INVESTMENT

Blockchain and DFI: The driver of change in asset management


“The future of wealth is tokenized.”

Mona El Isa, founder and CEO of Avantagarde Finance, told the audience at the CFA Institute’s Alpha Summit last month.

“If you make this assumption, you can completely re-imagine the infrastructure in which you are financing,” he said. “You can see a fully automated operational and administrative infrastructure that does not have the same barriers to entry as traditional thematic money.”

El Isa and another blockchain pioneer, Ethereum founder and chief scientist Vitalik Butarin, discusses the evolution of blockchain technology and the future of decentralized money (DFI) that has brought about changes in asset management.

Huge potential of blockchain and DFI

El Isa Sa and Butarin both started their blockchain journey with Bitcoin, then quickly realized that potential applications for blockchain had gone out of currency.

“The Bitcoin blockchain does one thing and one thing well,” Butarin said. “It maintains the bitcoin currency.” He saw the need for a broader core blockchain technology and began working on Etherium in 2013, a general purpose blockchain that supports a programming language. “For any contract, agreement or any application you want to build, you write the business logic or code, publish it, it’s ongoing and you can communicate with it,” he said.

El Isa Sa spent nearly 15 years in traditional endowment financing, as Goldman Sachs’ youngest market maker and prop trader. He later ran a long-short equity portfolio for a large European hedge fund. But when he started his own hedge fund, he faced high barriers to asset management.

“I was shocked by the inefficiency of the industry,” El Isa said. He never dealt with the costly administrative and operational burden of start-up hedge funds.

“The big organization I used to work at had a floor of working people, but I never really knew what they did,” he said. “As a small to medium-sized entity with less than 200 200 million in management, you’re ready to fail.” After a year of swimming against the tide, after trying his best for success, he realized it wasn’t going to work and had liquidated his hedge fund.

Then while scheduling his next move from a beach in Brazil, he started reading about bitcoin and got involved in the etherium. “I was so excited by what I was reading: I couldn’t bear the thought of not immersing myself completely,” El Isa said.

In late 2015, he moved to the “Crypto Valley” in Switzerland where he joined a very technical bitcoin scene. “I was the only woman and the only non-developer at Bitcoin meet-ups,” she said. At the first meeting, someone asked him if he had been there by mistake. “No,” he told her, “that’s exactly where I planned to be.”

In 2016, he co-founded Mellon, now re-established in the enzyme protocol within Avantgard Finance, as a way to break down barriers to access to asset management. “Mellon was the second or third player in the defense, the word DFI was there before,” El Isa said. “We have embarked on the journey to build the first ‘on-chain asset management infrastructure’ at Etherium.” His firm saw the crypto beer market and epidemic of 2018 and 2019 and is still getting stronger. Since the launch of version 2 in January 2021, Enzyme has achieved management (AUM) under 40 40 million in assets, an increase of 700%.

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DeFi vs. Trad Fi

“DFI has a huge commitment to greater efficiency, accessibility and transparency that will lead to new ways of working and reaching more people than traditional theories.” – Elco Fiole, CFA

Buterin defines a “smart contract” as a computer program that operates on a blockchain that controls digital resources. DFI is a category or application that seeks to replicate financial services and various types of financial agreements – whether you are holding or trading assets or making agreements between assets.

“We’ve really come a long way in defense over the last three years,” Butarin said. “Until recently there were hardly any interesting applications.”

“We got real attraction for the first time,” El Isa added. “In the last bull market, we had crazy assessments and DFI applications that were never delivered. This time is more exciting. We have technologies that work and we are growing rapidly in terms of user acceptance. ”

“In order to really scale DFI,” he said, “we now have to focus our efforts on protection and insurance. With DFI, you are a responsible person: if something goes wrong, you have no one to look after you.”

El Isa hopes that insurance applications like Nexus Mutual will provide security and safety to users and pave the way for massive DFI adoption.

In addition, well-known trade-offs in accessibility, usability and scalability are declining. For Etherium, Butarin hopes that the intensity of such trade closures will continue as scalability technology improves. “Currently the capacity of the Ethereum blockchain is fairly limited and the transaction fees are fairly high,” he said. His researchers are working to scale the etherium blockchain to level 2.0. Other near-term improvements in usability and low technology costs will help make it more acceptable to people who have never participated in a blockchain before.

