everything is so highly correlated is really um between custodial and non-custodial solutions because if you have a another lehman brothers it doesn't matter which hedge fund and tradify c5 you're invested in most likely you're going to feel the ripple effect and if you're invested in d5 and there's uh uh if you're invested self cuss totally in a g5 protocol and there's a smart contract risk um you will suffer but the other system won't suffer and so this is really you know a diversification the different risks you're looking at uh single points of failure and custodial risk on one system um as being the risks and on the other

system you're looking at smart contract risks um primarily um and so or losing your keys and and so like it's different risk profiles and you have to decide what's for you but i think that's really today's modern form of diversification um and last but not least i think increasingly we need to be concerned about governance i mean we're seeing increasingly more and more abuses of single points of failure when robin ho robin hood paused trading when um uh what were they called that group that um with gamestock do you remember the group i forgot their name um they caused a a a short squeeze in in game stock and um yeah the reddit people but i don't

remember what what they called themselves i'm having a blank but anyway um you know robin hood just single-handedly decided to pause trading probably because it was pressured by its largest hedge fund clients but this is this was really sad i mean for once you know the retail guy was winning against the hedge fund and suddenly that they were they were at some single point of you know failure just decided that that wasn't that they couldn't do that because their their big hedge fund clients would be pissed off um more recently we saw the lme cancel the trades um and we've just seen countless examples of of um you know centralized players um favoring their own interests in order to hurt other players or or at the expense of

other players and so i think going forward you know really thinking about decentralization is not perfect it's far from perfect on the governance level and we have a lot to learn but i think it definitely um has a lot of promises and and potential for balancing out the risks of of a single person's interest if designed if designed well and if if governance processes continue to iterate in the right direction i i feel your comments on the bear market i also quite like bear markets but obviously this comes from a point of privilege that you know we have certain economic certainties that kind of

that you know will hopefully be okay um there were times in the last bear market where enzyme was in dire straits as you explored earlier any advice for people uh you know in in in your shoes or in your shoes back then yeah yeah certainly was wasn't as uh easy as last time around although last time was a huge opportunity for us because we did manage to keep building despite um despite our really really tough financial situation the way we handled it at the time is um we asked everybody you know we had a burn rate which was basically at some

point giving us four or five months runway and just when we thought that the bear market we were coming out of the bear market covid hit and um you know and suddenly everything kind of uh collapsed again we we had very little certainty and four months runway so i think you know the decision we had to make quite quickly was um was uh you know either we what's the point of continuing during the bear markets you know a few people um put put in a few a few stakeholders put in some of their own private capital in order to keep the project going um but even that was running out and when covert hit the four-month runway was you know private private and the

private contributors were basically we're not talking about vcs by the way we're talking about individuals on the team the the the private individuals were at the limit so the only way forward was to say okay we either need to cut our burn rate drastically in order to get ourselves like say 12 months of runway or we need to or what's the point of continuing to fund for four months if we're going to be dead in four months anyway and so when you presented it like that to the team the team actually there was quite a lot of buy-in and most people voluntarily reduced their salaries uh as much as they could um and some of them uh pushed back and um are no longer with us um but i think um the the the solid team

off i think it was six of us that that that stuck around um were extremely um i would say like resilient and uh motivated and continue to push through those times in a in a way that i've never seen before you know more motivation than ever and they were compensated in in equity and tokens at the time instead of to compensate for their cash so i really recommend um you know not to be put off by a low token price but actually if you need to restructure your burn um you know you should be selling your token to your team as a way that hey if we pull this off this token will in our case it went from low low to high was 2 to 180 so you know so

i think that the the risk reward can actually be huge on a on a very short time period one or two years um if if you can get the buy-in from your team to really believe that they can create the value needed to bring this project back in a bull market and our team managed to do that um so we got our runway to 12 months and within that 12 months we were able to close a seed round with a placeholder and collaborative fund uh which gave us some more time and then later our series by then the bear market it was over but you know it was it was a it was a stressful time and a lot of sacrifices were made by the team um you know to get to get us to where we are today so i guess um i guess that so number one my advice

would be cut your costs immediately and probably cut them more than you have to try to incentivize your team with tokens or equity instead of cash so that you can buy yourself as much time as possible and also they will benefit more longer term the other thing is as stressful as it is also don't forget to think about the opportunities around you there's going to be huge opportunities you know something that i like to bang on for example as an example is if you're building something an asset management product in this space and you're funding the product development and the infrastructure development in asset management to look around and see what solutions you could plug into that are plug and play like enzyme that's one example but there must be so many other examples outside of asset

management where you can leverage existing infrastructure to reduce your costs um and you know m a can be interesting um partnerships or uh receiving um yeah partnering with competitors peers you know uh strategic partners can be very can be very interesting as well thank you yeah that's uh very insightful mona where can people go to find out more about enzyme or participate so our twitter uh channel is very active uh it's uh enzyme finance we have a telegram channel a discord channel um

but yeah twitter is like kind of the the central place where i think most activity happens uh in terms of announcements and there's always a vibrant discussion happening in discord and telegram as well perfect thank you so much for coming on mona it's been a pleasure thanks for having me back really great to be here