NEWSLETTER #3: DeFi and Digital Asset Insights

New to the Newsletter and to Codefi? Check out this explainer video about ConsenSys Codefi.

Hey Friend,

We hope everyone is staying safe during this difficult and ambiguous time. As a break from the COVID-19 news cycle, we have some DeFi topics for you this month that we hope you’ll enjoy. On a happier note, this week marks the six month anniversary of ConsenSys Codefi. It’s been a busy and exciting ride so far launching decentralized networks, bringing transparency to decentralized finance lending protocols, tokenizing real estate investments, tokenizing community-financed municipal bonds, and modernizing global commodities trade operations, among other projects. Thanks for coming along for the ride with us so far, and buckle up — for the DeFi journey is just beginning. 

In this month’s newsletter we break down how our Codefi Activate platform works, and what’s different about token launches today. Also in our newsletter this month, our Co-Head Lex Sokolin zooms up a few thousand feet to give his thoughts on how blockchain is changing the finance factory where financial instruments and products are made. Other entrepreneurs are trying to build the largest attention platforms selling deposit accounts sitting on 30-year old core banking software. Our advantage lies instead in global networks, public and private chains, and programmable, decentralized finance.

Project Highlight – Codefi Activate

Q&A with Codefi Activate’s Lead Token Architect Ejaaz Ahamadeen

What is the reason you created the Codefi Activate platform and how does it work?

We’re building Activate to solve three key issues that we see in the decentralized network ecosystem today.

1. Most people hold tokens for speculative value and often underestimate the importance and value of actively using these tokens to help secure a network.

2. There is currently no singular, easy-to-use platform that allows me to use a variety of tokens and earn rewards.

3. Managing tokens is a complex process that requiring improvements in UX/UI. 

Codefi Activate looks to solve these issues through a variety of components including our novel ‘Proof-of-use’ mechanism, the ability to delegate your tokens to a variety of validators and a easy-to-use participation portal to manage your tokens. 

Why did you choose SKALE as a launch partner?

As announced last month, we decided to partner with SKALE Network for Codefi Activate’s first-ever network launch because they provide a unique solution to Ethereum’s scalability and computational limits. Together, the Activate platform will help connect the SKALE network with an active community of token holders who can help secure the network and boost its performance by staking their SKL tokens and earning rewards. The ‘active’ characteristic is key here – while previous network launches have focussed on speculative behaviour, Activate is showcasing why using these networks is so much more important. 

Why should people care about using their tokens? 

Tokens offer an individual the right to access and participate in a decentralized network. This pioneering asset class helps incentivize a community to act in a network’s best interest so as to establish high performance and security standards for that network. The holder benefits directly from this by earning protocol-native rewards (i.e. more tokens!). Activate introduces a brand new programmatic feature called Proof-Of-Use, where individuals who purchase tokens have a requirement to stake at a certain percentage of their tokens for a minimum amount of time before they can transfer these tokens for other purposes – in the case of SKALE this is 50% of tokens for 3 months. This helps ensure the network is secured at its launch and prevents speculative behaviour typically seen in most token distributions.

What has changed with token launches now compared to the past (i.e. the boom of 2017)?

In the past, token launches were focused on raising large amounts of unwarranted capital for a token that often had no valid use within a network. These ‘networks’ were often nothing more than ideas in a whitepaper, and the development and actual mainnet were severely lacking. 

In our present ecosystem, networks are taking a much more cautious approach when defining a token’s design and use-case, with its legitimacy being tested and critiqued by it’s community on a live mainnet. This is important to consider when we launch tokens — highly engaged, knowledgeable and thoughtful communities are what will drive huge leaps of success within the decentralized ecosystem. Codefi Activate is aiming to be the catalyst for connecting these communities with networks.  

 Quick Codefi Hits

• New to the Newsletter and to Codefi? Check out this explainer video about ConsenSys Codefi.

• ConsenSys Codefi Survey: TLDR: We want to get to know you better and it’ll take 3 minutes.

• Cointelegraph ConsenSys and SKALE Kick Off New Token Issuing Platform. In the beginning of February our Activate platform announced a token launch partnership with the SKALE Network, a decentralized elastic blockchain platform for securely scaling Ethereum based dApps.

• Venture Beat Skale Network to launch cryptocurrency tokens that withstand regulatory scrutiny. More on how the Activate platform allows networks to launch their tokens based on a legal framework designed to withstand regulatory scrutiny.

• ConsenSys Codefi Blog The DeFi Score in Action: bZx Report. A breakdown of how the recent attacks on the bZx protocol offer opportunities to better evaluate DeFi risk, and how the DeFi Score reacted.

• ConsenSys Codefi Blog Rewards and Penalties on Ethereum 2.0 [Phase 0]. An overview of the Proof-of-stake implementation of Ethereum 2.0, plus its system of rewards and penalties. We also give a quick assessment of the ROI of a stake.

 “Future of Finance” – Central Bank Digital Currencies

from Lex Sokolin, Global Co-Head, ConsenSys Codefi

I’ve got a simple, modest goal. Let’s move $15 trillion of global gross domestic product to open-source programmable blockchains. No more, no less. 

To understand the full picture, zoom out for context. Bickering over protocols and forks is a great Twitter strategy. But doing the actual software and market development is what matters. So let’s describe where we are from the perspective of digitization and the global economy.

