Why DeFi on Ethereum Is Like Algorithmic Trading in the ‘90s

DeFi's surge has created an interesting dynamic: Traditional fund managers are beginning to experiment with what decentralization has to offer.

AccessTimeIconJul 29, 2020 at 11:01 a.m. UTC
Updated May 9, 2023 at 3:10 a.m. UTC
10 Years of Decentralizing the Future
May 29-31, 2024 - Austin, TexasThe biggest and most established global hub for everything crypto, blockchain and Web3.Register Now

Mona El Isa would never go back to traditional finance.

The former Goldman Sachs vice president developed the Melon protocol, a vehicle for creating Ethereum-based hedge funds without having to spend the tens of thousands of dollars it would take to launch a fund in traditional markets.

  • DeFi Market Rebounds to $50B as Speculators Hunt for Yield
    01:11
    DeFi Market Rebounds to $50B as Speculators Hunt for Yield
  • How Spool Is Aiming to Help Institutions Enter DeFi
    11:05
    How Spool Is Aiming to Help Institutions Enter DeFi
  • Ethereum Average Gas Fees Touched Highest Level in Six Months: Kaiko
    01:07
    Ethereum Average Gas Fees Touched Highest Level in Six Months: Kaiko
  • How a New Tax Proposal From the IRS Could Impact DeFi
    00:46
    How a New Tax Proposal From the IRS Could Impact DeFi
  • “Managers who are used to a fund custodian and fund administrator are starting to experiment with automating technology,” El Isa said.

    El Isa admits that not many founders in the decentralized finance (DeFi) space have her background in traditional capital markets. In the traditional world, DeFi resembles what algorithmic trading was in the 1990s, said Tarun Chitra, CEO of Gauntlet Network, a business that does stress-tests on blockchain networks and DeFi platforms.

    “A lot of money was made on random equities on electronic exchanges,” Chitra said of the Clinton-era innovation. “They were people who were more technical than financial.”

    Now Ethereum’s surging DeFi sector could force a similar migration.

    Chitra said some traders are beginning to move away from over-the-counter (OTC) desks in favor of emerging DeFi platforms like automated market maker (AMM) Curve and lending protocol Compound. Why bother with an OTC middleman?

    Still, while proprietary traders have taken an interest in DeFi, few hedge funds and banks have entertained it, he said.

    But builders who’ve come from equities to DeFi see a lot of opportunity for growth.

    Click for full coverage of Ethereum at Five
    Click for full coverage of Ethereum at Five

    New interest

    For example, in the Melon protocol’s first year there were almost no users and only $250,000 on the platform, El Isa said. After Melon’s user interface was updated last February, the platform’s total assets increased to $1.2 million. Now the number of funds on Melon has tripled in the last four months, although many of them are experimental, El Isa added. Around two dozen of the funds on the platform are real funds.

    “The biggest success story on our platform is now half of the whole [assets under management],” El Isa said, referring to a closed fund that only lets in whitelisted investors. “He’s got $625,000 on his network.”

    For traditional funds, operation costs are normally less than $100,000 for the first year and $75,000 for every year after that, she added. On Melon, the setup cost is currently $100 for the first year and around $1,000 to $2,000 per year in gas prices after that (the cost was around a fourth of those estimates last year, before gas prices started to spike).

    As funds build longer track records, El Isa hopes Melon will become more attractive to investors. “The track records are not long enough to make that attractive for people yet,” she said. “I think in a few months people will be like, ‘Wow, this fund has consistently been outperforming ether.’”

    Even if El Isa ends up moving from building protocols to launching another fund, she said she’s determined to do so in DeFi. Melon protocol is now decentralized and El Isa has launched Avantgarde Financial, a company that plays the lead developer role for Melon. El Isa was formerly the CEO of Melonport AG.

    ‘Less scary’

    Barney Mannerings, CEO of Vega Protocol, which aims to allow users to spin up a market for derivatives anywhere in the world, said that while DeFi is still in an experimental phase, he sees a great deal of interest from the large investment banks – the ones he used to advise while at Capco and Accenture.

    Instead of creating a new derivative over the course of a year, Vega will allow users to submit market proposals and deploy them over the course of a few hours.

    In keeping with Ethereum’s ethos, the protocol was designed to cut out the middlemen: In this instance, the commercial bank or broker that consumers pay to trade and the investment bankers those middlemen pay to trade for the consumer.

    “I was always thinking about the traders that I knew in London and New York and the products that they used in the real economy,” Mannerings said.

    In addition to building out Vega, Mannerings said he hopes large countries like the United States develop more crypto integrations to the traditional economy.

    “If I want to hedge my U.S. dollar risk on Vega and I can do it for a fifth of the cost, that’s great, but I also need to make sure that I can get U.S. dollars into an appropriate stablecoin and take that position easily,” he said. “We have to chip away at that risk and make it less and less scary.”

    Disclosure

    Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

    CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk employees, including journalists, may receive options in the Bullish group as part of their compensation.

    Nate DiCamillo

    Nate DiCamillo is a business reporter at CoinDesk with a focus on banking and economics.


    Learn more about Consensus 2024, CoinDesk's longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.


    Read more about