Detailed Plan
Problem statement
As the Cardano community continues to build the Cardano ecosystem, we need to enable institutional money to access the distributed exchanges being built upon the chain. If enabled, these banks, asset managers, fund managers, and insurance companies would be able to allocate part of the trillions of dollars worth of assets under their control into the Cardano ecosystem.
As the Cardano ecosystem matures, decentralized finance (DeFi) on Cardano will create new assets, synthetics, investment types, and new financial tools. Institutional money could be well served by participating in these decentralized markets, especially considering their mandate to seek out and allocate money to uncorrelated asset classes. For example, over the last two years, investment returns in DeFi have been far more interesting than in traditional finance. Furthermore, transacting in a decentralized space can also eliminate much of the counterparty risk of centralized finance.
However, DeFi on Cardano must be able to work within the operating constraints of these institutions. Institutional investors typically separate investment decisions and trade implementation. Funds are generally held with custodians and custodian banks, but managed by external fund administrators, and audited by 3rd party auditors.
To access institutional capital, the Cardano ecosystem needs not only to know how to classify and meet the various requirements of the institutional investors and their custodians but also to have tools and frameworks to meet their needs. These needs go well beyond multi-signature wallets as workflow, documentation, KYC requirements as well as complex risk, liquidity, and capital deployment controls that need to be built into both wallets on Cardano and DEXes.
Additional Challenge: Stake Pools
While this project is focused on Custodial Banking from a DEX and Wallet point of view, Stake Pools are a critical part of the Cardano ecosystem. In planning this project, an additional challenge was identified in that custodians need to stake ADA and tokens in their control, but they can not risk staking with unknown/anonymous Stake Pool Operators because of oversight requirements related to who they do business with.
Custodians currently are incentivized to stake with centralized exchanges because it is clear who they are doing business with. With the significant funds in custodian hands, this has a disproportionately negative impact on network centralization. We propose in the course of the project to additionally create a framework for information transparency (and hopefully), Zero-Knowledge Proofs, which Stake Pool Operators can use to demonstrate credibility to custodians, allowing the flow of institutional stake to smaller Stake Pools.
Describe your solution to the problem
1. We will research the missing permission and KYC layer for Cardano wallets, especially light wallets, to establish the requirements for a custodian and permissioned layer.
2. We will identify the legal requirements to satisfy institutional audit and compliance needs across multiple categories of custodians and jurisdictions.
3. We will design processes and necessary information frameworks and permission structures for the community to build compliant tools and integrations which meet these requirements.
We intend the research process to open discussions with institutions, regulators and legal partners. With the goal of bringing back into the Cardano community, frameworks that the various DeFi Protocols and wallets can use to be compliant and composable in their offerings to a point that will enable the integration of institutional funds.
This will reduce the compliance cost for Institutional Investors and allow for further investment portfolio diversification that could lead to increased strategic alpha.
Relevant experience
Mike Rogero, the project lead, has 25 years of experience as a c-suite manager of technology development companies. He holds several professional certifications relevant to the project: he is a Certified Financial Analyst (CFA) Charterholder, Certified Fraud Examiner (CFE), Certified Anti-Money Laundering Specialist (CAMS). He earned his MBA from INSEAD.
<https://www.linkedin.com/in/mikerogero>
Jarek Hirniak, the project technical lead, has 8 years of experience leading technical development teams in traditional financial institutions like UBS and Citadel Securities. He finished the Plutus Pioneers (NFT: https://pool.pm/d068fe47123ec4c86460eeb74c7d7765c67d2df295a3ac86d664ed45.PlutusFirstClassPhoto438)) program and has been programming in Haskell for 8 years. Holder of Certificate in Quantitative Finance (CQF) and Master of Informatics (MInf) with specialization in distributed systems and formal methods from the University of Edinburgh.
<https://www.linkedin.com/in/hirniak/>
Benjamin Wang, has spent the last 15 years working in investments research, fine-tuning investment products based on derivatives with custom-made indices for banks, asset management companies, and family offices. He has worked with a number of asset owners (investors), asset holders (custodians), and trade implementers (brokers) to carry out due diligence and select brokers, custodian partners, and other service providers in order to win mandates from large pension funds. He holds a MBA from INSEAD.
<https://www.linkedin.com/in/benjaminwangfr>
Anonymous, another team member is a senior financial professional, with 15 years of experience in fund management and investment strategy due diligence for Institutional investors and UHNWI. His tasks revolve around advising Institutional and Qualified Investors on trade strategies implementation and cross-border regulatory compliance. He is a silent partner at Noviganto & Associates GmbH a German Think Tank specializing in Corporate Finance, Strategies, and Law. He has strong relationships with different Fund/Investment Managers, Financial Regulators, and other institutional experts, allowing us to create a tied feedback loop with clients, regulators, and the research team.
