Bitfwd podcast with Henrik Andersson — Hosted by Konrad

Transcript:

KONRAD HURREN: Hello and welcome to the very first episode of the Bitfwd podcast. I’m your host Konrad Hurren. Today I’m joined by Henrik Andersson, a cofounder of mStable and dHEDGE. Henrik has over seventeen years experience in global financial markets, with almost a decade on wall street.

He has extensive experience across three continents as a quantitative analyst, senior research analyst and in institutional equity sales.

Henrik holds a master of science in engineering physics from the royal institute of technology and an MBA in economics from Stockholm University. Henrik is also CFO of Apollo Capital; Australia’s leading crypto asset investment firm. Henrik, welcome to the first episode of the show.

[00:57]

HENRIK ANDERSSON: Thank you so much Konrad, happy to be here.

KONRAD: Before we start. This podcast is going out to a layman audience who visits the Bitfwd website. So would you like to give us a layman’s introduction to what dHEDGE is?

HENRIK: Yeah, as you are well Konrad in the crypto space there are lot of technical terms and passwords.

[01:30]

HENRIK: So I will try to keep it in plain English. dHEDGE is basically a decentralised asset management protocol. So what does that mean? Decentralised means that there’s no institutions, no company, no organisation that is behind the dHEDGE software.

That is possible because we built it on a blockchain platform called Ethereum. Which is the largest blockchain platform for something called smart contracts, where you can build this kind of software on.

[This structure] enables people to trade without having to give up custody of your assets. So you can see strategies on the dHEDGE platform and you can follow those strategies and you’ll basically let the managers rebalance a portfolio. [We call portfolios pools on dHEDGE] to actually receive the returns.

And it also enables [people] on the supply side. The people that are managing these pools come up with strategies. Basically [dHEDGE] enables people to compete for having the best trading skills and is a way for democratising the asset management industry if you like. Because using something like Ethereum, it means that there are no barriers to entry and you can find the best managers wherever they are in the world. Which I think is super powerful.

[03:20]

KONRAD: It is [powerful]. I think the democratisation of finance in general is such a big thing in crypto generally. But I think it’s worth unpacking a bit. So maybe we can use some of your experience in the analogue version of the finance industry. What does a hedge fund look like in the physical world and then how can we compare that to the decentralised version on dHEDGE?

[03:46]

HENRIK: Hedge funds are, you know heavily regulated. You need a lot of capital to set up a hedge fund. If you want to become a hedge fund manager, you typically need to spend decades at an investment bank or something like that. Or have the right pedigree if you like, you need enough funding to be able to start something like that. Typically today it’s very hard to run a hedge fund unless you have something like 100 million dollars under management.

[04:17]

HENRIK: So [there are] only a very few people who get the chance to do that. And it’s not necessarily based on who the best people are, it’s more based on if you happen to be born in the right country, you’ve gone to the right schools, you worked at the right banks, to be able to get the opportunity.

So I think a lot of what’s happening in decentralised finance, which is a new financial infrastructure built on top of mainly Ethereum and other blockchains. [What’s happening is] about, as you said, democratis[ing] that whole process. [This] means that anyone is able to provide some kind of service. [This is a system] more based on merit; if you’re a really talented trader, you might be based in a third world country, anywhere in the world really. But you might be one of the best traders for a specific asset class or a specific strategy. And in the traditional world, you would have never gotten the chance because the barriers to entry are so high. You would need to go through all those steps and it’s really impossible probably for most people in the world to be able to do that.

But because of decentralised finance we can build software that is permissionless. Anyone can use the software because it’s just built on being able to connect to the internet and to different networks that are running on the internet, like Ethereum. And that enables anyone to participate. And that is what we call [the] democratisation of finance. So we have seen in the last one to two years a number of different DEFI primatives. A number of these software networks that are building a new financial infrastructure on blockchain technology. [These primatives have been built] among learning protocols, among derivatives, among decentralised asset management. It is also some of the core sectors that are being built out in DEFI right now that are enabling that permissionless access to these kind of financial services.

[Konrad postscript: in software development a primitive is a basic interface or segment of code that can be used to build more sophisticated program elements or interfaces. A helpful metaphor to keep in mind is building with Lego. So Henrik’s point, I think, is that we have lots of different pieces that we can now fit together to create something like dHEDGE.]

