A new decentralized finance (DeFi) fund has entered the space.
Regulated investment advisor Lima Capital LLC and Bakari A.G the financial services consulting company have launched the Voyager DeFi fund with custody support from Trustology.
These kinds of partnerships got us buzzing at E-Crypto News.
We reached out to the three organizations and got quite the interview!
Trustology Founder and CEO Alex Batlin, Hugo May Head of Strategy Lima Capital LLC and Bakari A.G: Voyager Fund co-founder Ciaran MacDevette answered all our questions.
Here we go!
Hugo May, Head of Strategy, Lima Capital LLC
Please, can you tell us how exactly third-generation decentralized finance (DeFi) funds work?
Hugo May, Head of Strategy, Lima Capital LLC and Ciaran MacDevette, Co-Founder, Bakari AG: Voyager Fund
Third-generation technology in the DeFi yield space has only emerged recently and for the moment the majority of risk-mitigation strategies only work comfortably on ethereum.
The term ‘Defi Fund’ in this context actually warrants some disambiguation. Broadly speaking there are two types: those that invest in governance tokens, and those that deploy liquidity to earn yield.
We can also go further to highlight that the term ‘Fund’ is occasionally applied to DLT-native pooled investments without oversight, where the default assumption might be a regulated undertaking for a collective investment, like a mutual fund.
For funds that have oversight or that otherwise have a strong focus on investor protection, partnerships are key.
To break down the process broadly for a yield fund, the fund will accept subscriptions into its bank account and transfer funds to the likes of Circle (for example) for stablecoin minting.
At this point funds have entered the DLT environment but are not yet deployable to platforms or protocols.
The next step is to send stablecoins to the funds custodian.
This has been a sore point for institutional managers up until recently due to the lack of quality service providers able to manage the intricacies of safeguarding funds and deploying them to DeFi protocols directly.
Once funds are received by the custodian, fund managers are able to make their allocations to the protocols and platforms necessary.
These operational steps are one thing, but what really makes a fund viable long-term is the adherence to internal and external processes and procedures, all while walking hand in hand with administrators and auditors.
Alex Batlin Founder and CEO Trustology
What is the effect of low-interest rates on the cryptocurrency and allied technologies environment?
Alex Batlin, Founder and CEO, Trustology
Institutional investors are leaning into DeFi for one simple reason—they are looking for high yield returns for their investors.
The Federal Reserve has a balance sheet of over $8Trillion, you’ve got looming inflation and negative-yielding bonds so it’s forced them to look for alternative means of generating yield.
That answer came with decentralized finance or DeFi and its applications, where over the past two years funds have been averaging between 8-10% returns across different liquidity harvesting strategies like yield farming.
However, the DeFi technology landscape is inherently complex so you need to rely on a DeFi custodian wallet provider capable of ensuring secure, compliant access with no compromise to working the assets harder in pursuit of yield.
Why do you think there has been an increased demand for DeFi products, services, and protocols?
Combination of superior yield compared to traditional financial markets and sufficient maturity e.g. yield and security track record, improved UX, emergence of institutional-grade custodians offering security, control and compliance solutions.
Also, as we’ve seen with the Covid pandemic there was an inflation of money supplies by central issuers whilst DeFi remained immune from such measures thanks to its decentralised fixed supply issuance model.
The hypothesis from there is that going forward DeFi will be viewed as offering cheaper and deeper liquidity because it’s more global in nature and because there is no single central entity that’s posing issuer risk in the middle.
As people gain confidence in the new DeFi products, and now have proof points that they haven’t failed, we’re seeing a fast ramp up of usage and uptake.
Ciaran MacDevette Bakari A.G: Voyager Fund Co-Founder
How exactly do you think DeFi products will change the world?
It is obvious that we have seen significant development in the DeFi space, with total value locked in protocols growing at exponential rates.
Even with these developments, it is still unclear the approach that traditional institutions would take to see the benefits of open-source blockchain technology.
In the past we have seen many attempts by large institutions to create private networks aimed at offering similar types of services.
It would be difficult for these traditional financial institutions to accept the nature of open finance initiatives as it fundamentally changes their role from infrastructure providers to merely users of the internet native infrastructure.
Those that would adapt quickly are presented with the opportunity to solidify their space at a second layer on the stack.
It is not difficult to make the case that financial infrastructure should be closer to a public good than part of a profit-oriented enterprise.
From financial inclusion to the efficiency of capital markets, the infrastructure should support society free of excessive intermediation, rent-seeking, gatekeepers and general callousness.
Usually the building and maintenance of these things would be the responsibility of Governments, but they are not well equipped nor well constituted for this task.
DeFi is the first viable solution to this problem. It will create more open and inclusive financial infrastructures, delivering benefits that over time will be seen as fundamental human rights.
It could become the most trusted global liquidity pool on earth.
As DeFi goes global and becomes reliable, more liquidity will flow there, and attract more liquidity. All of this will be enabled by decentralisation, because it is safer.
USD$80bln is already locked up in value for Defi, so it’s clearly on a growth trajectory.
