The cost of trust

In any economic environment, one considers the risk that others might unfairly exploit informational asymmetries to their advantage. There is thus the need to invest resources to assess their trustworthiness.

We can think of Finance as the complex of institutions, standards, and technologies needed to minimise the transactional cost between parties who do not fully trust each other. The level of trust defines expenses and resource allocations. Financial intermediaries act as bridges of trust between economic agents, and their efficiency can be measured by their ability to reduce the cost of such activities.

Historically, information limitations and asymmetries have generated strong incentives to exploit them unethically. The opacity and complexity of the financial system have created an environment where reckless and fraudulent behaviours are incentivised, and we have witnessed numerous unfortunate events throughout the years. This phenomenon has created endless cycles of market reflexivity, where downturns have inflicted severe social distress, especially for the ones with the least access to information, i.e. retail.

On the other hand, the cost of the existing legacy and disconnected financial infrastructure has deferred financial inclusion, with potential negative impacts on economic growth, income distribution, and global poverty levels.

This level of inefficiency will not change through incremental innovation. It rather requires a structural shift: a brand new technical infrastructure that addresses the challenges around transparency, automation, global availability, and credible neutrality. We think it will be DeFi.

A global financial system built on top of DeFi.

This is the first time in history we have access to a public and real-time auditable financial infrastructure that runs 24/7, without downtime. It is also the first truly global, not restricted by local rules, and neutral financial system that provides credible assurances to the actors building on it to transcend time. We believe in the world’s transition into trust-minimised, permissionless, and composable capital markets built on public networks and open-source software. 

DeFi will reshape the structure of modern finance and create a new landscape for entrepreneurship by broadening financial inclusion and encouraging permissionless innovation.

Non-Custodial Asset Management in DeFi

karpatkey DAO was created out of sheer necessity. In 2020, Gnosis announced that it would take an evolutionary leap into the newly created GnosisDAO. The transition of Gnosis from a traditional for-profit organisation to a DAO has created all sorts of coordination issues from a treasury management perspective that needed to be addressed.

The GnosisDAO implemented autonomous open-source tooling developed by the Safe and Zodiac protocols. It also needed to find a solution to manage its assets that would adapt TradFi’s best practices to tackle the requirements imposed by the open nature of a decentralised organisation.

A team formed by Gnosis and karpatkey members—and incubated in Gnosis—had been tasked to take responsibility for the research, execution, and reporting of the treasury management activities, and in December 2021, GIP-20 ratified karpatkey DAO as the official manager of the GnosisDAO treasury and later increased its scope in GIP-58.

Fast forward, and:

• karpatkey wins the ENS endowment RFP.
• the GnosisDAO treasury generated 53% of the top 65 DAOs’ yield in 2021;
• karpatkey reports became a source of alpha for the industry;
• karpatkey is assigned with the Balancer treasury;
• karpatkey has set a benchmark for non-custodial active asset management in DeFi; and

We inadvertently created an entire industry.

We have spent the last two and a half years working in the most adversarial blockchain environment—where any vulnerability is a bounty that will eventually be exploited—and have been exposed to multiple cycles of market volatility. We have resisted mostly because of our prudent and rigorous approach to risk management and long-term sustainable strategies.

We acknowledge the industry is still in its infancy. It still lacks the proper integrations, data monitoring systems, and interfaces to compete with TradFi. Throughout this period and after executing thousands of transactions on behalf of DAOs, we have been learning the challenges, designing the processes, and developing the infrastructure for the execution and risk management of institutional-level treasuries on-chain.

By leveraging the benefits of DeFi we believe we can dramatically improve the finance industry’s processes, from asset monitoring to portfolio accounting, reporting, and auditing, and many areas in between. Our conviction is that similar to the traditional finance world, a significant portion of DeFi’s total value locked (TVL) will be run by professional asset managers using the best tools and infrastructure available. It just won’t be the way we’re used to.