DeFiAM Labs: DeFi infrastructure for financial institutions

DeFiAM Labs wants banks to use the methods of decentralized finance on their own terms. A layer 2 is a network that processes transactions away from a base blockchain such as Ethereum and writes only the results back to it, which lowers fees and raises throughput. On such a network a bank can issue tokens for real-world assets, lend against them and settle trades with other banks, while it keeps control over who takes part. What is a layer 2 blockchain? explains rollups and the Lightning Network.

DeFiAM's research deals with capital efficiency and with applying DeFi and layer 2 blockchains to real financial systems.

The DeFiAM Network calls itself "the first and largest community in Switzerland" for professional wealth managers, institutional investors, family offices, private banks and DeFi pioneers. Its aim is to bring traditional finance and DeFi closer together. The network meets in Zurich, mostly at the University of Zurich and the Academic Gateway venue, and runs webinars, meetups and conference sessions through the year. It organized the DeFi Asset Management Conference and holds an Institutional DeFi Night during the EthereumZüri.ch conference.

Zurich is part of the Crypto Valley, the Swiss crypto and blockchain ecosystem that grew from the canton of Zug. FINMA supervises the firms that offer crypto services there.

A repo is a short-term loan in which one bank sells securities to another and agrees to buy them back at a set price, often the next day. It is how banks manage daily liquidity. In a tokenized repo, both the securities and the cash exist as tokens, so the two legs can settle at the same moment and the collateral can move within hours. J.P. Morgan's Kinexys and Broadridge run tokenized repo platforms for banks today.

For DeFi itself, recital 22 of the EU's Markets in Crypto-Assets Regulation (MiCA) says that services provided "in a fully decentralised manner without any intermediary" fall outside the regulation. A bank that uses DeFi methods remains a supervised intermediary, so its services stay inside the rules of its supervisor. DeFi in Germany and the answer What is decentralized finance? go into this line.

DeFiAM stands for DeFi asset management. DeFiAM Labs is the Zurich company behind a layer 2 platform for institutional DeFi, and the DeFiAM Network is its community of wealth managers, private banks and DeFi builders in Switzerland.

Institutional DeFi means that banks, asset managers and other regulated firms use DeFi protocols or their methods, such as lending pools and automated settlement, under the rules that apply to them. Most institutional DeFi platforms restrict access to known participants and keep compliance checks in the process. DeFiAM Labs builds such an institutional DeFi platform on a layer 2.

DeFi replaces the intermediary of a financial service with code, so it competes with banks in lending, trading and payments, and it gives them new tools for tokenized assets. The Deutsche Bundesbank found in its Monthly Report of July 2021 that DeFi applications in practice still run on centrally managed governance, for instance to fix code bugs. For a bank, that governance is where the risk and the supervisory questions sit.

A DeFi fund manager or vault curator puts client capital into DeFi protocols: lending pools, liquidity pools or staking. DeFi asset management tools track positions, yields and risks across protocols, and DeFi portfolio management or DeFi wealth management applies the same idea to a whole client portfolio. The risks include smart contract bugs, collateral liquidations and the failure of a stablecoin or an oracle, which a DeFi risk assessment has to cover before any money goes in.