Over the last several decades, multiple industries have been gutted by disruption. It starts with a cheaper, simpler version of a familiar product, which has some structural advantage. The product improves cumulatively, until the traditional industry can no longer compete, despite its initial market share. Napster pulled apart the music industry such that revenue collapsed 50 percent and the remainder was Spotify, not the music labels. Google did the same to the media industry as it incorporated all of the internet into its advertising maw. Uber leveraged GPS and Apple’s hardware footprint to create a substitute for the traditional taxi, cutting prices of New York taxi medallions by 80 percent. Amazon and Alibaba sliced deeply into retail, pushing cultural norms and payment volume to a new chassis. 

In all these cases – which became venture capital cliches because they ring true – something fundamental happened. The software equivalent of the core product in that industry became free to manufacture. I cannot build a Spotify of CDs, but if digital music files are an available Lego piece, then a blue ocean of opportunity awaits. You can think of these developments as fractals emerging from shifting societal tectonic plates. As humanity levels up its technical capabilities, the shape (but not the nature) of human activity changes. We may not know every recursive fold of the fractal, but we know its spiral tendency. 

Unlike the examples above, financial services can be a much more difficult beast. Its sectors are highly technical and arcane. Its language is specialized and protected. Barriers to entry come from relationships with power in the form of regulation and licensing, and from network effects in the form of market infrastructure, liquidity and payment rails. It is more difficult for the vector of digitization to digest finance. But like all things, we already know the answer. Revenue pools and fees will continue to collapse, consolidation will create power laws and the remainder of the industry will be natively digital. 

In terms of the Financial Services value chain, we can boil this soup down to the essentials. Financial products are made in the factory, manufactured as deposit accounts, exchange- traded funds, underwritten debt or insurance policies. Some capital-provider makes the thing itself from various financial ingredients. They then travel across some middle office or connecting set of providers. Think of CRM, KYC/AML, trading software, collateral management, financial planning, and other feature sets as the intermediating set of steps to get a financial product into the hands of its final customer. At the very end of this labyrinth is some distribution channel – a store. This store may be a bank branch, a financial adviser or a lending officer. Increasingly, it is your mobile phone or some crypto YouTube influencer. Financial products are sold, not bought, which means that distribution remains valuable, regardless of the form. 

I say all this to bring us back to the macro story. Over the last decade, venture capital has funded an incredible assault on financial incumbents. Annual investment increased from several billion in the late-2000s to nearly $70 billion per year in 2019. The percentage of venture capital focused on fintech similarly grew from 5 percent to nearly 20 percent. A seismic rebalancing of financial services “disruption” investment occurred – but it focused primarily on distribution. This is why today we have a dozen global unicorns all making the same fintech bundle bet. Though Robinhood, Revolut, Wealthfront, N26, SoFi, Chime, MoneyLion and others started in different verticals, today they face each other for the heart of the millennial customer. It has never been easier to swing for the fences. However, JPMorgan, Goldman Sachs, Santander, DBS, Schwab, BlackRock, Amazon, Apple and Uber are not far behind – the fractal unfolds parametrically.

So what is left for the entrepreneurs? Knowing that finance comprises 20-30 percent of global GDP, what we should do is shift aim towards manufacturing its core product for free. Other entrepreneurs are trying to build the largest attention platforms selling deposit accounts sitting on 30-year old core banking software. Our advantage lies instead in global networks, public and private chains, and programmable, decentralized finance. 

Just like Linux powers the majority of mobile operating systems in the world, open-source projects like ethereum (and others) can one day power transaction, market and settlement infrastructure across all asset classes. Trillions in value-added economic activity can flow through modular, expandable rails that standardize and mutualize identity, accounting, financial instruments, and the workflows that today are captured across thousands of niche software platforms. This is the work left to be done! But to appreciate progress in that context, we have to follow all the chess pieces, which means tracking the efforts of AI-first tech companies, large financial incumbents, and Web 2.0 fintech startups – all the contributing to the Borganism.

Final Remarks

That was a whole lot of newsletter, so thanks for sticking with us. We have some exciting announcements and releases coming up next month, so stay tuned.  In the meantime, wash your hands, stay healthy, follow us on Twitter, learn more on our website, and let us know your thoughts. Whether you’re interested in working with us, for us, or you just want to say hello, please feel free to contact us.

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Till next time, 

The ConsenSys Codefi Team

Previous Codefi Newsletters

Did you miss a newsletter that you really wanted to read? Is it a rainy Sunday and you want to dive deep into the archives of decentralized finance? Don’t worry, we’ve got you covered with our repository of past Codefi newsletters. 

About ConsenSys Codefi

ConsenSys Codefi is the blockchain operating system for commerce and finance, built to optimize business processes and digitize assets and financial instruments. We combined elements of digital assets and tokenized securities, crypto payments processing, enterprise finance blockchain, and the emerging frontier of decentralized finance to build a global software enabler for the new financial infrastructure. Think Twilio, for blockchain-based finance.

Codefi contains four core modules:

• Assets: A platform to create, issue, and manage the lifecycle of digital assets, associated markets, and digital financial instruments on public or permissioned blockchain networks.

• Payments: A platform to send, receive, and manage cryptocurrency payments and revenue within a single dashboard. 

• Networks: A suite of tools empowering anyone to utilize tokens and participate in decentralized networks.

• Data: A data, analytics, and risk management engine for digital assets, public blockchain tokens, and their growing networks.

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Want to get in touch with us directly? Please feel free to contact us, we’re happy to discuss partnerships, customer support, and more.