Run a hedge fund with Enigma and Set Protocol
At Enigma, our mission is to ensure adoption and usage of decentralized technologies. We are trying to achieve this mission by bringing privacy and the ability to use sensitive data to blockchains. Enigma is a secure computation protocol which is able to run blockchain functions, or smart contracts, on sensitive (secret) data.
Blockchain is an amazing technology for correctness — however, it comes at the large cost of privacy. Data on blockchains are public by default. This not only limits any application with sensitive data to run in a decentralized manner, but it also limits usability. One of our previous posts touched on how a lack of privacy restricts the usability of decentralized exchanges. Today, we’ll talk about how secret contracts can increase the power of important DeFi projects like Set Protocol.
Set Protocol is among the projects that are driving meaningful adoption of decentralized technologies. With Set Protocol, a user (investor) may mint (buy) a Set that contains assets such as DAI or ETH that periodically re-balances itself based on some rules. Similar to buying into a mutual fund, a user can buy into a Set, which is an investment vehicle with automated trading strategies. Current Sets trade on volatility, price trends and achieving a certain portfolio composition.
Currently the Set Protocol works in the following way:
- Fund manager defines a SET: A SET is an ERC20 token and the mold for the investment vehicle. The SET contains logic about the investment strategy, which is the composition of the portfolio (75% ETH, 25% WBTC) and conditions that are required to rebalance the portfolio. Currently rebalancing conditions for a SET is on-chain and publicly visible.
- Investors put assets in a given SET. User can either put in the basket of goods or put in a single asset, which is then traded into SET assets. At this point, new Sets are minted.
- When rebalancing conditions are met, which are currently time since last rebalance and price difference, a rebalance is proposed and initiated by a network participant.
- When rebalancing is called, the contract checks whether the re-balancing logic is correct, and if so, the rebalancing is executed via a dutch auction. Currently Set Labs is responsible for providing liquidity. In the future, any network participant can program bots that connect to decentralized exchanges like Kyber and 0x to initiate orders required for the reshuffling.
Using Set Protocol, I can define a strategy that holds 40% of my assets in DAI, 30% of my assets in ETH and 30% of my assets in wBTC. I can then mint this Set, and all the reshuffling is done without any further input from me. Notably, this causes rebalancing to not trigger taxable events under US tax law as I am holding the Set and not buying or selling the underlying assets. This is an extremely important product for users, crypto projects and many stakeholders in the ecosystem.
However, Set protocol doesn’t offer the same experience to participants (fund managers) that build and open source Sets. While economic incentives such as management fees and performance bonuses can be integrated in the Set contract logic, the public nature of the blockchain reveals the “secret sauce” of each Set and enables any participant to deploy a similar Set with lower fees. As a result, the incentive for fund managers to provide competitive Sets is lacking. Without some way to protect strategies, fund managers don’t receive the same level of benefits that individual users receive. In other words, Sets are really cool if you are minting them — not so much if you are building them.
This is where the Enigma Protocol comes into play! Using Enigma, fund managers can build and deploy “Secret Sets”— or in other words, private investment strategies. Secret Sets will not only incentivize fund managers to participate, but will also create a provable performance and trading history that would protect investors against rogue fund managers.
The workflow for a Secret Set would be as follows:
- A fund manager creates a trading strategy described with Enigma secret contracts (written in Rust). Since Enigma secret contracts compile into WASM instead of EVM, it’s possible to enable more complex strategies that work with decimal points. Fund managers can also use Catalyst to backtest (research) and master data driven algorithmic trading strategies that can be turned into a Secret Set.
- The two inputs of the secret contract would be the (private) trading strategy and the price feed. While trading strategies remain encrypted, any network participant can run historical data on the strategy to ensure strategies haven’t been modified. (Note: Enigma’s network cannot currently leverage on-chain price oracles like MKR, so a price feed would need to be built-in.)
- Deployment of the Secret Set would deploy an ERC-20 token contract on Ethereum. This contract would act similar to the current Set contract, except the rebalancing conditions (trading logic) would not be visible to the entire network. The contract creator would also want to make certain adjustments to the contract that mitigate malicious activity by the fund manager, such as adding limits to how much of the portfolio value can be traded in a day. Measures like this would prevent adversarial actions such as dumping or pumping for personal gains.
- Investors put assets in a given SET. User can either put in the basket of goods or put in a single asset, which is then traded into SET assets. At this point, new Sets are minted by the ERC-20 token contact.
- When rebalancing conditions are satisfied based on the computations on the Enigma network, the Secret Set will call a function on Ethereum to rebalance asset balances in the ERC-20 token contract.
- Rebalancing can then be done by a dutch auction similar to the current rebalancing process.
Published at Mon, 29 Jul 2019 15:22:09 +0000
Bitcoin Pic Of The Moment
Please give credit by linking to: "https://bestpicko.com/" (not Flickr)
Copy Link Address: bestpicko.com
By Bestpicko on 2018-05-15 01:06:57
