“The future of assets is tokenized.”
“If you make that assumption, you can completely reimagine the infrastructure that finance is built on,” she continued. “You can see a fully automated operational and administrative infrastructure that doesn’t have the same barriers to entry as traditional finance.”
The enormous potential of blockchain and DeFi
El Isa and Buterin each began their blockchain journey with Bitcoin, but quickly realized that blockchain’s potential applications extend far beyond currencies.
“The Bitcoin blockchain does one thing and one thing well,” said Buterin. “It preserves Bitcoin as a currency.” He saw the necessity for a broader core blockchain technology and In 2013 I began working on Ethereuma general-purpose blockchain that supports a programming language. “Whatever agreements, contracts or applications you want to build, you write the business logic or code, publish it, it runs and you can interact with it,” he said.
El Isa spent nearly 15 years in traditional finance, as certainly one of the youngest market makers and prop traders for Goldman Sachs. She later managed a long-short equity portfolio for a big European hedge fund. But when she began her own hedge fund, she encountered the high barriers to entry in asset management.
“I was shocked by the inefficiency of the industry,” said El Isa, who had never encountered the costly administrative and operational burdens of a hedge fund startup.
“At the big institutions I worked at before, we had floors full of operational people, but I never really knew what they did,” she said. “As a small to mid-sized company with less than $200 million under management, you’re doomed to fail.” After a 12 months of swimming against the tide and trying her hardest to succeed, she realized it wasn’t going to work and liquidated her hedge fund.
Then, while on a beach in Brazil planning her next move, she began reading about Bitcoin and have become hooked on Ethereum. “I was so excited about everything I read: I couldn’t bear the thought of not fully immersing myself in it,” El Isa said.
At the tip of 2015, she moved to “Crypto Valley” in Switzerland, where she joined a really tech-savvy Bitcoin scene. “I was the only woman and the only non-developer at the Bitcoin meetings,” she said. At the very first meeting, someone asked her if she was there by mistake. “No,” she told him. “This is exactly the place I wanted to be.”
In 2016, she co-founded Melon, now renamed Enzyme Protocol, inside Avantgarde Finance to cut back barriers to entry in asset management. “Melon was the second or third player in the DeFi space before the term DeFi even existed,” said El Isa. “We set out to build the first ‘on-chain asset management infrastructure’ on Ethereum.” Her company survived the crypto bear markets of 2018 and 2019, in addition to the pandemic, and remains to be thriving. Since launching version 2 in January 2021, Enzyme has acquired $40 million in assets under management (AUM), a 700% increase.
DeFi vs. TradFi
Buterin defined a “smart contract” as a pc program that runs on a blockchain and controls digital assets. DeFi is a category or application that seeks to copy financial services and several types of financial contracts – whether you are holding or trading assets or creating contracts between assets.
“We’ve come a long way in the DeFi space in the last three years,” Buterin said. “Until recently, there were hardly any interesting applications.”
“We’ve had real momentum for the first time,” El Isa added. “In the last bull market, we had crazy valuations and DeFi applications that never delivered. This time, it’s more exciting. We have a technology that works, and we’re growing fast in terms of user adoption.”
“For DeFi to truly scale,” she continued, “we need to focus our efforts now on security and insurance. In DeFi, you are the responsible person: there is no one to take care of you if something goes wrong.”
El Isa hopes that insurance applications like Nexus Mutual, which offer security to users, will scale and succeed, paving the best way for mass adoption of DeFi.
In addition, familiar trade-offs between accessibility, usability and scalability are diminishing. For Ethereum, Buterin expects the severity of such trade-offs to proceed to diminish as scalability technology improves. “Currently, the capacity of the Ethereum blockchain is quite limited and transaction fees are quite high,” he said. His researchers are working to scale the Ethereum blockchain itself to Layer 2.0. Further near-term usability improvements and lower technology costs will help make it more acceptable to individuals who have never participated in blockchain before.
Fiole mentioned that ETH currently has a market cap of $400 billion and that Ethereum, as a core technology, has certainly one of the most important development activities and probably the most available applications.
Governance and regulation
Fiole praised blockchain as a breakthrough technology, highlighting its “trustless” nature – that’s, trust is inbuilt by code. In comparison, traditional asset management is heavily regulated, and more regulations are on the best way, for instance related to climate change.
“In DeFi, you have to ensure both protocol integrity and investor protection,” Fiole said. For example, protocols use “administrator keys” to administer risk, perform upgrades, and even implement emergency shutdowns. Users will need to have trust within the ecosystem and rely upon the administrators.
Buterin said governance means various things for various DeFi applications. For example, the decentralized exchange Uniswap requires little or no governance – it’s only a contract you interact with. For the more complicated applications, governance becomes an even bigger issue.
As an example, El Isa said Enzyme is certainly one of the more complex protocols. “We do upgrades in a decentralized way,” she said. Users must consent to upgrades. In keeping with decentralized values, they usually are not forced to upgrade.
Enzyme has three forms of stakeholders: token holders, developers (vault or investment managers), and users (investors within the vault) – each with their very own incentives related to managing the protocol. Token holders are rewarded with a better token value when the protocol is used. Developers receive (MLN) tokens after they do job.
El Isa and her team realized early on that users weren’t well represented, despite the fact that they trusted the system probably the most. “That’s why we set up a governance council that consists of both technical experts, including smart contract auditors, and users,” she explained.
Alpha generation and risk management
El Isa identified that yield-generating strategies are attractive given the shortage of digital dollars. “You can find very attractive lending rates for digital dollars,” she said. “And any positive return looks attractive, especially in countries like Switzerland, where you have to pay to keep your money in a bank account.”
These return strategies are also consistent in several market environments or in periods of high volatility.
Recently, yield farming has turn into popular, where one receives rewards in the shape of native tokens along with normal yield to offer liquidity to the protocol and thus increase returns. However, as all the time, investors must concentrate on potential risks.
In yield farming, returns are variable and the very best returns often come from the riskier protocols. “You have to look at the quality of the code base and the risk profile of the codes,” El Isa said. “If you are a lender in the DeFi space and the protocol is compromised or exploited, you could suffer a total loss of your funds in the worst case scenario.”
Buterin believes that yield farming opportunities will decrease as protocols scale. He also emphasized technical risk. Every smart contract has a certain probability of failure. “We don’t know exactly what that chance is,” he said. “But investors need to be aware of that risk.”
Fiole noted that DeFi today has a complete value locked of $76 billion and over 7,000 coins listed on exchanges and growing. He asked, “How many tokens will we see?”
El Isa doesn’t consider there ought to be a limit on the variety of tokens. “Just when it gets too overwhelming, asset management helps filter it,” she said. She sees a parallel within the evolution of asset management in traditional financial markets – investors initially focused on passive token strategies and now there’s an actual shift towards energetic management to create alpha.
The future prospects of blockchain and DeFI
Over the following few years, Buterin expects the technical challenges of blockchain technology – reminiscent of cracking cryptography using supercomputers – to be solved little by little: Scalability and security can be improved by Ethereum 2.0, resulting in more applications. Ethereum researchers are also working on an exciting “Proof of Stake” algorithm to cut back Ethereum’s energy consumption by greater than an element of 1,000 (99.9%).
“We are still in the early days of DeFi,” said El Isa. “But this time it is much more exciting. We are seeing real usage and traction. This time it is more about features and usability. It is no longer just about the token price.”
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