[06:29]

KONRAD: Cool. So that’s kind of related to the idea of win-win-win organisation. Isn’t it? It’s taking what we know from the analogue world, which is win-win organisations where the owners of the business and the customers win. And it’s sort of extending that to everyone, so that everyone has a chance to win.

[06:57]

HENRIK: Yeah, I think so and it creates something that is digital native, if you like. And most things in the world are getting more and more digital and DEFI I think is a digital native version of finance.

KONRAD: Sure, makes sense

HENRIK: Crypto currency started as the digital native version of money, like we had physical money, bank notes or coins and then those became digital. [The way this happened was] basically money in our bank which is represented in a digital way. But [that’s] just a digital representation of physical money. So it’s not really anything new. It’s like putting a newspaper on the internet I guess. While bitcoin is the digital native currency and I think in the same way you have traditional banks and traditional hedge funds which are legacy financial infrastructure.

You might have fintech today, and there’s a lot of excitement about fintech, but really it’s a digital version of the old legacy banking system. It’s running on the old financial rails. But DEFI is the digital native version of finance.

[08:21]

KONRAD: That’s really interesting. So with that brings a whole lot of challenges because of course in the traditional world we’ve got part of that infrastructure — the governance around it. [This includes] all the legislation of all the different countries, including IFRS accounting standards, [and] various other standards everywhere.

So, what’s a good approach for a digital native organisation for governance? We’ve talked a lot about decentralised autonomous organisations (DAO) on Bitfwd and sort of in the crypto community generally. What’s dHEDGE’s approach to maybe using a DAO in the organisation or to run the app?

[08:57]

HENRIK: Yeah, there’s a lot of experimentation I think going on and on the governance of these new financial primitives that are being built. There are different versions to do it. But I think you know, Bitcoin kind of was the first digital asset and there is a certain governance structure around bitcoin. Bitcoin has a protocol that is not changing very much so they don’t need another big infrastructure for updating the protocol or anything like that because what they call hard forks doesn’t really exist when it comes to Bitcoin.

When it comes to Ethereum, which is the second largest crypto asset out there, they have a certain governance structure. They don’t have a DAO [but] they have another structure around governance and how they build consensus in the community. What I have seen more recently, is the rise of DAOs as you mentioned, which are decentralised autonomous organisations. Because for many of these new decentralised finance projects, you need a way to make decisions and if you are going to build something that is decentralised, which at the end of the day is the goal of many of these projects, you need a way to make decisions in a decentralised way. And I think right now it seems like the gold standard for making decisions in a decentralised way is through a DAO where you have some kind of voting mechanism which can be off-chain or on-chain. And a way to enforce those decisions by a number of people who can sign transactions to change the protocols or to make certain things happening around the protocols.

So for dHEDGE, you know, we really launched [the] project during 2020 and we were fortunate enough to launch dHEDGE after some of the DAO structure was built out and we had projects before us that have thought a lot about DAOs. So we really tried to launch dHEDGE with a DAO first approach. So I think launching something new, there is also a path where you are more centralised in the beginning and there is a process to decentralise overtime. I think with dHEDGE we tried to be as decentralised as possible from the beginning. Meaning to try and build a community that can make certain decisions about the protocols as early as possible.

So for example with dHEDGE, it was really the community who decided about the structure of the public auctions that took place. But many of the early decisions in the protocol’s history, those decisions were made by the community, by running polls, by having votes and things like that. But I think there is still a process, there will most likely in most of the projects a core team that make some of the important decisions in the beginning before you have built that community I guess.

But we have recently done with dHEDGE as well is we’ve started something called the ecosystem DAO which is a council that can be rotated, people can be voted into this council, they can get paid for being, doing work for the ecosystem DAO. People can come to the DAO and propose to build things on top of dHEDGE or to do certain things for the dHEDGE protocol. [These can be things] like building content for example or moderating a forum, things like that. The ecosystem DAO can make decisions about approving those proposals or not. So that’s something we recently launched in the last couple of months actually, it’s been running for two months now. I think over time more of the decisions around dHEDGE will be made by the community and that’s really what a DAO is about.

[13:19]

KONRAD: So would you say you’re almost finished that journey to decentralisation or how are you managing that process to get to that end, if there is an end?

