Unblock Tokyo — ConsenSys — Decentralized Finance (DeFi)

The “Unblock Tokyo” conference was held on Saturday, October 5 at BinaryStar in Ginza, Tokyo. Ejaaz Ahamadeen, Global Lead for Digital Asset Design at ConsenSys, was interviewed by Nicole Nguyen, Head of Asia Pacific at Infinity Blockchain Ventures and Head of the Asia Blockchain Review, about Decentralized Finance, or DeFi in short. Here is the conversation.

Nicole: Decentralized Finance, or DeFi is one of the hot topics these days for blockchain. So, first of all, my name is Nicole, I am based out of Bangkok, and I am heading Asia Blockchain Review. I am here today with Ejaaz Ahamadeen, the Global Lead for Digital Asset Design from ConsenSys.

Ejaaz: As the Head of Digital Asset Design at ConsenSys, I focus on anything around tokenization of real world assets, as well as public chain assets and how that ties into the Ethereum blockchain. My wider role is part of a team at Consensys called Codefi, which stands for ConsenSys Decentralized Finance. This is a brand new product suite, which we built to address a few things.

Over the last two years, we have seen a major trend of institutions and companies in the commerce and finance sector moving a lot of the infrastructure, manufacturing and distribution value chains onto blockchain type networks. That is a difficult transition, with lots of dependencies, risks, and processes that need to assimilated and transitioned. So if we are to support our clients to make this transformation and reap the benefits, there need to be certain infrastructural tools that we build that will allow this to happen at scale, minimize the risks and allow flexibility for our clients.

So we developed this product suite called Codefi, and it covers four main things: Codefi Assets, which focuses on tokenization of real world assets; Codefi Payments, which focuses on the transfer of cryptocurrency payments; Codefi Networks, which bridges public chain assets to private assets; and then there is Codefi Data, which provides data analytics and risk exposure.

Nicole: We already have a lot of buzzwords, a lot of hype, ICO, STO, financial inclusion, decentralization. Do you think this DeFi term is another hype to get more people into the blockchain space?

Ejaaz: Let us explain first what DeFi is. We are all very familiar with normal financial transactions and processes, like banking transactions for deposit and loans, for example. Decentralized finances is a set of protocols and products that are being built on open blockchain ecosystems, primarily on Ethereum, which facilitates all these traditional banking transactions and processes completely autonomously using smart contract infrastructure.

Is it a big hype? For the last six months, DeFi has been really popular in the blockchain ecosystem, particularly on Ethereum, with projects like MakerDAO, which focuses on producing a decentralized stablecoin tied to the US Dollar, and Compound, which helps to create money markets, and DYDX, which helps with margin and lending on a decentralized platform. There are a lot of people who have been speaking about DeFi right now.

It is important to understand that there are certain functions and products from traditional finance that make sense to operate on a decentralized public chain. And we are seeing this come to bear through their increasing popularity. In the ICO bubble, there was a lot of talk, there were a lot of white papers being written, and not much of substance being built. The difference between the ICO craze and DeFi is that there has been less talk about very few functions — lending, stable coins, margin trading — but there is actual development and building of infrastructure.

For example, MakereDAO right now has around USD 350m worth of Ethereum locked up in smart contracts. And that is not owned by any centralized authority. We are also seeing a growing number of verticals. There are around 60 different applications right now focused on DeFi. While that might be small compared to the number of ICOs at the end of 2017, there are no products or services that see more real value accumulation and aggregation of users than DeFi has right now.

Nicole: Let us talk a bit about product/market fit with regards to DeFi. What are the top three problems that DeFi actually solves? And some of the challenges that only DeFi can unlock?

Ejaaz: First, its access to capital. Right now, if you would like to take out a loan or get access to start up funding, it is often hard to get access, because there is a lot of accreditation, and a lot of KYC (Know Your Customer) requirements. I am not saying these things are bad, but there is a huge amount of friction that prevents users from acquiring low cost capital. DeFi is a way to solve that by removing centralized intermediaries, and allowing access to low cost capital depending on your actual reputation and financial health score when it comes to operating on these systems.

Second, there is fractionalization. If you would like to take part in certain investment products, you often have to be an accredited investor and meet some high end renumeration thresholds. With fractional liquidity, you suddenly have a platform that is accessible by people globally, who have access to the public or private chain ecosystem, depending on how they interact. And that is the main reason why we built out Codefi, because we are seeing bridges between private and public chains.

