Crypto CeFi, the Original Sin
The spectacular and scandalous collapse of FTX showed the colossal damage that a centrally organized, opaquely disclosed, and reckless managed ﬁnancial agent can do to the entire industry and society at large. That centralized organizations can dominate the assets originated from decentralized networks is a sad irony, a disease that has plagued crypto since the day when there was crypto trading.
The narrative of the "crypto natives" is that blockchain technology was supposed to replace centralized entities, the likes of the Federal Reserve or other monetary authorities. Whereas in reality, cryptocurrency has handed itself to the shady and sketchy organizations that primarily use them to loot and raid. The irony is so sharp that it hurts. It has never been clearer than NOW that decentralized, transparent, rigorous, and professional management of the Web3 ﬁnance must take the center stage. NOW isn’t just a watershed-moment, it is an existential one.
The infrastructures needed to enable and sustain a crypto-powered Web3 go far beyond the DeFi in its current form, as facilities in this category are merely independent functional units - MUCH better units than their counterparts in centralized systems. What we regard as the absolute necessity is the operational and control layer on top of these functional units, capable of enforcing responsibility and accountability imposed upon the operators of these functional units, while demonstrating their competence and credibility. These operators should ideally be elected and monitored by the communities (organized as DAOs) they serve, and are regulatory compliant to perform their professional tasks, if necessary.
Throughout 2021 and the better part of 2022, prior to the fallout of FTX, the number of DAO participants has already grown from 13,000 to a whopping 1.7 million people worldwide. The records speak for themselves; decentralization is the heart and soul of Web3. The damages done by the likes of FTX, 3AC, Celsius, etc. will only serve to show the advantage of Decentralized Autonomous Organizations (DAOs), as they are built on blockchains and promise transparent and democratic governance. Yet such lofty promises will disappoint if the operations of the DAOs are built on leaky or shaky foundations, particularly regarding their ﬁnance.
Integrated Financial Management in a DAO
Most DAOs today are built hastily with incoherent and fragmented management components that have resulted in plutocratic governance schemes, Sybil-infested incentive structures, and the proliferation of useless "utility tokens" (as fundraising vehicles). While these integrity and economic issues are already threatening the viability of DAO as an important augment to the traditional corporate framework, the lack of professional ﬁscal and ﬁnance tooling makes the matter even worse.
There have been numerous DAO treasury tools in the market, and more are coming. Most of them are multi-sign wallets in one form or another. Participants in the Web3 ﬁnancial management sector need to urgently understand that the robustness of individual parts of a machine is not the same as a well-designed and well-run machine itself. How these parts are put together is entirely a different thing of its own merit. A Multi-sig wallet can be regarded similarly to a DeFi lending protocol or a DEX as an independent functional part (we can’t emphasize enough that they all are MUCH better than their counterparts in the centrally managed regime). Yet, what makes up a ﬁnancial management framework is the processes and procedures governing the usage of these parts, which must also be built on-chain to be veriﬁable and enforceable.
A quick review of the evolution of the Web1 economy to the Web2 economy may shed light on our vision of the DAO ﬁnancial management in the Web3 era. There were once numerous companies of various sizes who were all building their own online business systems. There were abundant independent solutions available to them (front end browser tools, back end server tools, middleware, payment, etc.), and yet what made Web2 an ultimate success isn’t the abundance or individual qualities of these solutions; it is rather the emergence of cloud service and SaaS. Specialized, customizable, integrated, and off-the-shelf software suites that are capable of providing end-to-end solutions for a certain domain of business have won the day.
This is what Ink Finance is delivering to DAOs who treat their ﬁscal management and ﬁnancing seriously.
What Financial DAOs Look Like in the Future
While progress in recognizing DAOs as legal entities is underway in places such as Wyoming and the Marshal Islands, or that the Colorado co-op scheme is being revised to embody DAOs, the underlying technical infrastructures that carry them must be built to address at least the following three critical aspects of on-chain ﬁnance:
- This is the easiest to understand: open source DeFi protocols that carry out ﬁnancial transactions such as spot trading, derivatives, lending, cross-chain asset swaps, and payment solutions. These facilities have never been short of innovation since DeFi took root in 2019, and will certainly attract more talents and investments after the fallout of FTX;
- The operational and control layer on top of the above mentioned DeFi facilities. It is very much underappreciated why the aforementioned facilities are not enough to mitigate ﬁnancial risks by themselves alone.
Let’s use Aave and Uniswap, the two prominent DeFi protocols, as examples. If an asset manager spends $1M to acquire token X from Uniswap and then pledges it on Aave to get a 700k loan, and then uses the proceeds to acquire more token X from Uniswap, and then pledges it again on Aave, and repeats the process indeﬁnitely, neither Aave nor Uniswap can stop his egregious leveraging. The guardrail curbing this asset manager’s action is the key, which leads to the inevitable process of rulemaking and enforcement - the process of ﬁnancial governance, itself being a part of a more general governance framework.
What makes this process challenging is that the domain of ﬁnance is widespread, requiring profound ﬁnancial knowledge and the proper engineering that delivers rigor as well as ﬂexibility. This is the sector that Ink Finance is specialized in, one that we expect to see more competition in, as its critical importance becomes more and more clear to the institutions and large ecosystems. We regard this sector as the ﬁnancial SaaS of Web3.
- Last but not least, the integration with global regulations. The FTX debacle has shown the harm of regulation arbitrage. If the advanced leading countries do not step up on the regulatory effort, the shady organizations will simply base themselves in jurisdictions with poor or no regulation, yet the nature of cryptocurrencies assures that the harm will be felt globally.
Encouragingly, various decentralized protocols have made major inroads in this domain, paving the way for on-chain organizations to be regulatory compliant if they choose to. Ink Finance has dedicated critical efforts to integrating these technologies to its own stack, partnered with industry leaders such as Astra and Humanode.
To sum up, the ﬁnancial DAOs of the future will need to use open source DeFi facilities as their transactional backbone, manage its ﬁscal and ﬁnancial process with a transparent and on-chain executable ﬁnancial control framework, and make themselves regulatory compliant when required.
The ingredients to the long-term legitimacy of on-chain ﬁnance are customizable, ﬂexible, and specialized products that can be picked off-shelf and ready for end-to-end deployment, that brings professionalism, security, transparency, and adaptivity to regulatory oversight.
Only when the crypto industry can deliver such sound ﬁnancial management solutions, will it then be able to persuade and incentivize traditional institutions to shake off the carnage brought by the centralized agents operating under the banner of crypto. Only then can institutions such as auction houses, VC & angel investors, alternative asset managers, and web2 metaverse companies adopt DAO as an augment to their corporate structure in order to achieve high eﬃciency of their businesses, which is the promise of the Web3 world.
At Ink Finance, we will keep delivering the most comprehensive and professional solutions to ﬁnancially minded DAOs. We might be facing the longest and coldest crypto winter, but we are ready to chew glass and work with other determined builders to accelerate the adoption of TRUE decentralized ﬁnance.
About the author
Tony Tang is the CEO of Ink Finance, a multi-chain financial governance toolset for on-chain organizations to manage all aspects of their fiscal and financing activities. Tony is a financial industry veteran with an engineering background who previously served as managing directors at several top financial institutions and fintech VC.
This content was provided by Ink Finance.