As decentralized finance (DeFi) balloons to a roughly $10 billion market, infrastructure builders are coming up with ways to reduce the associated risks.
Announced Wednesday, wallet and custodial technology provider Trustology has added a “DeFi Firewall” to its suite of institutional-investment tools. The “Firewall” is basically a set of rules or filters selected by a fund, specifying which DeFi protocols or decentralized exchanges they consider kosher.
With DeFi’s liquidity mining opportunities driving adoption and demand, investors from a more traditional or institutional background want some of this action. At the same time, they have to be able to show that funds are being managed in as prudent a fashion as possible.
Trustology, which is backed by ConsenSys and Two Sigma Ventures, has already built wallet-native tools to prevent clients from sending their crypto to the wrong address or the wrong exchange, and now this is being extended to DeFi smart contracts, explained Trustology CEO Alex Batlin.
“A fund might decide it’s allowed to use Uniswap but not KyberSwap, for one reason or another,” said Batlin. “Or they might decide that USDC or MakerDAO’s Dai are allowed but not USDT and that these funds are only ever circulated within a permitted set of addresses – now they can prove to their investors that is all possible.”
Catering to institutional investors who’ve remained largely on the sidelines of the emerging yield farming trend is something other industry players are also courting. Just last week, the Chicago DeFi Alliance launched a Liquidity Launchpad program to get “informed and professional players” into the DeFi space.
Certain blockchains have endeavored to protect smart contracts by preventing unauthorized access, and there are several DeFi-primed wallet solutions around today, said Batlin, but nothing that offers the type of institutional controls for businesses to legally operate in DeFi.
Next on the Trustology roadmap will be the introduction of “DeFi Notifications,” Batlin said. This is an automated system to deal with DeFi events, such as when a fund manager has placed a lot of collateral in a particular smart contract and the price of ether (ETH) has gone up or down.
“One of the problems with blockchains is the lack of a notification service so you have to be constantly monitoring the blockchain to figure that out because if you don’t, your positions can get liquidated,” said Batlin. “We can either send you the automated notification through webhooks or email alerts.”
Further down the road, the plan is to introduce “DeFi Flows,” Batlin added. “So we can pick up that an event has happened and have an automated response to that. For instance, when some event takes place, a broker might want funds automatically sent to Aave to be interest-bearing.”
Batin said both of the upcoming products would be released in four to six weeks.
So, if institutional DeFi is a thing, what form is it likely to take?
“It’s more family office and very alternative, and they’re looking at 10%-15% allocation,” said Batlin, adding:
“We’ve signed up five new funds in the last two weeks and they were all guys from the traditional space who had set up crypto funds to focus on DeFi. So it’s more about fragmentation than traditional funds allocating.”