How Alkemi Network is delivering DeFi for institutions

HOW ALKEMI NETWORK IS DELIVERING DEFI FOR INSTITUTIONS

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CONTENTS 03 HOW ALKEMI NETWORK IS DELIVERING DEFI FOR INSTITUTIONS 07 DIRECTORY

HOW ALKEMI NETWORK IS DELIVERING DEFI FOR INSTITUTIONS | December 2021

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HOW ALKEMI NETWORK

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n the high-octane world of cryptocurrency, there are a few hard and fast rules. Markets are volatile, regulatory guardrails remain embryonic, and new digital coins are being minted and launched virtually every day.

For Brian Mahoney, however, one absolute certainty exists: the future of finance lies on the blockchain and, over the next decade, the sector is poised for dizzying growth as the crypto world merges with the rest of the industry, with profound implications.

“In a world where much of our financial plumbing was designed in the 1960s and 70s, the capital markets infrastructure system was simply not designed for the internet age,” says Mahoney, a former HSBC banker who is now a Co-founder of Alkemi Network.

“In our view, the new Wall Street will be on a blockchain and it will be powered by decentralised financial applications.”

Alkemi Network, an institution-grade liquidity network, is one of a new breed of companies seeking to build this brave new world from the ground up.

Its goal? To tackle two fundamental problems in finance, which are becoming increasingly acute as digital assets creep ever

further into the mainstream.

The first is that, in traditional capital markets and banking, the market is still being held back by outdated legacy infrastructure which makes it tricky for institutions to gain full access to digital assets and related products and services, however attractive they may seem in an era of near-zero interest rates and a relentless hunt by investors for yield.

THREADING THE CRYPTO NEEDLE The second is that, for all their growth, the rapidly evolving cryptocurrency markets remain highly inefficient due to a fragmented liquidity experience: a fast-moving space and a growing education gap compounded by an ongoing mismatch between buyers and sellers – adding to the sector’s reputation for extreme volatility.

“Our aim is to thread the needle between these two worlds,” says Mahoney, who believes the future lies in decentralised finance (DeFi), a blockchain-based form of finance that doesn’t rely on central financial intermediaries, such as brokerages, exchanges or banks to offer traditional financial instruments. Instead, it relies on smart contracts running on the blockchain.

HOW ALKEMI NETWORK IS DELIVERING DEFI FOR INSTITUTIONS | December 2021

To solve this Gordian Knot, Alkemi Network’s platform, Alkemi Earn, provides the custody-free infrastructure for digital assets to earn yield in a trusted counterpart environment.

Facilitating open access to liquidity, with an emphasis on principal protection for customers and partners, Alkemi Network is bridging the gap between the fast-growing digital capital markets world and traditional investors hungry for compliant yield.

In doing so, Mahoney believes Alkemi Network can help institutional investors unlock access to a booming market with huge potential for growth and attractive returns for the hedge funds, asset managers, family offices and high-net-worth individuals who are eager to invest.

Anatoly Crachilov, Chief Executive of Nickel Digital Asset Management, which operates a DeFi fund, agrees that the potential is huge.

“We are seeing very strong structural interest in the space from institutional investors,” he says. “For many, it’s a completely new area.”

For Paul Frost-Smith, CEO of crypto arbitrage hedge fund, Argentium, crypto market access still remains “shockingly 4

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expensive” ,in terms of fees and commissions, adding that traditional banks, having arrived late to the party, are still playing catch-up.

“For small investments, it is not uncommon to suffer fees of 15 per cent or more on entry/fiat conversion, so there is plenty of scope for reduction and, as this happens, liquidity will dramatically increase,” Frost-Smith says. “With so much interest and a wall of new money on the horizon, crypto is not a market you want to be short. The challenge is separating the wheat from the chaff.”

THE INDUSTRY FACES THE “THREE CS” Mahoney says traditional financial players are keen to participate more in the emerging world of so-called DeFi, allowing them to earn interest on deposits and borrow assets, but have so far been held back by what he calls the “Three Cs”: capital, control and connectivity.

The first C, capital, represents the fact that so far, there has not been enough capital in the DeFi ecosystem for large-scale investors to tap into on an institutional level.

“The juice has to be worth the squeeze for these institutions to come in,” says Mahoney.

“There has to be enough breadth and depth of assets on these platforms, meaning they need to be able to deploy large amounts with pricing and yields worthy of their time. The ROI needs to be there for these institutional players to make the leap into the world of DeFi.” The second C is control because there has not been a trusted counterparty liquidity environment through a Know Your Customer (KYC) and Anti-Money Laundering (AML) process, so a lot of institutions have been blocked from participation due to compliance concerns.

“Control really boils down to the trusted counterparty problem,” Mahoney says.