If funded, the project team will further leverage the combined participant and partner networks to further fill out the execution and delivery team beyond the principals. We expect to create a project team within the INSEAD community which will enable the project to conduct interviews with custodians and fund managers in multiple countries leveraging that international network.
Detailed plan
As the first generation of DeFi Protocols on Cardano prepare to launch, we should prepare and facilitate the inflow of institutional money. However, institutional money is usually protected by layers of permissions and authority. Custodian services are commonly used to safeguard the assets managed by asset managers, hedge funds, etc.
The separation of power between the investment decision-makers, the custodians holding and releasing the funds, and the various banks and brokers that implement the investment trades make it difficult to use the decentralized exchange ecosystem, especially with consideration to the light wallet problematics.
The Cardano community would be served by research into the design and structure of a layer which could be called by the various wallets, particularly light wallets, to deal with the establishment of a permission layer, specific KYC checks, and the permission requirements needed to fill the operational requirements by custodian banks.
We propose to coordinate a research group with the task of identifying how the needs of custodians can be met with as little customization as possible by individual Dapps and wallets by creating a shared services layer and process that could serve as a toolkit for the community.
This research group will reach out to a broad spectrum of custodians in various locations around the world as well as the investment managers they serve in order to create a knowledge base to better inform the Cardano community of their needs as well as a framework of shared resources that can be leveraged or further built upon by the Cardano community as a whole.
While the product will be designed primarily to be of assistance to DEXes and wallets, the overriding goal will be to align the different players and allow interoperability and composability between the competitive players in the ecosystem by offering shared knowledge and frameworks.
With two senior INSEAD Alumni leading this project, we intend to leverage the INSEAD network's access to the global financial community to facilitate the project. INSEAD is ranked by Financial Times as the #1 MBA program in the world in 2021 and has been in the top five for more than 15 years with ~60,000 Alumni around the globe. Approximately 30% of its graduates are recruited into the finance sector and cover every part of the globe. We intend not only to form our research team around recent graduates but will endeavor to enlist the help of the school to use the research to create a case study and/or research from the school itself. If successful this will be another method of shining a light on the Cardano ecosystem for the next generation of finance professionals. We also will leverage the ~1,000 INSEAD Alumni actively involved in blockchain projects to bring awareness to the Cardano ecosystem through this research and findings.
Key Metrics of this project related to the Catalyst Fund 7 Goals
This project directly relates to several of the Fund 7 Project goals. Here is what we foresee as relevance and impact in order of outcome impact:
Stated Fund Intention: F7: Boosting Cardano's DeFi
"How can we encourage DeFi teams to build/deploy open finance solutions on Cardano in the next 6 months?"
Project Impact : High
1. "Number of articles and open-source financial models research delivered to the community."
The main outcome of this project is research for the community on frameworks and composability required by custodians which can be used across the ecosystem to facilitate inflows of institutional funds.
2. "How much Total Value Locked (TVL) are the funded DeFi dapps able to capture 3, 6 and 12 months after launch."
The use of the project outcomes will directly relate to TVL in the ecosystem. We envision Institutional Money as being behind a flood gate, which if opened would exponentially increase TVL in the Cardano ecosystem. The more DEXes and wallets are able to use this information, the more TVL will increase.
3. "How long does each dapp take to be launched?"
Use of our frameworks, especially if they are made of composable ideas, should speed time to market for both DEXes and Wallets.
Project Impact : High (With Reinterpretation)
The following Fund 7 KPIs focus on quantity (how many dapps, number of users, number of assets) as opposed to scale. We believe that getting to a $1 Trillion ecosystem value is the next critical milestone in Cardano's growth. Our project is about enabling scale by opening the floodgates to the vast pools of liquidity held by institutions and custodians to flow into Cardano.
If we assume a change from a quantity mindset in the "how many", "number of" phrasing of the following KPIs, to a scale mindset of "how much", then we believe this project will have a significant impact on the following goals.
4. "Scale of token holders/unique wallets(when dapp has a token)."
[original goal "number" changed to "scale"]
The key intended outcome of the project is to bring large institutional investors into the ecosystem. Any success will dramatically increase the scale of wallet holdings overall.
5. Scale of DeFi dapps were launched on Cardano mainnet within 3, 6 and 12 months after funding.
[original goal "how many" changed to "scale"]
As the project specifically is focusing on DEXes, success will directly lead to increases in the scale and transaction volume within the ecosystem. We expect success to be visible between the average scale of DEXes that adopt our frameworks for custodian accessibility and those that don't. DEXes which are used by Institutional fund managers/custodians will presumably have significantly larger liquidity and transaction volume.