Finally, there is trustless and transparent execution. Often, when you transact in the services and products in traditional finance, since you use a centralized intermediary, you are often unaware of what is happening in the back-end, you do not really know where your money is ending up. With DeFi, we have a global operating system where you are able to see exactly where the funds are going, you are able to see exactly how much is being lent and how much is being borrowed. And this is extremely important to financial markets. You can make much better decisions and take action transparently according to the information available on both public and private chains. That is why DeFi is such a large movement. It is bringing the power back into people’s hands for their own financial autonomy.

Nicole: Let us take a look at the incumbents. I am sure you have this conversations with a lot of institutions, so how has their response to DeFi been so far? And what would it take for them to get into the game?

Ejaaz: From what we see at ConsenSys, the initial reaction to DeFi was twofold: first, the kind of “blockchain pro” users are very excited to see a new way to transact in financial assets and money. Second, on the institutional side, it generated a huge amount of interest. However, there was justified concern around how the incumbents would be able to interact with DeFi because institutions have a very different agenda, risk portfolio and reputation at risk than a normal user who wants to participate in crypto. So it is important to provide some tools, that enable them to interact.

Let me talk about two projects currently under way at ConsenSys. The first one is based in France, a collaboration with a local real estate investment management firm, Mata Capital, and a notary called Screeb Notaries. We worked on opening up their real estate investments through tokenization, which generated incredible demand and was an amazing, amazing success in proving the value of the product costs and efficiency, just in this particular market. Another example is where we worked across England and Wales on something called Her Majesty’s land registry, which holds deeds on property, and changed how to transact in a transparent manner, across different stakeholders.

The majority of ConsenSys’ clients right now are based in the US and Europe, because that is where we originated and have built up strong relationships and a strong community. However, we are now seeing increased maturity within Asia, and in Japan in particular. There are frameworks that are being put in place. And we are seeing institutions starting to take certain steps that we observed in the West maybe six to twelve months ago.

Nicole: That was a really interesting point about the the global landscape of DeFi right now. The total assets in the Ethereum DeFi ecosystem are just around USD 1bn, with most of the products coming out of the US and Europe. So will there be a different approach to Asia, in terms of products, in terms of engaging with the institutions, and what would what would it take for DeFi to evolve further in Asia?

Ejaaz: Regulatory concerns and frameworks are a huge ordeal right now. In the US, the SEC and FINRA as two of the major regulators have stepped in and increased their oversight. Every jurisdiction has its own regulatory landscape. Specifically in Japan, there has been quite a bit of progress in that regard. It has been a cautious start, but the discussions that are happening around the regulatory sandbox are supportive. Official policy is evolving to the point of allowing certain blockchains options to occur and businesses to be established, and that is hugely important. Because that opens the testing phase, and that is something that we have seen within the US, in particular in states like Wyoming, which have been very pro blockchain. And I would argue that Asia is actually looking at things which the West does not really pay much attention to right now. There is a lot of progress in payments, real world assets, real world asset tokenization. So that is where our core focus is going to be when we build up the Codefi suite within Asia.

Nicole: With my next question, I would like to address DeFi in general, not only in the Ethereum ecosystem, but looking at the overall system from the perspective of public blockchains. Where do you see, let’s say over the next one, two, three years public blockchains putting money into DeFi?

Ejaaz: I have to say, DeFi has been a primarily, and wholeheartedly focused on Ethereum. The reason being, because the Ethereum blockchain itself allows the classifications to be built and execution handled right. The question that you just asked is, should other Layer 1 public blockchains get involved? What are some of the risks and consequences?

So should allow blockchains get involved in the fight? Absolutely. If we are all going to sit here and create an open, decentralized world with all of these financial applications available to a bunch of different users, then it makes sense that we should access all these different communities that are building brands and blockchain ecosystem strategies. The number one DeFi product right now is MakerDAO, which is a stablecoin. Recently, they announced a partnership with a secondary scaling solution called Loop. That partnership is specifically focusing on is how they can build gateways to use different assets, and not just use Ethereum. These are the first kinds of iterations and experiments that we are seeing to open up access for all these different people and communities. That is really important.

There is also talk about real world assets. There is also talk about other assets on other chains. And that opens up a different kind of risk portfolio to an application, because I have just put ETH into MakerDAO, and have just received DAI. But if we bring in all these other kinds of assets, does this not affect the volatility of my stablecoin? Managing that risk was extremely critical and something that the MakerDAO team, as far as I am aware, is very focused on. It is not an easy task at all. But it is important.

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