[13:31]

HENRIK: I think we have some way to go. [We are] still fairly early in the project development [dHEDGE] has been running live for not yet six months. So [we are] still relatively early in the journey I would say and we will add more decentralised decisions coming up, for example if you have a treasury, there is a protocol fee that is captured in the DAO treasury, we call this treasury the Uber pool and you can go to dHEDGE and read more about it in our org docs. I think what will soon enable us to enable the community to make decisions about how to deploy this treasury. Really trying to find the right incentives for the governance around this treasury and be able to grow this over time for the benefit of the dHEDGE protocol.

We have a governance token [called DHT] that you can stake and you can basically signal your commitment to the protocol by staking it for a short time or a longer time. And if you stake the DHT token for a long time, it basically means that you will align yourself with the dHEDGE protocol for a long time and that means your voting power, making decisions about dHEDGE protocol and the dHEDGE DAO. It’s much stronger if you stake the token for a longer time and you can currently stake it up to three years. So if you do that you’ll have more influence than if you stake it for a week or so.

[Konrad postscript: A governance token is a digital representation of ownership and confers privileges, such as the ability to vote on proposals.]

Alright, so. We will give the DHT stakers the ability to make decisions about dHEDGE treasury or what we call the Uber pool. And by having the DHT stakers commit themselves for a long time, we think it’s more likely they will make decisions that benefit the protocol in the long term. So we are trying to find the right incentives for the governance around the protocol and having that time parameter is one way to do that.

[15:55]

KONRAD: Right. So with decentralised apps in general you’ve got a governance token, the ownership structure is really quite different than a traditional organisation. One thing I really wanted to unpack is: what is approaching a venture capitalist looks like for a decentralised app versus a traditional organisation? Given that the governance is a lot different.

[16:24]

HENRIK: I think in the crypto space there are certain VCs (venture capitalists), and sometimes crypto fans that really understand this new model of decentralised governance and we have seen VCs and crypto funds buy into governance tokens. So they can participate in the sale of governance tokens early on to become influential in the protocol’s development because having the governance token is a way for them to be able to make decisions about the future of the protocol they’re investing in.

I think in many cases the economic value is captured in the protocol token itself as well. So this looks a little bit different for different protocols. We have seen a number of big protocols across more centralised model. For example, there is a learning protocol called Compound. Which has, I would say, some traditional venture capitalists behind it perhaps investing in the equity in the company that developed the protocol.

What happened with Compound was that the stakeholders decided to decentralise the protocol, basically create a governance token which is called COMP and the shareholders of the company behind compound became owners of their account token. In the long term the value will accrue to the COMP token to a fee that is captured on the platform. So that is kind of an example of the journey of a protocol that’s come from a more centralised model of traditional VCs where the VCs realised that the value lies in a decentralised token that they created.

And I think the same might be true for another protocol Uniswap, which is [currently] the biggest exchange platform. [Uniswap] created a governance token. That governance token might not in the beginning capture the value of the protocol but I think the important thing there for the stakeholders and the venture capitalist who bought into this model is that the holders of that token can make decisions of the protocol. So if you have a decentralised way of making decisions then those decisions can also mean that you capture the value in the token in the future and I think at some point we will see that happen for Uniswap.

[19:21]

KONRAD: I’m sure we will. Yeah I’ve been watching uniswap. It’s very cool although I have to say the fees on the Ethereum network definitely put me off using Uniswap at all.

[Konrad postscript: the Ethereum network can run code instructions, the fees on the network are calculated according to how much demand there is for code instructions. At present there are multitudes of complex smart contracts being used on the Ethereum network, so the demand for code instructions is very high. And so the fees are very high.]

[19:36]

HENRIK: Yeah absolutely, the fees are pretty crazy right now and have been for quite a while now in DEFI and on Ethereum. Which is very unfortunate but hopefully we will see scaling solutions come out and i’m quite hopeful that we will see that for 2021 and in Ethereum. It is one of my biggest hopes that we will really see projects approaching on the [layer 2s] and that the fees will come down and get more people into DEFI.

[Konrad postscript: given what I said about code instructions above, a layer 2 solution can be loosely thought of as shifting those code instructions off the main network and onto a different layer — hence layer 2. Currently there are a number of different proposed ways to do this, all with different tradeoffs.]

[20:07]

KONRAD: Yeah definitely needs to happen. I think it will too. There are solutions out there that will be adopted, different solutions for different problems.

HENRIK: I think so too

KONRAD: Because we’re discussing these quite different methods of organisation. Thinking about your time at the very beginning of dHEDGE, maybe when you guys were running the first apps on a local machine or the Ethereum testnet. At the beginning, what did you do to encourage accountability within your team and foster trust between yourselves?

