The Universal Custodian Vault and Its Management (UCV)
Universal Custodian Vault, or UCV, refers to the vault for safe guarding and assuring assets or instruments that represent the “N” part of the N-to-1 mapping relationship, or the inputs to the overall UFiT function. It must be stressed that prior to these assets or instruments being locked into the UCV they must all be converted to the UNFT format by the preprocessor provided by NFTAL, if they are assets coming from other heterogeneous blockchains. Calling the preprocessor is the job of heterogeneous blockchain adaptors.
It should also be noted that each UCV is made of one or several UCV Cells, each of which only accepts one uniquely named UNFT asset with a specified quantity.
When a user injects a certain quantity of UNFTs into the UCV, this part of the total issued UNFTs on the carrying blockchain is locked in the vault. The newly issued, or mapped-out instrument, called UMI, is freely controlled by the user. The locked UNFT assets can only be taken back when the user surrenders the UMI to the vault (can be in partial, if allowed by the preset rules).
A complete UCV must satisfy a series of management constraints. The Vaulting Contracts provided by UFiT impose these constraints on the UCV so that management can be carried out during the UCV’s operation.
2. The Vaulting Contracts
The Vaulting Contracts refer to the suite of smart contracts that serve as the interface to allow users to construct UCV according to the purpose of custody, and deposit UNFTs into the UCV. These smart contracts implement and enforce specific management rules pertinent to the purpose of custody that are predetermined by UFiT’s governance process. They enforce at the least the following requirements:
- Unique name: each UNFT placed in the vault must have an independent and uniquely marked name, such as “UETH” or “UBSC”.
- License of redemption: A redemption license can be generated through the system, which contains a quota for redemption. When an account holding this license initiates a redemption against the UCV, with the presence of certain portion of the associated UMIs, the corresponding portion of the UNFTs in the vault are released to the account that initiated the redemption. By default, no redemption license will be generated, so that only the account that has originally deposited UNFTs into the UCV can initiate the redemption.
- Management permission: When a UCV is constructed, it is necessary to define a list of accounts that have the rights to participate in the governance of the UCV, and these rights are expressed as a set of permissions, including permissions for viewing, modification, and liquidation of the UNFT assets in the vault.
- Invocation whitelist: UFiT defines a list of addresses, the whitelist, that are to be invoked when an UCV is constructed. This whitelist can be adjusted by a predefined UFiT governance process.
- LMC mark: When a UCV is constructed, the user can mark the vault for intervention by the decentralized organization LMC (Liquidation Management Committee). If marked, it means LMC will be committed to manually dispose the assets, when automatic liquidation mechanism fails to obtain quotations that meet the redemption requirements. After LMC manually dispose the marked assets in UCV it will also manually complete the redemption. LMC ‘s formation and its specific operating mechanism are predefined by the UFiT’s governance process.
3. The Management Functions of Vaulting Contracts
Different users use the custodian services provided by UFiT for different financial purposes. While UFiT implements all types of N-to-1 mapping relationship with one technical architecture, the different financial purposes must be reflected on top of it, and these purposes are managed by functions provided by the management contracts included in the suite of Vaulting Contracts. The following addresses some of the most common usage purposes and their related management functions.
3.1 Financing via Securitization
Securitization is often a misunderstood concept in crypto industry that deserves special attention. The process conventionally refers to the pooling of multiple illiquid assets to create a liquid instrument for financing, or funding. It is critical to understand that the pooled assets must preexist first, and the actual funding is done by
- selling the entire pool of assets for proceeds, or,
- borrowing proceeds with the pooled assets as collateral.
In the first case, securitization has little to no meaning if the pooled assets are not from the real world, which typically have reliable valuation but no trading liquidity. It is in this regard that UFiT can demonstrate its readiness to embrace the coming integration of crypto and real assets, where the income and rights from the real assets can be mixed with the price performance generated from the liquid crypto assets.
In the second use case the situation is just the opposite, i.e., the assets that are pooled together serving as collateral generally have abundant trading liquidity (UFiT DAO’s governance process maintains the eligibility standard), so that a fixed amount of debt can be issued.
Clearly the funding will not be completed by merely pooling the assets and issuing a securitized instrument. The selling of this instrument (borrowing and repaying can be viewed as the selling of a debt certificate and buying it back with additional interests) must subsequently take place. For collateralized debt issuance, UFiT’s UMI Management Contracts (discussed below) provide functions to allow the placement of the issued debt tokens, their repayment, and forced liquidation in case of default for outstanding debts.
