Episode 6: The future of managing money Episode Transcript (website) Samantha Yap [00:03]: Hi! I’m Samantha Yap. Welcome to The Story of Money by YAP Cast where we talk about where money is heading. Join me and Mona El Isa on this episode of the Story of Money by YAP Cast. Last episode we heard from Mona El Isa, once a trader at Goldman Sachs, and now the founder of a DeFi company called Avantgarde Finance, an asset management services tool built on Decentralised Finance. We heard her talk about the importance of us managing our money, but also how hard it has become, and how the mechanics of the investment industry are not always working in our favour. If you haven’t heard that episode yet, I’d recommend you give that one a listen first, as what we’re going to talk about here will make a lot more sense! We hear a lot about Traditional Finance players moving over to crypto, and there are some great stories. But Mona’s is a little different — she has set out to make the process of managing our money simpler, cheaper, and fairer. Go from clunky TradFi asset management to a simple custody layer, like Enzyme, on top of the settlement layer What led you to start Melon, Enzyme, Avantgarde? Yeah, tell me about your thinking behind starting your protocols and company. Mona El Isa [01:18]: Yeah, so I think when you look at traditional finance or let's say traditional asset management, it's actually like it takes a lot of resources and multiple entities all engaged in very manual and expensive and slow non-automated processes in order to make a system that kind of works but is opaque still and very expensive, very high barriers to entry etc. And the reason is the traditional finance or CeFi stack asset management today is such that you know you have custodians who look after your assets. You have the asset layer, you know people who issue assets across different spectrums, different issuers for bonds, different issuers for equities, different issuers for real estate and every single country it's different. It's just really complex. Then you have different trading venues for different assets and different asset classes. You know whether it's in crypto, maybe Coinbase, Binance, and in traditional financing the LLC or, you know, the New York Stock Exchange. You have then fund administrators who are responsible for basically making sure that whatever the investment manager has promised to their investor is being enforced. They're responsible for the NAV reporting, they're responsible for, you know, handling investments and redemptions, etc. And then you have to have compliance officers, operational staff, back, office, middle office, accounting, and risk management. All of these are different people, different entities, and then the service layer, compliance lawyers etc. And it's all just very heavy and disorganized and all over the place. It's a multi-entity, very very clunky experience. And where I got excited when I started to learn about crypto and blockchains is the fact that we could convert this heavily complex multi-entity experience into a very simple vertically integrated experience because now we have a blockchain that acts as a settlement layer. We have a custody layer for asset management which could be like a protocol, like Enzyme. We have assets which are all issued on chain, on a particular blockchain. So ERC-20s, wrapped coins, NFTs. We have, let's say the trading and execution layer is what I would call DeFi today. So that says lending, borrowing, derivatives etc. And then you have the fund admin, operational, auditability, and accounting layer which is Enzyme. And all of this stuff just meshes into one vertical stack. And enables people to do things with immediate settlement, so with full transparency, pretty big cost savings whilst in the custody of their own assets if they want to be and you know, in a kind of much more transparent way, and I think this is the future. A more efficient asset manager Samantha Yap [04:10]: So, you've designed essentially a far more efficient and transparent assets manager. Would you put it that way? Mona El Isa [04:20]: I think asset management framework or asset management framework infrastructure, yeah, I think that's what we've done with Enzyme over the last few years. I think it's six years now. Samantha Yap [04:30]: What led you to start Avantgarde Finance Enzyme and Melon yeah? Mona El Isa [04:26]: I had just had that terrible year of trying to set up my own fund. And with every failure and with every bad experience, I guess you learn a lot of very valuable lessons and for me the very valuable lesson, which I didn't know at the time, was learning from the inside out - how the entire engine of asset management works because that was something that when I was at Goldman, when I was working at a large hedge fund, had not been exposed to. I was only exposed on the investment side of things and that was kind of what led me to found Enzyme or Melon at the time. And that was the decentralised asset management protocol. But the more we built that, and after we decentralised that, I sort of realised that, to really make this work, DeFi/Enzyme needs to have worked, so two things you know we talk about decentralizing DeFi protocols a lot in the crypto space, and we were the first people to ever do that. But when we learned quite quickly after decentralizing Enzyme, was that decentralization doesn't necessarily move things forward without some leadership and everyone was sort of afraid to lead because they were afraid of being perceived as not decentralized. And so, what we decided to do was set up a new company called Avantgarde Finance, actually Avantgarde Core initially we and proposed to the Council that we would become the lead developer and sort of try to pitch the road map and product development and in the priorities for the for the protocol. And then at any point you know they still control the protocol, and they can kick us off as core developers if we're not doing a good job. So, we maintain that decentralization. But by having the efficiency of a sort of centralized organization and we report to them periodically and the other thing that Avantgarde finance is doing is that you know we talked a little bit in the previous question, I think about the vertical division is to have this vertically integrated stack for asset management. And we also have realized over the last few years that