DeFi Insight: On-chain Asset Management with Enzyme
by Valentin Kalinov on Oct 14, 2022 4:45:03 PM
Enzyme is a decentralized protocol for on-chain asset management, allowing users to create, manage and invest in custom crypto asset management vaults. Before becoming Enzyme the protocol was called Melonport, and it is one of the oldest DeFi protocols running on Ethereum. Founded in 2016 by Mona El Isa, a former Goldman Sachs trader, Enzyme precedes the term DeFi. Back then, all protocols were just called dApps. The goal of Enzyme is to keep the trustless relationship between the investment manager and the investor. In traditional finance, one needs financial intermediaries to give trust between counterparts. These people or entities ensure that the investment manager manages the funds in a way initially promised to the investor. Enzyme tries to tackle the challenge of intermediaries in traditional financial markets by managing all trust relationships in a decentralized, trustless way. Enzyme makes sure that a fund manager can only behave in certain ways(e.g., interact only with specific protocols or assets). The protocol is made of 25 smart contracts, and it is fairly complicated compared to the average DeFi app. Enzyme is one of the first projects on Ethereum to decentralize its operations fully.
Authors: Valentin Kaliniov, Christian Viehof
How does Enzyme work?
The main goal of Enzyme is to be decentralized and trustless by not relying on any centralized entities. The protocol is also governed in a decentralized way by an elected council. As a matter of fact, Enzyme is one of the first protocols to decentralize its governance in February 2019. Using the web portal of Enzyme users can invest in funds and portfolios launched by other users. The MLN is the utility token of the protocol and is used in various operations across the platform. The protocol is not limited only to simple asset management strategies. Some use cases include:
- DAO treasury management: Managing a DAOs treasury might become challenging. Many DAOs are risking their funds by keeping them in one wallet, often controlled by a single entity. Enzyme cooperates with Gnosis Safe to offer DAOs a way to delegate trading and execution securely to a DAO member without running the risk of them running away with the money. Team members can access DeFi protocols to lend, borrow, provide liquidity, and stake, programmatically or opportunistically. Another benefit is the transparency of the management tool. Any DAO user can monitor the health of the DAO and its treasury at all times.
- Vault strategy: The protocol allows people to deposit into and subscribe to other people’s strategies. These strategies are very customizable, offering custom fees and setting rules around deposits or redemptions. Enzyme offers In-built accounting tools to report back to investors in real time. Advanced risk management(e.g., the ability to restrict and specify certain allowed or forbidden investment behaviors) is also built into the protocol. Vault managers can set management fees, performance fees, and entrance fees.
- Indexes: Users can build indexes and make the underlying vault shares transferable so that they can be used as collateral in other protocols.
In addition to Ethereum Enzyme has also launched on Polygon. One of the reasons for the second deployment was the high gas fees on Ethereum.
As mentioned above, Enzyme is one of the first protocols to decentralize its governance in February 2019. Enzyme has a unique approach to governance. Most DAOs today use coin voting for their governance structures. Coin voting has many disadvantages and Enzyme turned to a different approach by electing a governance council. Not anyone can become a council member. Candidates need to fulfill certain requirements, including industry knowledge and technical skills. Additionally, with the latest protocol upgrade, council members need to prove minimal activity quotas not to be removed for inactivity. One could argue that a DAO governed by a council might not benefit the utility of the protocol token. Would a council care about the token price? In the case of Enzyme council, members are paid in MLN tokens, and since MLN is a volatile asset, the members are highly incentivized to do everything to improve the price of the token.
With traditional finance, if an update or upgrade is pushed, it is forced upon its users. Enzyme’s upgrade process is managed by a governance model where the fund manager could opt out of the upgrade depending on its benefits. For example, a future update could increase certain fees or change risk management policies, and a manager could opt out of such an update. In addition, there is a 7-day cooldown period where fund managers can review the update and decide their next steps.
