Transparency Equals Liability: Why DeFi Strategies Get Copied | Matteo Manzi | Orion Finance (EP. 307)

0:00 And it's basically the moment a strategy works, the market can copy it, right? Yeah, yeah. It's so easy to you have this tokenize vaults on chain in which the manager is submitting orders from off chain, but the transaction on chain is real time transparent to everyone else. It's trivial to build a smart contract that's monitoring the tokenize fund smart contract and just execute the same trade one block after into another tokenize fund, bypassing the fees. This is Money never sleeps. Sharp riffs, big ideas and real insights from smart people. I'm Pete Townsend. Let's go. Money never sleeps well. So joining the show today is Mateo Manzi, Co founder and CEO of Orion Finance, providing on chain portfolio management infrastructure designed for privacy, compliance and verifiability. Welcome to the show, Mateo.

0:51 Thanks for having me. Awesome. Listen. It was great to meet you in person in Amsterdam at the Techstars Demo Day. After all the mentoring calls that we did last year, when you went on stage that day, you said something that stuck with me and I think it's stuck with a lot of people in the crowd as well. Transparency equals liability. So what do you mean? Would you say transparency equals liability? Yeah, sure. Well, I have to say that to the party proposition of Orion came from the realization that the the on chain asset management market was maturing. It was starting to be able to not only define on chain products for financial market, but also to actively manage products on chain. However, we noticed this contradiction in the fact that managers have alpha, you know, financial markets, we talk about alpha when we talk about information asymmetry or in general IP asymmetry.

1:49 And because of this asymmetry, they they have a business model that is based on charging management and performance fee. Now the blockchain promise has been transparency since day one, I would say has been verifiability more than transparency. So because of the only way we had before the technology was mature was full transparency to enable verifiability. We do for granted that in order to interact with tokenized portfolios on chain, one needed to be in plain sight of everyone else. Imagine being at a poker table playing a game of poker and you need to bath on your cards. OK, but you can see your everyone else's cards and everyone can see yours. How can you make an intelligent bet? How can you play the game? So that's another way of thinking about it. That's why for asset managers, full transparency is a big blocker and it's not an accident. I believe that as institutional adoption starts to rise, the words public block chains in general, the focus on privacy starts to become again the central attention for crypto. Absolutely, absolutely.

2:54 And it's basically the moment a strategy works, the market can copy it, right? Yeah, yeah. It's so easy to, you know, you, you have this tokenized vaults on chain in which the manager is submitting orders from of chain. So the IPS of chain, the orders are generated of chain, but the transaction on chain is real time transparent to everyone else. And so it's it's trivial to build a smart contract that's monitoring the tokenized funds smart contract and just execute the same trade one block after into another tokenized fund, bypassing the fees. Yeah, absolutely, which is where the space is headed, right? We've had hedge fund algorithms for years that are running program trading that will continue to run at the speed of light. But when you're able to move just everyday strategies and more plain vanilla strategies on chain that you want to be able to do this with a degree of, well, not transparency, but privacy.

3:49 What are you building to address this? Yeah. So we are building the first multi pod shop in D5 for asset management. So it's a multi strategy set up that enables managers to tokenize their strategies. So they're alpha driven strategies and being a multi pod, we are able to preserve the confidentiality of the alpha drive in the allocation. The way we do this is partnering with SAMA on integrating advances in cryptography. There are two fields that run in parallel. We use both of them. One is 0 knowledge, one is fully homomorphic encryption. And with 0 knowledge, we are able to scale the system computationally by proving off chain compute to the on chain system. And so kind of in the spirit of ZK or lapse in the ecosystem for more technical listeners and FHE, which is really magic the first time you hear about it, which is this technology that enables you to do mathematics on encrypted numbers. And so using FHE, we are able to have vaults which are like this tokenized, You can imagine the most organized funds. It's a, it's a, it's one case of using Volts by having their NAV. So their share price evolved based on some logic. We can have the logic be encrypted using FHEVM, which is this protocol built on the FHE technology. And then it's like, again, the analogy of the poker game. Everyone is playing their cards.

5:07 They put the chips on the cards, but they're hidden. And now before doing the rebalancing, we put all the cards together, we shuffle them and then we can look at them. And now looking at them, we can associate the specific hand to the specific bet. And so in this way, we protect the alpha of this specific manager while maintaining the ability to interrupt the with the Today at least fully composable transparent defy market. So at a certain point, we need to bring back the positions to transparency that makes sense you. Do you do? Yeah. It's it's intense. It's intense. And it's, it's thinking about when you look at the billions, if not trillions of transactions a day, they're going through Triad 5 rails in general, which are entirely private.

5:52 That moving it on chain means that you know that you want to be able to carry over that privacy with you when it comes to asset management structures. The best example of this that I had from my days in the hedge fund market was Millennium, the big multi pod hedge fund. And that I remember sitting down with them to try to figure out one of their settlement strategies around the trading that they were doing. And there was this concept of, hey, listen, we got 100 different groups of traders that are called pods that are following different strategies and they're trading everyday. But sometimes one may take one position on a repo or repurchase agreement and someone may take another position opposite position on that same underlying instrument for the repo.