[20:42]

HENRIK: You know, the core team knew [each other] during the development of dHEDGE. And then as we expanded the team and included more of the community, I guess, that’s a process that needs to take time. We sort of wanted to include the community quite early in the process. You mentioned that when we were running on the local machines, actually what we did before the launch, was that we had it up and running on the Ethereum testnet — Ropsten. We were able to run a couple of trading competitions on the testnet which got quite a lot of attention. We had some prizes and it was a way for us to build a community very early on for dHEDGE.

I think you know, having a DAO and entrusting people with the ecosystem DAO there are different ways to do that. So one simple way is you might pay for a grant or something like that, you pay a certain percent up front and we pay more once something has been delivered. This is a simple way to mitigate some of those trust issues.

[22:05]

KONRAD: That makes sense. So it was really a journey of making a community first and then making the product

[22:14]

HENRIK: Yes exactly and getting the early feedback from the community as well on the product itself. So they could make very early decisions about the product itself. Also a way to find and iron out any problems that were in the app early on in an environment where we were not putting any money at risk

[22:38]

KONRAD: yeah that’s super important. So now that I guess real money is at risk, what do you do right now to help keep your users safe?

[22:47]

HENRIK: We do similar things that you’ve seen from other DEFI protocols as well. Meaning we launch a bug bounty really early where people can report any issues with the app or protocols or the smart contracts and they can get rewarded for finding security issues.

So that’s something we did very early on. We also, before we launched, got the contracts audited by a firm that published the report and published it on the app before we launched. We completed our second audit because we have to make upgrades to the contract.

I think that’s an issue that DEFI protocols have, we might do an audit [and then] especially in the beginning you want to make some upgrades and you want to improve your codebase and then you will need to do another audit as well, on those changes. So we just completed the second audit as well but I think it’s important for everyone to know and all the listeners to know that there are no guarantees in crypt. Even though contracts have been audited there is always a risk that there are bugs that have not been found.

I think the best, perhaps the best metric of the security of smart contracts is how long they have been live for and how much money they have protected during that time. Something that has been live for a very long time and protected a lot of money you can put more trust in that protocol that they are secure because in some way, how much money is protected by a particular smart contract is pretty big bug bounty as well

[24:55]

HENRIK: The bitcoin network is protecting a trillion dollar or so running, say, for twelve years now and you can be sure it is a secure code base.

[25:09]

KONRAD: Yeah, it seriously is. I wrote a small article for my employer and I mentioned that the bitcoin network has been continuously live for twelve years, I think its been down for, in total, like 17 hours or some ridiculously small total time when you think of like just your average ISP or your network at your place of employment that goes down like maybe once a week or whatever (hopefully not that often, but it happens).

Maybe if we go back to what we were saying about the layer two solutions before. What are your plans for integrating L2 solutions onto dHEDGE, are you guys looking to do anything particular to dHEDGE or are we looking maybe just to wait for Metamask to integrate L2 solutions on their platform and Uniswap et cetera

[26:13]

HENRIK: We do have plans for L2 as well, which I think which I’m definitely super excited for. I think the user experience will be so much better when the managers on the platform don’t have to worry about gas fees. Also when the end users coming to buy and sell pools on the platform don’t have to worry about the gas fees. You know making a simple Uniswap transaction on Ethereum today can cost something like $50, which is pretty crazy.

So dHEDGE is fairly tightly integrated with Synthetix today, and they have advanced plans to move to Optimism. So that is something we are looking as well and actively working on. So Optimsm is one of the two main L2 solutions that will be used and will be out later this year. There [are] ZK rollups and there are optimistic rollups and we are going down a path of optimistic rollups, as is Synthetix, as is Uniswap as well. So we are super excited about that. [It] is something we’re actively started working on, so we hope to bring it, as soon as possible to the dHEDGE protocol and to the users. But these things tend to take a bit longer than we all hope for. But I think we’ll get there in not too long time

[Konrad postscript: What rollups do is essentially taking all the code instructions from lots of users, and bundling them. You’re processing them in that bundle in a certain way and then you’re passing on information about that processing onto the main chain of the network to process the pre-processed information. This is a way to make the transactions cost a lot less because you’re not asking the whole network to do a whole lot of calculations.]

[28:01]

KONRAD: I saw Optimism was delayed until July, I think it was.

