Vertalo: DeFi + Digital Assets & Security Token Ecosystem
The recent news about DeFi has illuminated several opportunities for new applications of Vertalo’s technology. Vertalo is a SEC registered transfer agent and asset data management platform that is leading the charge of onboarding of traditional assets and securities (real estate, fund interest, debt, equity) into their blockchain-based digital representations.
To date, there has been a fixation on security tokens as a conduit for capital formation and secondary liquidity. While there are certainly opportunities for capital formation and secondary liquidity, DeFi will inadvertently create a massive security token market via availability of collateralization. Taking an asset, tokenizing it, and collateralizing it would stabilize shared liquidity pools and massively grow the DeFi space. Many in our industry view DeFi and digital assets as polar opposites, but I would argue that the convergence of these previously distant schools of blockchain technology development will drive the next inflection point in value for both.
Our vision is to marry the two worlds, bridging between traditional and decentralized finance. To this extent, Vertalo believes traditional assets and securities can and should benefit from the same efficiencies in today’s DeFi model.
Background
Vertalo began studying the DeFi space from a business perspective in early 2019. At the time, Vertalo concluded it was an interesting area with transformational applications. However, its total value appeared limited to an asymptotic multiple of the value of the underlying protocol token. Additionally, as a regulated entity, it is important for us to be prudent in allowing further development of the space — to establish technical robustness and refine risk management.
As recent DeFi projects have emerged, and the total value locked in smart contracts has exploded on a Cambrian basis, it was time for myself and Vertalo to revisit the concept. As Vertalo’s VP of Finance, I was tasked with experimenting with various protocols, mapping aspects of Vertalo’s platform to their processes.
I’ve personally been involved in the DeFi space for several years, having invested in early DEX’s, stablecoins, and synthetic instrument platforms. I understood the general concepts of the space, however, it’s been over a year since I emerged from that rabbit hole and stopped actively following the developments.
So What is DeFi?
My recent experiment began with a Forbes article written by my partner from NovaBlock Capital, Leeor Shimron remarking on some of the opportunities and risks presented by emergent projects in the DeFi space. This led me to an informative twitter thread by Tony Sheng, a Multicoin alum, which had received enormous praise and criticism by both poles of the DeFi space. Familiar enough with some of the various platforms and armed with enough knowledge from conversations with several projects and thought leaders in the space, I began to dig in.
Defi, or “Decentralized Finance”- The general gist is that smart contract protocol tokens (such as Ethereum or Tezos) can be “staked”, “locked in a smart contract”, or in a more traditionally worded sense, “collateralized”. This will generate a return for providing that liquidity. Similarly, collateralized tokens can be borrowed against, at fixed or variable interest rates that vary significantly across asset (table below).
Within this framework, there has emerged a new practice of ‘yield farming’, where the borrower pockets the spread between collateral APY and loan APY, but additional uses their loan for additional collateral. This leverages the original position, provides additional credit availability and leverages the original position for additional yield (and risk!).
This isn’t a new concept — “Borrow Low Lend High” is as old as time, but today’s DeFi model is different. Tokens are still locked in these smart contracts, and in most popular models, are essentially deposited into a shared collateral pool. Rather than the volatility inferred by thin order books spread across exchange venues, these larger liquidity pools have a stabilizing effect.
These pools resemble traditional risk transfer structures, such as a general account at an Insurer. Users generate a return by swapping borrowed tokens to the token used for collateral, and staking those swapped borrowings. The result is essentially a leveraged lending practice, but can yield in excess of 100% APY. Additionally, there are various elegant models for minting, burning, liquidating, and auctioning that stabilize the shared value/risk and can also recover lost value — I’ll get into these in a subsequent post.
Currently, liquidity for many pools is incentivized — one or both sides of the lending/borrowing equation are subsidized with incentive tokens (governance tokens, protocol tokens, etc — tokens distributed for a reason other than ‘interest’ payments). For example, Compound Finance will distribute a fixed amount of COMP token to both borrowers and lenders that are using its protocol. Compound Finance rewards stakers in-kind APY, given the type of collateral being staked, and it enables borrowers and stakers to both partake in the growth and governance of its platform.