The MLN Token
MLN is the protocol token of Enzyme. The token’s name inherits the protocol’s original name — Melonport. MLN is an ERC-20 token and is the utility token of Enzyme. It accrues value by charging protocol fees. The Enzyme council can mint up to 300,600 MLN per year. The mint is intended to fund critical protocol development, maintenance and marketing activities. Over time the mint should decrease as the protocol becomes self-sufficient. In addition to minting, the council has the right to burn tokens. To date, the Enzyme council has burned close to 400k MLN tokens. The protocol collects usage fees in MLN tokens. These fees are then also burned to reduce the circulation of MLN further. MLN tokens can be acquired in two ways. First, they can be bought on a crypto exchange or earned as a reward in return for contributions to the ecosystem. Users can contribute to the protocol by developing, maintaining, auditing and growing the protocol in return for earning MLN.
The classification of MLN according to the ITC:
Economic Purpose (EEP): MLN is listed as a Settlement and Access Token (EEP22TU02). The token is used for charging protocol fees and is the protocol's settlement token.
Industry Type (EIN): The issuer of MLN is active in the field of Decentralized Lending, Saving and Asset Management (EIN06DF02).
Technological Setup (TTS): MLN is an Ethereum ERC-20 Standard Token (TTS42ET01). The Class “Ethereum ERC-20 Standard Token” captures every token that is implemented by means of the ERC-20 Standard on top of the Ethereum blockchain.
Legal Clam (LLC): The MLN token does not entitle its holder to any legal claim or rights against the issuing organization; therefore, it is listed as a No-Claim Token (LLC31).
Issuer Type (LIT): The dimension “Issuer Type” provides information on the nature of the issuer of the token. Avantgarde Finance, a London-based company develops the Enzyme protocol Therefore, the issuer type of MLN is Private Sector Legal Entity (LIT61PV)
Regulatory Framework (EU) (REU): The dimension “Regulatory Status EU” provides information on the potential classification of a token according to the European Commission’s proposal for a Regulation on Markets in Crypto Assets (MiCA, Regulation Proposal COM/2020/593 final). The LUSD token qualifies as a Utility Token (REU51UT) according to the definition provided in Article 3 (5) of Regulation Proposal COM/2020/593 final.
The International Token Standardization Association (ITSA) e.V.
The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.
- The International Token Identification Number (ITIN) is a 9-digit alphanumeric technical identifier for both fungible and non-fungible DLT-based tokens. Thanks to its underlying Uniform Token Locator (UTL), ITIN presents a unique and fork-resilient identification of tokens. The ITIN also allows for the connecting and matching of other media and data to the token, such as legal contracts or price data, and increases safety and operational transparency when handling these tokens.
- The International Token Classification (ITC) is a multi-dimensional, expandable framework for the classification of tokens. Current dimensions include technological, economic, legal, and regulatory dimensions with multiple sub-dimensions. By mid-2021, there will be at least two new dimensions added, including a tax dimension. So far, our classification framework has been applied to 99% of the token market according to the market capitalization of classified tokens.
- ITSA’s Tokenbase currently holds data on over 4000 tokens. Tokenbase is a holistic database for the analysis of tokens and combines our identification and classification data with market and blockchain data from external providers. Third-party data of several partners is already integrated, and API access is also in development.
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Valentin Kalinov is an Executive Director at International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database, including a classification framework and unique token identifiers and locators. He has over five years of experience working at BlockchainHub Berlin in content creation and token analysis as a project manager at the Research Institute for Cryptoeconomics at the Vienna University of Economics and token analyst at Token Kitchen. You can contact Valentin via firstname.lastname@example.org and connect on Linkedin if you would like to further discuss ITSA e.V. or have any other open questions.
Christian Viehof is an Executive Director at the International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database, including a classification framework and unique token identifiers and locators. He completed his Bachelor in Economics at the University of Bonn, the Hong Kong University and the London School of Economics and Political Science with a focus on Behavioral Economics and Finance. Currently pursuing his Master of Finance at the Frankfurt School of Finance and Management, you can contact him via email@example.com and connect with him on Linkedin, if you would like to further discuss ITSA e.V. or have any open questions.