6:43 And well, for trading efficiency purposes, you don't want both of those trades to hit the market. You want to cross them. But at the same time, for the purposes of preserving the alpha of these strategies or the risk adjusted return of these strategies, you basically you don't want each POD to know what the other one is doing. So when we first met back in August, actually it's probably July before we did tech stars, you said Millennium on chain, right? And that kind of nailed it for me because I had that strong reference point. For those that may not be as deeply involved into this D5 space as you, can you tell us what Millennium on Chain really does mean?

7:28 It also hit a nerve for me when talking to Millennium back in 21. I think something like that because the system they managed to set up and in general Millennium is one example. The multi strategy set up in asset management managed to set up not just the way to harness alpha, but a system to to create the economies of scale when it comes to execution operations. And also, you know, higher level questions about how to allocate capital across boats as well. Talking to them about this concept of netting was very fascinating. So being able to think about again, economies of scale that plays a role in in this in the world of defy, not just because of market orders efficiency, but also because of reduced gas fees.

8:12 You also democratize that by netting trades. And so the idea is very simple. It's again being able to in in the defy space. People talk about coincidence of wants. So I want something that someone else has I want to buy 3 shares of Tesla and someone else wants to sell 2 shares of Tesla and buy 2 of Apple. OK Apple, you may need to go to the to the to the account, whatever you want to buy that. But with Tesla, we can kind of exchange it directly and by this bartering process, we we can save in execution costs slippage because there's no real market impact affecting the price of the trade. And this is very powerful because creates an economy of scale and an incentive for participants to behave within these systems rather than being small fishes in a big sea that makes sense. So you can still be a small fish, but within a big infrastructure that enables you to compete. So that's one free lunch to get out of this privacy preserving system.

9:13 You get privacy, but you also get capital efficiency because all of a sudden you don't need to buy and sell as much as you would do if you were a lonely strategist. Is there also a benefit to doing non privacy preserving strategies? For sure. I mean this applies regardless of the privacy layer built on top. Let's say that there is no information assignment. It's just a a basket product built on top of of an investment universe. So the S&P 500 is the most famous example. You have the US equity market, OK, The logic is let's measure the market cap of these instruments. Let's pick the top 500. And then you do a weighted average of their returns. And all of a sudden you have the return of an object that doesn't exist in the individual stock components, but it's in some sense more real.

10:02 So you can still think about tokenizing basket products and defining new cryptocurrency based financial instruments that are defining basket allocations logics, which are fully driven by smart contracts as well. So the allocation is again, this rule I just described on the S&P 500. You can do the same with on chain vaults. And you can build funds of funds vaults of vaults. Yeah, on chain by measuring their DVL and then defining a new vault based on that. That's where I get really excited about this stuff. Is, is, you know, expanding the concept right of the vaults to say that, well, there are tons of public equity strategies out there just but let's just focus on equity for a second that where so many layers exist in the infrastructure of hate. We're going to build this one passive strategy representing an index and then we're going to package it up with two or three others to deliver a specific kind of return diversification. And we might put a future overlay on top of that or an option overlay on top of that or an FX overlay on top of that. And then we may do a fund of funds with that with two other strategies we put together.

11:14 You don't need all those additional layers when you have the vaults, you can just These are composable vaults that you can piece together through the protocol, right? Yeah, yeah. And at that point, you end up with a single token representing all this layered logic you presented. And then if you want to build an AMC, you want to securitize this instrument, you want to build an ETP on top of this single token, then it's operationally, it's, it's a game. Definitely. And why is this model emerging now? So I would say one big component, maybe it's the biggest is the regulatory maturity. We have FINMA led the way in Europe at least that we have got things in place, the Genius Act of course. So that's big. That's been a big driver of institutional adoption towards technology that the maturity of the technology is also a big subject.

12:04 FHE was not really feasible computationally and therefore gas wise on the Ethereum blockchain since basically this last summer, summer 25 ZK in general, that's zero knowledge. Technology also got extremely cheap. And so I would say these two things together are making the design space at the same time richer in terms of what can be done. At the same time, you have real demand also driven by the increasing volumes of stable coins and real world assets coming on chain in being able to build on top of them a layer that's about actually managing these assets, not just about, yeah. Fascinating. And when Orion does work, Matteo, what does asset management look like in five years? Yeah.

12:48 So the good thing will be that traders won't need to know what they're trading on the blockchain. So the obstruction of complexity has been a focus for us and for the industry overall in enabling traders to just connect to a broker, P5 broker to be able to have an interface that gives you paper trading facilities to able to be able to, you know, have a sandbox environment to test strategies and to deploy both actively managed and basket products that you know, drive the TPL and I mean that move capital into on chain rails, making all of us benefit from the efficiency of this technology. Absolutely.

13:32 There's so much opportunity here and so much potential. Listen, Mateo, thank you for joining me today to talk through this and to tell us about Orion Finance and the opportunity here with building Millennium on Chain. What's the best way for people to get in touch with you and learn more about Orion? Thank you. Just go to visit orionfinance dot AI. You can find our contacts there and just let's work together. Awesome. Thank you so much, Mateo. Thank you. Money never sleeps. Well.