“With DeFi, everything’s open source and permissionless. There’s no KYC. There’s no AML. There are no compliance checks, so it’s like the Wild West of finance right now. These institutions are not super comfortable with that, and they have traditional structures; the Chief Compliance Officer or the Chief Legal Officer need to sign it off. Solving that control problem is a real blocker for these institutions to come in.”

The final C, connectivity, is “about making it easy for these institutions to plug in,” according to Mahoney. This means that they can use their existing suite of tools to pipe into new platforms like Alkemi Network and gain exposure to DeFi.” He claims that Alkemi Network’s technology platform has sought to solve all three of these challenges in order to streamline access to DeFi for institutional players, while meeting all their internal and external requirements.

“We have really been focused on making that on-ramp as seamless and frictionless as possible,” he says.

“And that’s what Alkemi Network provides – a holistic experience that solves the ‘three Cs’ for these institutions to participate.”

CEFI VERSUS DEFI Before DeFi was introduced, Centralised Finance (CeFi) – where all crypto trade orders are routed through a central exchange – was the recognised standard for trading cryptos and still maintains a grip over the sector, although it is starting to loosen.

Founded in 2018 and backed by Outlier Ventures, US-based Alkemi Network is an institution-grade liquidity network for financial institutions and individuals to access DeFi and earn yields on their Ethereum-based digital assets.

It was developed as a technology platform designed to drive down the cost and complexity of accessing DeFi, while also solving the compliance headaches DeFi poses for institutions.

A key plank of this has been the creation of a ring-fenced, trusted counterparty mechanism, where only verified users are allowed to access Alkemi’s liquidity pool.

This, Mahoney says, is a critical innovation because previously, if you were an institution coming into DeFi, you entered into an open liquidity pool and did not know who was on the other side of each transaction.

“Because they are entirely permissionless, that’s been driving a lot of the growth. But at the same time, there are lots of potentially nefarious actors in that pool, and it’s hard to suss out who they are. Institutions are not comfortable with that level of risk.”

He continues: “We offer a trusted counterparty KYC-compliant pool for these institutions to come in where everyone in the pool is known. They are not known by name, but known and trusted

HOW ALKEMI NETWORK IS DELIVERING DEFI FOR INSTITUTIONS | December 2021

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in the sense that everyone has been vetted. It’s like a high-quality credit user experience: a way for you to continue to maintain trusted counterparty exchanges in an open environment.”

Alkemi’s protocol has gained traction with about 90 institutions already using the service.

Mahoney says: “They are getting bigger and bigger. We are looking at larger ticket sizes and the pools are growing healthily.”

Nickel Digital’s Anatoly Crachilov agrees that this is likely to be an important development in the future growth of the market: “Ultimately I think how the industry is going to evolve is by using specially designed KYC protocols, whereby I can onboard with an application which wants to control my identity, my KYC and, using the reference, I can be onboarded with other services and interact with other market participants.”

Rival operators such as Aave are also emerging to handle growing institutional demand.

The current version of Alkemi Network is built on the Ethereum blockchain, but Mahoney describes Alkemi as a “chain agnostic company”.

“We picked Ethereum because of the business network and liquidity network effects,” he explains.

“We’re open to other chains but that’s why we chose Ethereum to build out the decentralised finance experience.”

RAPID GROWTH POTENTIAL So what does the future for this technology look like?

Mahoney foresees a gradual merging of crypto into mainstream finance.

“Fast-forward 10 years from now, we might not even have blockchain as a separate technology. It’s just going to be called capital markets. I see DeFi as just the next wave of innovation for capital markets and we are in this adoption period which is going to take some time. It’s very early days.”

Certainly, the potential for growth is stark. The global crypto market capitalisation currently stands at about USD2.5 trillion: a significant sum, but modest when compared to established financial markets. The fixed income market in the US alone is currently valued at about USD50 trillion.

Mahoney says: “There’s a powerful tailwind behind crypto and it is certainly accelerating. I’ve been in this space since 2016 and in capital markets for almost 15 years, and I have more conviction every single day that this is the future.”

HOW ALKEMI NETWORK IS DELIVERING DEFI FOR INSTITUTIONS | December 2021

He predicts the transition to a world where blockchain-based financial services are fully embedded in the mainstream will take five to ten years and draws comparisons to the rise of the Internet.

“The Internet had been around since the 1980s, so that took 25 years for adoption. The difference with crypto, and the reason why I think it’s actually going to happen faster, is because this time around there’s an incentive mechanism baked into the protocol layer. The Internet the first time around didn’t have that.”

He continues: “This time around, people have ways to actually benefit on the ground floor with their wallets, and these currencies settle rapidly. You can do microtransactions. They’re global.