3.2 Asset Management
Conventional asset management practices, both in crypto and real world, require raising proceeds first and then deploying the raised proceeds, according to the asset managers’ investment views. In this class of applications, target investment assets to be custodized do not preexist. Therefore, the UCV’s management contracts must first be used to hold investors’ deposit, and then used to hold assets of the investment portfolios.
It is critical to note that spending investors’ proceeds on the purchase of investment assets must be carried out within the control of the management contracts, which requires that the carrying blockchain of UFiT provides at least one DEX that supports the exchange of investor proceeds and the target assets made of the investment portfolios. Here again, we rely on UFiT DAO’s governance process to regulate the eligible investor proceeds and the target assets to be custodized, because if they lack sufficient liquidity then the quality or even the legitimacy of UFiT will be compromised. When users construct asset management UCVs, the related management contracts will be called to enforce the eligibility rules set by the governance process.
Aside from eligibility management, position management contracts enforce userdefined portfolio composition rules and risk management rules. In concept, these rules can be arbitrarily complex, but UFiT V1.0 will only implement the most commonly used ones. We will examine two specific use cases.
ETF, or Exchange Trade Fund, is foremost a passively managed fund, which is invested in a portfolio of multiple instruments and assets, chosen according to a preset fixed formula of specific asset composition. Note that such a passive fund can be listed and traded on an exchange (hence an ETF) is not the issue of our discussion. Although the composition of a passive fund doesn’t change drastically throughout its life span, it can still incur changes of holdings according to the preset formula of asset composition, such as adjusting for changes of components in an index tracked by the passive fund.
Discretionally managed funds also draw their returns from the underlying portfolios holding various assets and instruments, but the fund managers generally do not adhere to a fixed formula of how to compose such portfolios, and instead adjust their positions frequently to reflect their views at the time of the adjustments. Although no fixed formula is in place, diversification rules are commonly applied.
For these two most commonly adopted asset management forms, UCV management contracts allow the portfolio managers to specify asset composition formulas (for passive funds) or diversification rules, according to eligibility set under the governance framework. These contracts also allow the fund managers to specify a list of accounts that have the permission to alter the UNFTs in the UCV, with dynamic verifications according to the statically set rules.
For both passive and discretionary funds, a separate UCV, called proceeds vault, is designated to receive and hold investor proceeds, as well as the proceeds generated from the fund’s liquidation. This vault guarantees that any outflow of unused proceeds is for assets acquisition only, and the final liquidation proceeds are for distribution only. The proceeds vault keeps track of all incoming proceeds and their corresponding percentages. The acquired assets from secondary market will be deposited into the portfolio holding UCV, called portfolio vault. When a fund terminates, liquidation process will liquidate what’s in the portfolio vault to the secondary market, and place all received proceeds back into the proceeds vault. Any investor holding the issued fund tokens can redeem at the proceeds vault.
3.3 UCV’s External Interface
As we have seen in several places in the previous discussion that crucial resources external to UFiT, but obtainable on the same carrying blockchain, are required to execute the functions of UCV management contracts.
The first is the oracle machine interface for evaluating assets under custody, feeding not only real-time asset value fluctuations but also critical status change of assets (such as the default of a bond) to the risk control modules. Obviously, such an interface must take information from sources that are heterogenous to the carrying blockchain of UFiT, and UFiT’s design paradigm will reflect such generality with a “best effort” approach, including utilizing the services provided by existing DeFi projects.
The second one is the trade execution interface for fund deployment, fund adjustment, and asset liquidation. When a UCV is constructed, its purpose must fall into the category designated by UFiT’s overall governance process, and each allowed designation usually has predefined operations that can be specified by the user at construction time, and later be executed by the Vaulting Contracts while the UCV exists. One of the most important operations is the acquisition and disposal of assets in the secondary market. While a sophisticated execution engine is desirable, it is certainly another kind of application that falls outside of the basic infrastructure performing custodian or trust services. By and large, UFiT relies heavily on existing DEX facilities carried by the same blockchain that UFiT itself operates on. This interface, with the current design of UFiT, is not highly portable, and it will be upgraded or optimized in later versions.
See the following illustration of UVC management contracts in the construction of an investment fund facility.