Without brokerage rules, borrowing restrictions, or pesky bankers to muddy the structuring and underwriting process, this powerful new combination of rate arbitrage, incentive token distribution, and collateral volatility can be a playground for the financially or mathematically oriented mind.
As such, in 7 days I’ve:
- Signed >200 transactions
- Had 30+ loans interactions on Maker, Compound, and Aave
- Launched 2 decentralized index funds on Melon Protocol (also the new interface updates look great!)
- Staked in Balancer Pools
- Staked in Curve liquidity pools
- Staked Curve LP tokens in Mintr
- Built a farm that comfortably yields 70.1% APY, and I’ve revved it up to ~123.1% APY, but don’t try that
Vertalo & DeFi
The efficiencies of these DeFi models and the unique approach to risk and liquidity is artful, and the applications expand beyond tokens. Vertalo’s mission is to connect and enable the digital asset ecosystem, and this includes connecting traditional and decentralized finance.
Vertalo, in this contemplated model, would initially support two offerings: on-ramp and off-ramp.
Under the on-ramp model, Vertalo would support the application process for tokenized assets managed on our system to be considered for eligible collateral by DeFi communities. For context and scale: one of the real estate assets we’ve identified as a strong candidate, would raise global TVL by ~5.88%. This additional value would stabilize liquidity pools and mitigate risk.
Under the off-ramp model, Vertalo is developing a framework for the liquidation and subsequent auction processes for collateralized fixed income instruments. Upon liquidation, the remaining collateral would be auctioned, but at that point the remaining collateral would also become a security and subject to US Securities Law.
Vertalo’s API-first data management platform reads and writes to chain, meaning the system can monitor and understand chain events in real time. Pairing this on-chain registry with compliance software and API’s between investment banks, capital advisors, and broker dealers, Vertalo represents a bridge between DeFi and the regulated world. As such, I believe Vertalo is uniquely positioned to serve as the on-ramp for digital assets to the DeFi space, driving an inflection point for both markets.
Twitter — https://twitter.com/thebrichman
LinkedIn — https://www.linkedin.com/in/blakerichman/
For more information on Vertalo, visit www.vertalo.com or stay updated with Vertalo’s communications:
Telegram — https://t.me/vertalotoken
Twitter — https://twitter.com/vertalo_?lang=en
Medium — https://medium.com/@Vertalo
LinkedIn — https://www.linkedin.com/company/vertalo
ABOUT BLAKE
Blake Richman is an investor and entrepreneur focused on building fintech solutions for the next generation of private capital markets. He currently serves as VP of Finance at Vertalo, a leading data management platform connecting and enabling the digital asset ecosystem. Blake invested in Vertalo while at NovaBlock Capital, a blockchain-based capital market infrastructure focused venture fund, where he previously served as Chief Investment Officer and remains a Partner. Blake entered the blockchain world while serving at Hercules Capital (NYSE: HTGC), a $2.3B public BDC, where he assisted with the structuring and underwriting of $135M in debt and equity transactions. Blake has previously held various positions in venture capital, asset management, and debt capital markets, and holds a BA in Economics from University of Maryland.
ABOUT VERTALO
Launched after their own March 2018 STO, Vertalo is a B2B SaaS company founded to map the gaps between primary and secondary trading of digital securities offerings. As the ‘Operating System for Digital Assets’, Vertalo is focused on connecting and enabling the digital asset economy, providing an industry-leading cap table and investor onboarding solution that facilitates direct ownership and direct listing of any private asset. In addition to offering direct issuance services to private companies, Vertalo also offers white-label, licensed, and joint venture opportunities to capital advisors, broker-dealers, and investment banks. A subsidiary of SeriesX, Vertalo is headquartered in Austin, TX with offices in New York City and Seoul. Learn more about SeriesX and Vertalo at www.vertalo.com.