Trustology is aiding the sector on this path. By pioneering a custodial service in real-time, institutional investors and retail clients alike will be able to enter DeFi with all the security controls of conventional finance and more.
This, in turn, will breed legitimacy and thus generate much-needed confidence in the market.
What factors do you think have caused high barriers to entry into the DeFi space for interested parties?
We’re seeing a shortage of institutional crypto custodians who can support DeFi protocols, lacking in speed, scale and the ability to address institutional needs for high security, account segregation and authorisation controls.
In addition, there are other impeding factors. A combination of technical complexity, some poor UX issues still in the market that need addressing, fiat-to-crypto onboarding (less so now) and lack of regulatory certainty.
Please, can you tell us more about institutional custody of digital assets?
I’ll come at this from an evolutionary stance as the topic of institutional custody of digital assets is quite broad. Initially, when this market and ecosystem started over a decade ago with Bitcoin, it was about securing and owning the assets.
As the private keys are linked to the underlying cryptoasset, if keys are lost then so too are the assets.
Securing the keys at that time was problematic for most, where the experience was not very user friendly, not easily accessible (e.g. cold storage) or scalable (e.g. hardware wallets) to meet business demand, with keys tending to get lost.
There was also an un-addressed need for a low-latency, user friendly, yet highly secure custodial wallet providers that function as independent custodians to meet regulatory requirements but also address the need for speed in transaction processing with zero compromise to security.
Fast forward to today with the advent of Ethereum and DeFi, and we’re starting to see increased demand for institutional crypto wallets to take on more of a utility role – as users start to explore additional facets of financial services such as investing, borrowing and lending for yield generation.
Institutions want to be able to know they can either borrow, then CDP their ETH with MakerDAO to mint DAI stable coin or lend money, using Compound Finance for instance. And they want to do so in the safest, fastest and easiest way.
What makes Trustology’s institutional custody service different?
Tried and tested hardware security combined with cloud infrastructure makes our solution secure and resilient but also fast and scalable.
The TrustVault Platform underpins all our applications and APIs with end-to-end hardware security and front-end flexibility to enable instant transactions.
It operates on a highly-secure, geographically distributed network of customised HSMs and cloud-based services with integrated KYC and AML checks.
Each HSM device is stateless, each customer wallet is generated securely inside one of our HSMs by our bespoke firmware, but then the key material is wrapped and backed up to the cloud when not in use to ensure resilience.
Trustology is one of a handful of service providers using HSMs.
By re-signing transactions with our proprietary firmware running inside HSMs, we mitigate an important attack vector.
Whilst the HSM may keep the wallet key safe, and even if other providers also use some form of end-user hardware to authenticate transactions, hackers can still compromise the transaction if policy validation and re-signing are performed in software.
It is this unique re-signing technology we offer that enables us to provide an extra layer of security and easily adapt to any signature scheme like BLS but also to different blockchains and protocols.
This in combination with our DeFi services such as DeFi Firewall rules, flows and notifications and bespoke integrations with DeFi bridges such as MetaMask and WalletConnect puts us in a unique position to provide security, access and utility with no compromise.
This makes it possible to lend, borrow and swap through DeFi apps using Trustology and we’ve seen lots of traction there.
Congratulations on your new partnership! What’s next for the trio?
Next is adoption.
The opportunity in DeFi is as staggering as its growth, but it remains small in comparison to traditional markets. DeFi needs much more safety and useability to bring in more capital and that’s where we can add value.
Whether fully fleshing out the existing initiative or leveraging the infrastructure we’ve put in place to support different ones, we want to see more people in DeFi, and we want them sleeping well at night.
With DeFi evolving at lightning speed, we look forward to supporting their emerging needs for Layer 2 networks and beyond as they grow the fund.
Please, can you tell us more details about the partnership?
To ensure that the Voyager Fund follows an approved and regulated operational model, they have partnered with market-leading third parties and service providers.
For safeguarding and administering cryptoassets, we’ve opted to partner with Trustology as our crypto custodian.
Their hardware-secured scalable infrastructure enables us to interact with DeFi protocols in a manner that mirrors the specifications of our investment mandate.
This is critical for building trust with our investors and in terms of mitigating our holding and fiduciary risks.
Please, can you explain to us the general concepts and ideas behind blockchain-enabled income opportunities?
A central concept underpinning income opportunities is liquidity provision, which is to say that one can be rewarded for making assets available for others to use.
Lending markets are an easy way of looking at this, where liquidity providers (lenders) supply assets in exchange for interest.
This has been, and remains, the foundation of the existing DeFi applications. Attracting liquidity to one’s protocol, however, needed to be incentivised.
This in part led to the explosion in rewarding liquidity providers with governance tokens, which could be sold to enhance the yield being earned.
Today the core of simple, risk-managed blockchain-enabled income strategies consists of providing liquidity in return for interest and reward tokens.
E-Crypto News:Please, can you tell us more about the new Voyager DeFi fund and its offerings?
Voyager offers peace of mind for those interested in accessing the attractive yields available in DeFi, but who are not comfortable navigating the landscape alone.
This is done in two ways:
- Voyager is a regulated Mutual Fund, providing a very familiar structure and investor experience where traditional expectations are met.