6. Scale of daily active users are the DeFi dapps funded in this cohort attracting.
[original goal "how many" changed to "scale"]
Project success will lead to utilization by institutional fund managers / custodians of Cardano DEXes and Dapps. This use will be visible in larger trades, and TVL vs. DEXes who do not adopt the frameworks.
7. Scale (volume) of listed pairs (in case of DEXs).
[original goal "numbers" changed to "scale"]
Project success will directly lead to greater trade volume due to a greater scale of trading in pairs, as opposed to more pairs. While we do not see Institutions increasing the number of paired assets, their involvement would increase exponentially the scale of liquidity available. Success will be seen in the liquidity of DEXes who adopt the project frameworks vs. those that do not.
Project Impact : Low
We see this project being not applicable or having a negligible impact on the following Fund 7 Goals:
8. Number of bugs and vulnerabilities found in each dapp.
9. Amount of resources lost due to bugs or vulnerabilities.
10. Number of users participating in testnets
11. Distribution of supply between the team and the community.
12. Number of listed assets (cases of loan+lending dapps, derivatives and synthetic assets).
Key Project Metrics Related To Its Own Goals:
The Fund 7 challenge question for our category is "How can we encourage DeFi teams to build/deploy open finance solutions on Cardano in the next 6 months?".
We propose this project with a reframing of the question to focus on growing the scale of the Cardano ecosystem. "How can we encourage DeFi teams to build/deploy open finance solutions on Cardano in the next 6 months that will be attractive to institutional investors and their custodian partners while being compliant with their workflow needs."
For the purpose of this project, our goals would be:
1. Attracting Institutional Investors to Cardano DeFi.
2. Encouraging DeFi teams to build financial solutions that would meet the Institutional Investor's compliance, workflow, and regulatory needs.
We propose to measure progress toward these goals in the following steps:
1. Which institutions did we interview about their intentions and needs to use DeFi Protocols?
2. Were we able to gauge a change in interest in investing in DeFi at the start and end of the project?
3. Were we able to, as part of the research, introduce institutions and custodians to stakeholders within the ecosystem - DEXes, Wallets, Input-Output Global, Cardano Foundation, Emergo. At the conclusion of the project, did these introductions lead to tangible results within the ecosystem? Presumably, this will lead to hard number metrics such as number of institutions who moved into Cardano, TVL, partnerships with ecosystem stakeholders.
4. With the result of the research and resulting frameworks, papers, and articles, were we able to get buy-in to adopt the recommendations by DEXes, DeFi protocols, and Wallets? How many projects implemented our recommendations?
5. How many institutional investors and custodians began allocating funds to the Cardano Ecosystem? What was the level of fund allocation? What is the TVL of Institutions on Cardano? Can we see a difference between fund allocation with ecosystem participants who adopted the project frameworks vs. those that didn't?
Time Frame:
3 Months: A project team that will enable the investigation and research interviews to be completed on a broad enough scale and jurisdiction will be formed. The framework for investigation as well as information to be gathered will be defined. Traditional finance players, fund managers, and custodians that are most appropriate will be identified. INSEAD will be approached to identify a professor who would be able to sponsor the use of the research and results within research publications or case studies.
6 Months: Project interviews will be near completion, and initial frameworks outlined and in the process of iteration. We expect this will lead to specific recommendations for community toolkits and APIs. These recommendations will be made available to the community as a whole on an equal basis. Follow-up interviews among key players within the Cardano ecosystem will be undertaken to encourage adoption.
12 Months: The project will be wrapped up with the following outputs: 1) Research from a global point of view on the specific needs and workflows required for Institutional Investors and their Custodians to allocate to Cardano DeFi. 2) These needs will be dissected into solutions and recommendations on how to meet the needs most effectively as a community as a whole, as opposed to single compatible projects. We expect one or many research papers as a result, numerous articles, and interviews to be made available to the community.
Funding:
We assume a core team of 6 researchers spread around the world working remotely on the project for 7-10 months, along with the four senior project leads guiding and digesting the results. The team will be paid a salary for their time, with the majority going to the researchers and domain experts that we will need to hire as consultants along the way. We also assume there will be outside expenses such as advice from legal counsel for specific questions on legality and process.
We believe the requested funds will be sufficient to complete the research phase and output of frameworks and recommendations.
Implementation of the KPIs, zk-proofs, and composable objects like NFTs we envision will enable the recommendations across the DeFi ecosystem will likely require additional funding for later Catalyst Funds by the projects wanting to either implement our recommendations into their projects or build something for the community. We see our job as using community funds to create knowledge that will be used across the community and a shared framework of knowledge, which individual projects will implement and use as they see most appropriate for their project.