As of today, ETH has a market cap of ০০ 600 billion and as a core technology, Ethereum has the largest development activities and the most readily available applications, Fiole noted.

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Governance and control

Fuel has hailed the blockchain as a groundbreaking technology, highlighting its “incredible” quality অর্থাৎ that is, trust built into code. In comparison, traditional resource management is highly regulated, for example there are more regulations on the horizon in the vicinity of climate change.

“In DFI, you have to ensure both the integrity of the protocol and the protection of investors,” Fiole said. For example, protocols use the “Administrator Key” to manage risks, upgrade, and even implement emergency shutdowns. Users need to trust the ecosystem and rely on administrators.

Butrin said the rule means different things for different DFI applications. Uniswap decentralized exchanges, for example, require very little regulation – this is just a contract with which you communicate. Governance becomes a problem for more complex applications.

For example, El Isa said that enzymes are one of the more complex protocols. “We upgrade in a decentralized manner,” he said. Users must choose to upgrade. In keeping with decentralized values, they are not forced to upgrade.

There are three types of enzyme stakeholders: tokenholders, developers (vault or investment managers), and users (investors in vaults) – each with their own set of incentives related to protocol governance. Tokenholders are rewarded with a higher token value if the protocol is used. Get MLN tokens if developers do well.

El Isa Sa and his team quickly acknowledged that users were not well represented, although they trusted the system the most. “So we have established a Governance Council consisting of a technical expert, auditors for smart contracts and users,” he explained.

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Alpha Generation and Risk Management

El Isa cited the application of yield-bearing strategies due to the lack of digital dollars. “You can find very interesting nding rates in digital dollars,” he said. “And any positive yield looks attractive, especially if you live in a country like Switzerland where you have to keep money in your bank account.”

These yield strategies hold up well in different market environments or even during high volatility.

Yield cultivation has become popular in recent times where rewards are available more than usual in domestic tokens for providing liquidity to the protocol and resulting in kickers at a return rate. However, as always, investors need to pay attention to the potential risks.

In crop cultivation, yield variability and maximum yield often come from risky protocols. “You need to look at the quality of the code base and the risk profile of the codes,” El Isa said. “If you are a donor to DFI and the protocol is compromised or exploited, in the worst case scenario you may lose your total money.”

Butarin believes that the chances of yield cultivation as a protocol scale will decrease. He also emphasizes the technical risks. There are some opportunities to break every smart contract. “We don’t know what that opportunity is,” he said. “But investors need to understand this risk.”

Fiole noted that the total lock-in value of DFI today is 76 76 billion and more than 7,000 currencies and exchange listed inventories. He asked, “How many tokens are we going to see?”

El Isa Sa does not believe that there should be a limit to the number of tokens. “When it becomes irresistible, this is where asset management helps filter,” he said. He sees a parallel in the evolution of asset management in traditional traditional financial markets – investors first focused on passive token strategies and now there has been a real shift in active management to create alpha.



The future of blockchain and DFI

Over the next few years, Butarin hopes that the technological challenges of blockchain technology – such as cryptography being broken by supercomputers – will be addressed one by one: Ethereum 2.0 will improve scalability and security, leading to more applications. Ethereum researchers are working on an exciting “steak proof” algorithm to reduce Ethereum’s energy consumption by more than 1,000 (99.9%).

“We’re still in the early days of DFI,” El Isa said. “But this time is much more exciting. We are looking at actual usage and traction. This time it is more based around features and usability. It’s no longer just a matter of token value. ”

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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.


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Julie Hammond, CFA

Julia Hammond, CFA, is a director of the CFA Institute’s Educational Events and Program Group, where she has led the planning of several annual and specialty conferences, including the Fixed-Income Management Conference, the Equity Research and Valuation Conference, and Latin. The America Investment Conference, the Alpha and Gender Diversity Conference, and the Seminar for Global Investors, formerly known as the Financial Analyst Seminar. Previously, he developed strategies for pension, endowment and foundation fund clients at Equitable Capital Management (now Alliance Bernstein) and has also served as an auditor for Coopers & Leibrand (now PricewaterhouseCoopers). Hammond served for several years as chairman of the Rockbridge Regional Library Foundation’s investment committee. He holds a BS in accounting from the McIntyre School of Commerce and an MBA from the Durden School of the University of Virginia.



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