HENRIK: That’s right, the public mainnet is delayed until July. It’s a bit of a disappointment.

KONRAD: A little bit. But I think it’s best to get it right, because honestly if something goes wrong with the Optimism launch and there’s like a bug or a hack that’s possible, there’s just going to be so much damage it’s not even funny. So we’ve got to get it right.

[28:31]

HENRIK: Yeah definitely, in the long scheme of things it really doesn’t make a difference if it’s in March or July.

KONRAD: Exactly, this is an absolutely long term game.

But really I wanted to dig into something that I think is quite important, so say you are a normie, say you’ve got a $300 thousand home loan, $200 in your bank account. You know that sort of person, why should they really care about dHEDGE and why should they care about those layer 2 solutions and how you integrate them?

[29:52]

HENRIK: Yeah, right, so I think you know, what is being built right now in DEFI is fairly technical. It’s not used by that many people, it’s mainly for people already in crypto. But I think, you know, what it could enable is really exciting, so it could enable someone like that to get access to the best hedge funds or the best traders in the world, alright, without any barriers.

Like today to be able to access the best hedge funds in the world you need to be very wealthy and you need to have a big investment account because the minimum to invest in some top hedge funds in the world is a really big ticket right. So those are not accessible today. But with the democratisation of finance I think, a lot of things out there that are only available to a small group of people can be available really to anyone. [This is possible] because it’s automating certain financial services using software that anyone can access through the internet. I think that is a super powerful narrative.

You know, right now it’s kind of hard to use, it’s hard to onboard and we’re not there yet but certainly if you look out a few years what this could enable [is] what’s making everyone so excited about DEFI as well.

[31:34]

KONRAD: Definitely, so you just touched on your onboarding at present. What does the process look like for, say, the normie with $200 in their bank account. Say they’ve got $200 USD for example, how would they go from that $200 USD to then investing in a pool on dHEDGE?

[31:55]

HENRIK: Yeah, so you know it’s pretty messy, it’s pretty complicated to do something like that. So, as a first, you need ETH because dHEDGE is built on Ethereum and the native currency of ethereum is called ETH. So to be able to do a transaction on the ethereum network you need some ETH in a digital wallet.

So you need to perhaps send those $200 to an exchange like Coinbase or whatever your exchange in the country you live in, what you have available. You need to buy some ETH to be able to transact on the Ethereum network, you need to download a digital wallet like Metamask to your browser. That’s one way to do it, but there are lots of different wallets out there.

So once you acquire some ETH at an exchange, you send it to your Metamask wallet, then to invest on the dHEDGE platform you need a form of digital US dollar called SUSD. So you need to find an exchange to buy SUSD. Currently the best way to do that, from ETH, is probably Uniswap.

So once you have your $200 in ETH, you need to convert some of that ETH but not all of the ETH because you still need some ETH in your wallet to be able to make transactions in the future. So you need to buy some SUSD using Uniswap, and as you mentioned a couple of times, it’s very expensive to use Uniswap. You might end up with $50 in fees doing that and then you will end up with SUSD in your wallet, [as well as some ETH you did not swap so you can make transactions].

Once you have the SUSD you can go to https://app.dhedge.org/ and on there you will find our leaderboard where we rank all the pools on the platform based on their risk adjusted returns. I really think that’s the best way to rank managers and figure out who is really the best at this.

And then you can learn more about the managers, you can find a pool you think you want to get exposure to and you can use our app to buy a pool token. Once you invest SUSD, in return you will get a pool token for the specific pool you invested in and then you can hold onto that pool. You can follow the performance on the dHEDGE app, you can get updates from the managers, they can write updates on the app itself to the investors and you can hold that pool token. And over time you can switch to other pools if you find something else that you like better, but, that’s sort of the process which is really long and complicated today.

[35:16]

KONRAD: it really is, but it will get easier, we’ll get there right?

HENRIK: It will definitely get easier over time

KONRAD: Looking forward to that,I think that’s a good place for us to stop, really. Thank you so much for your time, for joining us on the very first episode of the bitfwd podcast. And to the audience, thank you for listening and if you’d like to learn more about dHEDGE, which i’m sure you would because it’s a really really cool project, go to https://app.dhedge.org/ and on that page you can see the docs as well as some other cool stuff and there’s lots of good documentation around how to use the app.

Thank you for your time Henrik.

HENRIK: thank you so much Konrad

END.

Music credit to https://www.bensound.com