having that vertically integrated stack is going to be difficult with just a protocol alone. It requires coordinating some other bits and pieces, and so I see Avantgarde Finance as the coordinator you know towards getting that stack in place so that really managers can basically have and be enabled to set up a fund and manage a fund simply and then investors can easily get access to those funds. A necessary framework: transparency, cheap, simple, accessible, possible to assess risk Samantha Yap [06:57]: Basically, you've created, you know, the most efficient asset management framework through Enzyme Finance and then obviously Avantgarde helping coordinate it all? Could you explain and make the case for why you think this is a necessary framework for the future of asset management and where money is heading today? Mona El Isa [07:16]: Yeah, sure, so I think you know basically, for all the reasons I mentioned. You know, I think it's incredibly important to be able to bring transparency to the market. So, ensuring that information is transparent to anyone, whether it's a regulator or a 25-year-old exploring their investment options. Enablement like making it simple, cheap, you know, vertically integrated solution for asset managers to access because the world is just, it's just not, you know, if you have such high barriers to entry and so much complexity, you're basically just encouraging large incumbents to stay in the asset management space. It's large, lazy incumbents and not necessarily anything new and innovative. And last but not least, I think access is really important like creating a future where accessing DeFi, understanding DeFi opportunities, assessing risk is as easy as shopping on Amazon. And I bring it all back to DeFi not because DeFi is the only thing people should invest in, but because I like the qualities that DeFi gives you - the transparency, the real-time reporting, the ability to scrutinize behaviours, yeah, you know, in a way that you can't do in traditional finance. The case for DeFi: transfer, transparency, accountability Samantha Yap [08:22]: Yeah, and if you're going to make the case for decentralized finance you know what is it that excites you and you've shared some points and the transparency, the efficiency. But yeah, if you're going to make the case for decentralized finance to an audience that might not know much about it how would you like to sell it, or explain its value? Mona El Isa [08:41]: I think the keyword you know for me or the key thing is transparency. Transparency in itself doesn't stop bad things from happening, but it does allow market scrutiny. It does allow people to scrutinize and therefore make a more accurate, accurately priced risk enables more efficient markets. So, this is something that doesn't really exist today in CeFi and so you know we've seen very recently CeFi, TradFi players like 3 Arrows Capital or Celsius get away with bad behaviours for long periods until eventually they became insolvent and ripple effects were against all their counterparties, clients, investors, etc. Traditional finance is not that much better when you think about Madoff and Lehman. So, I think transparency is really key in terms of pricing risk accurately or getting people to call out bad behaviour and pressure investment managers, asset managers to change their behaviour accordingly. I think accountability is also very interesting when it comes to DeFi. I talked a little bit about conflict earlier and how it's hard to hold people accountable if they say they're going to do something and they do something else because of the lack of transparency, even though financial intermediaries exist to try and enforce that behaviour, complexities and slow information makes it quite hard to do that in real-time. What I like about DeFi is that you can embed certain rules that, certain promises into smart contracts, and then you can rely on those smart contracts to enforce those rules. So, you never have to worry about a manager deviating from a specific promise. So, if they say they're only going to invest in this 10 universe of tokens, you can actually code that into the vault’s smart contract such that you know this the blockchain and smart contracts will not allow them to trade any other tokens, for example. Or if your leverage ratio is only allowed to be a maximum of 3X, this behaviour can be enforced at a smart contract level. So, I think with this degree of transfer, transparency and enforceability are now possible. It's hard to see why investors, regulators, and counterparties wouldn't insist on it going forward, and I fundamentally believe that the future of asset managers is moving towards this DeFi vertically integrated stack versus the old way of doing finance. There are some other aspects to DeFi which are interesting that I haven't touched on like self-custody and permissionless behaviours but I think transparency and enforceability and accountability are the ones I get most excited about. What’s on-chain, and how does it change the game? Samantha Yap [11:06]: Yeah, and with respect to transparency, there's the term on-chain gets used a lot. Could you explain what on-chain means? And how does on-chain asset management change the game? Mona El Isa [11:16]: Yeah, when you hear the word on-chain when referring to asset management or just in general, it basically refers to the financial system that uses blockchain to settle its trades, account for transaction, auditability and enforce certain behaviours. So, transacting on-chain is only possible with this new world of digital assets and the view that I took six years ago when I got into this space is that increasingly we'll see more and more digital assets because of that, even traditional assets moving on-chain, because of the codeability of finance, the enforceability of actions through smart contracts and the transparency you get through blockchains, changes the game massively. So, there is a real big reason to move things on-chain. And I think it's not the what that's changing when we go on-chain, it's how. On-chain asset management is changing things because we're automating protocols that were, you know protocols that were usually enforced by people and intermediaries. We're automating processes we're making professional financial activities possible without the need for financial intermediaries. And we can only do this because assets now exist