Anyone can access them. That is a big, big difference.”

RIPE FOR DISRUPTION Crachilov agrees that the parallels with the Internet are apt.

He points to the way the Internet has already fundamentally transformed many industries, but not yet finance.

“This is one of the few industries – alongside healthcare – which was not properly disrupted by the emergence of the internet over the last 20 to 30 years,” he says.

“And the reason for that is these two sectors are really protected 6

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We offer a trusted

counterparty KYC-

compliant pool for these institutions to come in

where everyone in the pool is known. They are not known by name, but known and trusted in the sense that everyone has been vetted. It’s like a high-quality credit user experience: a way for you to continue to maintain

“

trusted counterparty

exchanges in an open environment

Brian Mahoney Co-founder & Chief Strategy Officer

by regulatory frameworks. For that reason, you have a number of players still operating in the old paradigms and the backbone of the financial system is still running on the old framework mainframes.”

So what about regulation? There’s no question that the explosion of activity in the crypto space has got regulators around the world sharpening their pencils.

With the growing interest from the SEC, FCA and others, Mahoney believes stricter rules are inevitable, and will ultimately be good for the industry as long as they are done in the right way.

“We view compliance as a competitive advantage and we have doubled down on this strategy,” he says.

“Alkemi Network has seen compliance and regulation as inevitable from day one. It was only a matter of time.”

He adds: “There is a need for it, ultimately. You have to have a healthy balance. The intersection of commercial activity between the private and public sectors is important for fostering adoption, making people comfortable and allowing them to sleep at night.

That’s where we see the future going. It’s very early days still and the regulators are still trying to get their heads around these new, fast-moving technologies.”

The challenge for regulators, according to Paul Frost-Smith, is to protect the vulnerable in the transition to a digital world where human identity, and every asset capable of being recorded, is stored on blockchain.

He believes that increased regulation may pave the way for institutions to start getting involved, but argues that, fundamentally, it remains the enemy of crypto.

“The beauty and benefits of being decentralised are wholly at odds with single party control – and central banks, states and the dinosaur financial institutions of the 20th century all have a vested interest in slowing down digital adoption as it is a fundamental challenge to their intermediation and raison d’être.”

KYC prompts fierce debate While there is resistance to KYC within the industry, Mahoney is pragmatic and believes it will have to become more accepting of supervision.

“The roots of crypto are libertarian and anti-Big Brother, antigovernment, so there is a clash of multiple cultures. But as more

HOW ALKEMI NETWORK IS DELIVERING DEFI FOR INSTITUTIONS | December 2021

capital comes in, more hacks take place, more protocols start up and innovate; it’s only a matter of time before the neighbourhood watch comes in: the regulators. Ultimately they are trying to protect consumers, but the risk is that stringent regulation will stifle innovation. A lot of the issues arise due to complexity.

It is going to take time to educate policymakers and reach a regulatory middle ground, but we’ll get there.”

Plus, the rapid adoption of these new technologies by investors is already moving apace, he says.

“On the ground, there are a lot of institutions already in this space. The biggest traders in the world are very active in crypto: the Chicago Flash Boys and all the high-frequency traders are already all in DeFi and they are still in CeFi, so they are playing both sides.”

“And that is why this is going to only continue to accelerate and it’s not just going to be capital markets. I think most industries are going to be touched by crypto and blockchain in some shape or form.”

BRIAN MAHONEY

CO-FOUNDER & CHIEF STRATEGY OFFICER Brian is Chief Strategy Officer and Cofounder of Alkemi Network. He has 10+ years of experience in capital markets and fintech and oversees strategy, growth, and investor relations at Alkemi Network. Before Alkemi, he led Corporate Development at AlphaPoint, a digital asset exchange infrastructure provider, and oversaw the company’s capital raising and strategic growth initiatives.

Prior to that, he held roles at ARC Capital, Reitler Advisory, and HSBC Bank where he sourced & executed a variety of growth equity and leveraged buyout transactions.

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DIRECTORY alkemi.network Alkemi Network is bridging CeFi to DeFi, building an institution-grade liquidity network for financial institutions and individuals to access professional DeFi and earn yields on their Ethereum-based digital assets. The flagship protocol, Alkemi Earn (Earn), facilitates borrowing and lending within a compliant environment via a primary permissioned liquidity pool of digital assets (ETH, wBTC and stablecoins). Earn also offers access to a secondary, permissionless liquidity pool of digital assets as part of Alkemi Network’s mission to enable everyone to join the decentralized financial ecosystem.

Contact: Peter Gray, peter@alkemi.ai, calendly.com/peter-alkemi

HOW ALKEMI NETWORK IS DELIVERING DEFI FOR INSTITUTIONS | December 2021

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