- The investment team manages The Fund in accordance with the principles of traditional risk management, independent oversight and investor protection.
Crypto-savvy investors may not definitively need Voyager, but their parents might.
Alternatively, even the most experienced digital natives might feel more secure with professionally structured management and institutional custody.
Further, there is clear benefits no matter one’s level of sophistication:
- Savings on gas fees, which are a smaller proportion of a fund than an individual portfolio.
- Saving time and effort: in a continuously evolving landscape, it can be a full-time job staying up to date with developments and maintaining the best risk-reward strategy.
- Long-term yield: yields in DeFi markets are highly variable, and Voyager is able to access the best minimum yields through the likes of Genesis.
How can interested parties partake in the fund’s offerings?
How can such partnerships like this one provide a basis for greater adoption of cryptocurrencies and their underlying technologies?
You need great technical, financial, and DeFi knowledge to understand how to extract maximum yield at acceptable risk.
Then you need to re-balance capital and respond to events e.g. margin calls.
Not everyone has the skill + expertise + tech to do this, so bringing in pros gives you exposure without having to acquire all of the above attributes.
This partnership is facilitating the participation of the traditional investment market in DeFi money markets. It solves immense practical difficulties for investors, but also provides a tangible and accessible opportunity to motivate familiarisation and education.
By participating in funds like Voyager or simply observing the emergence of a regulated fund in this space, the wider market will become comfortable with the technology, terminology, and most of all the opportunity.
What security measures have been put in place to safeguard the digital assets at the fund?
Certain blockchains have endeavored to protect smart contracts that are built by improving their security at the blockchain level from malicious hacks by preventing unauthorised access, but to date there have been no security measures installed at the wallet level and regulators are still at an impasse as to how to govern let alone mitigate the risks of smart contracts.
Our DeFi Firewall technology is a step in the right direction.
It implements advanced security controls for the fund such as allow and deny lists either manually or programmatically through automation to enable them to securely and easily move assets between DeFi protocols, allowing them to navigate the ecosystem in real-time whilst removing barriers of trust with their clients looking to place funds with them.
Please, can you tell us about transparency and integrity where DeFi funds are concerned?
Transparency is inseparable from blockchain technology, together with the two other pillars: decentralization and immutability.
These all have profoundly positive implications for the financial industry at large as this technology slowly takes on the responsibilities of capital markets infrastructures.
For the moment, however, DeFi funds act as an example of how deploying capital through DeFi immediately implies the creation of transparent, immutable records of Fund activity, available to auditors, administrators, and investors alike.
What policies and measures have been put in place to ensure transparency and integrity within the Voyager Fund ecosystem?
[Alex] DeFi Firewall
As a regulated mutual fund Voyager has a high standard of oversight.
Independent administration and auditors ensure strict observation of the Fund’s mandate and the deployment of funds from an ethereum wallet generates an immutable record of Fund transactions.
We’ve applied our DeFi Firewall controls for the Fund for their smart contract transactions, the protocols they will interact with and the user permissions for signing transactions.
As the DeFi firewall is built on top of the TrustVault platform, it inherits all of the platform’s infrastructure benefits such as its HSM encased proprietary resigning firmware, combined with insurance and advanced multisig and allowlist safeguards, subwallets, compliance webhooks and more.
How did you get involved with cryptocurrencies and their allied technologies?
Alex : Ran innovation teams for banks such as UBS’ FinTech Innovation Lab, based in the UK’s Level 39 accelerator – Europe’s largest FinTech incubator – where we did a lot of different projects.
Ultimately we focussed heavily on blockchains, our team was responsible for smart bonds, the EEA, Hyperledger and R3. Early on, I connected with Joe Lubin (founder of ConsenSys), and helped launch the Enterprise Ethereum Alliance (EEA).
I was also involved in helping R3 in the early days, as well as Hyperledger. I moved to BNY Mellon and worked on blockchain and digital custody.
Ciaran : Wrapping my mind around getting my first MP3 was a life-changing experience, when I heard about Bitcoin and value transfer over a network it felt similar.
I was very interested in understanding how this was possible and later, while living through a post financial crisis job market and the European peripheral sovereign debt crisis, I became interested in whether blockchain offered something different.
Coming from a technical background my interests then crept into my work.
Hugo : I was stationed as an automation engineer in Nigeria working for Krones AG in a Brewery.
A lot of the living costs have to be paid with cash, including accommodation. Getting USD into Naira was a difficult task through Nigeria’s banking system due to the inefficiency.
We would often take USD bills and exchange them peer-to-peer, after a while we learned that BTC could also be used, the process of sending actual value online sparked my interest.
Do you have any secrets you want to tell us? Care to spill the beans?
Alex: Never underestimate the power of a heavy wrench as an alternative hacking tool.
If you have three wishes and a Genie that could make them come true, what will they be for Voyager and the DeFi space?
Alex: Globally harmonised and passportable compliance registration so we can get on with what DeFi, blockchain and cryptoassets were meant to do—freedom to transact transparently
That DeFi continues to outpace walled gardens.
The tools and regulatory clarity to port the fund to a decentralized ecosystem in a compliant manner.