on-chain and smart contracts that exist today which enable us to program certain behaviours. Risks of automation? Irreversible transactions? Samantha Yap [12:26]: One follow-up question on you know the on-chain management and is there a risk to automating like a certain trade or a certain position? Is it detrimental that what's on-chain is also something irreversible. Mona El Isa [12:38]: Yeah, you could argue that it is. The thing about centralized finances that trades are reversible for better or worse, and that can be good. I mean we saw like I think three or four weeks ago, the London Metal Exchange just randomly decided to cancel hours’ worth of trades just because they didn't think that users would have the margin requirements necessary, so they wanted to avoid some, but they just took that decision without consulting anybody, and so there were a lot of really pissed off people who made a lot of money on the trade they did and then had them reversed. So, you could argue who were the LME to make that call, to make that decision. You know they're not a regulator. They're not a government. You know, like on the plus side, you know if you make a mistake and you need to reverse that mistake, it is more likely that you will be able to reverse that mistake in traditional finance than you would in DeFi, although not always possible, and then in DeFi until, like you very correctly said, transactions are typically final, you know. Unlikely ever gonna be able to reverse a transaction unless you're on a centralized blockchain and so yeah, you have to be OK with that risk and that's up to Avantgarde's builders to make sure that we're building tools that check against these things to make sure that they sanity check from a user experience, user interface experience to make sure that people are given tools to minimize the mistake, possible mistake first. How far away are we? A gradual move Samantha Yap [14:00]: How early are we or how far away are we from seeing this technology being adopted by Banks and traditional financial institutions. Mona El Isa [14:09]: don't think banks and traditional finance people will adopt the DeFi stack overnight. Ultimately, I think we'll see centralized finance gradually moving over to decentralized finance. I think it's something that they're a little bit afraid of, they don't fully understand. However, I think that we will see more and more people, you know, sort of bridging the gap between CeFi and DeFi and transitioning their businesses over in parts by using the DeFi stack, where it's also a small problem for them and where they think it's necessary and then, you know, increasingly uses it, using it as confidence builds and you know and track records in this space become more and more robust. Samantha Yap [14:48]: And what's your immediate focus? What are you looking for and hoping to see in the next year or a few months to a year? Mona El Isa [14:57]: I think that's a great question. Aside from the development work that we do, I think we're really there to handhold people through that process. So, anybody building anything in asset management that wants to leverage certain bits of the DeFi stack. You know, I think we're the perfect place to come to whether it comes to giving strategic advice or looking at the different options or how to transition your business piece by piece if you're not ready to do a radical overnight change, but I think where we're focused really is in bridging that gap between CeFi and DeFi, making it more secure to use, making it more transparent with the interface because you know blockchain everyone says it's really transparent, but you have to have the right tools and interface. For that transparency. I think the role we want to play is handholding CeFi players that the hand holding on holding the hands of CeFi players in traditional finance. Like I said that doesn't have to be an overnight move or transition or an all-in-one, it can be partial gradual transitions, but I feel that we are perfectly positioned having been in this space for six years and having a lot of traditional finance experience and a lot of DeFi experience, probably more DeFi experience than 95% of the people out there, maybe 99%. I think that we, you know, we're perfectly positioned to assist with that transition. Who are you working with? Samantha Yap [16:12]: I think that yeah, you are the go-to expert on that. Are you working with anyone right now? Like any kind of traditional financial or centralized finance players? Mona El Isa [16:23]: We're working with a lot of centralized finance players. Yeah, I would say I'd like, you know, as a kind of go for next year to also be working with more traditional finance. Theirs as well. Samantha Yap [16:32]: And that's why you say your hand holding these guys. So, it's a very important job that you're going to do so, or that you're already doing so. Mona, thank you so much. This has been a really great discussion. You know, I've really enjoyed learning more about managing money and then seeing the need for infrastructure and frameworks like Enzyme and Avantgarde. So thank you so much for your time. Mona El Isa [16:55]: Thanks for having us. It's been a pleasure to be here, Sam. Samantha Yap [16:59]: You’ve been listening to me talking to Mona El Isa, founder and CEO of DeFi company, Avantgarde Finance. She calls it DeFi as a service. You can find their website at avantgarde.finance. Over the two episodes we have heard her talk about the importance of managing your money, but how difficult that is — and why so many of us are afraid of doing so. After putting up with the structured and elitist way that traditional investment management worked, she has spent the past few years trying to build something better on the blockchain. She’s learned some really interesting lessons along the way that are relevant to all of us. Ultimately her message is a positive one: DeFi makes possible some really fundamental elements — it is cheap, transparent, simple, accessible, accountable, enforceable and, most importantly, makes it easy to assess risk. Her prediction, that we’ll see traditional assets moving over, and removing financial intermediaries, is an exciting one, making this part of the story of money perhaps the most exciting and far-reaching of all. Thanks for tuning in to another episode of YAP Cast. I’m Samantha Yap. For new episodes, follow The Story of Money by YAP Cast.