DBLP and Regulatory Compliance
As the end of Q2 2022 quickly approaches, along with the planned release of the DBLP, the basis.markets project has been working to ensure that the technology is ready for public usage, and pre-audit. The infrastructure and technology required to launch the proposed DBLP has been built successfully.
This update will cover the efforts and the results of the last months as well as emerging legislation, specifically in the regulatory space. These developments will need to be considered in-depth and present some blocking challenges.
Moving forward, as is, without taking these developments seriously is detrimental to the project as it moves such a decision forward to a point in time where a protocol is potentially halted. Now is the time to prepare, pivot and re-engineer to ensure the delivery of a solid protocol.
A deeper review covered a changing landscape with the help of professionals and clarified the major roadblocks, how to operate prudently and a potential path forward. This article has been written in place of the typical weekly update. Questions will be collected in preparation for an AMA in the short-term (in place of the planned town hall) — a technical deep-dive will soon be released.
- The DBLP core infrastructure is complete, testing has been a success and the technology is ready for use.
- New regulatory developments that have become apparent can’t be ignored, advice has been engaged on this topic.
- The regulatory developments pose consequences for the basis.markets project and stakeholders, they pose blockers to the originally proposed DBLP architecture and tokenomics.
- The basis.markets project will move forward in its current form as all initial development has concluded this month as planned and communicated. In its current form however it will be restricted to Solana devnet as no custody of third-party funds in its current architecture/design will be taken.
- There are several ideas as well as a road forward that potentially comply with the regulatory requirements. This is in active development however and will be proposed and implemented in accordance with the DAO.
The DBLP architecture as initially introduced in this town hall has been built on both the smart contract and reward market side (DBLP-A) as well as the infrastructure required to operate strategies. A working smart contract ecosystem as well as all required adjoining tools are ready to be sent to auditors. We are currently finalising a selection procedure of appropriate auditors.
DBLP-A Smart Contracts
Immense effort has gone into creating a versatile, composable and secure architecture. The schematic and explanation of key components below will be covered in a more in-depth video review but represents the flow on-chain.
A crucial element which allows us to move quickly is the lower layer of strategies. As has been explained in the greater architecture, this section is composable and we have built a secure manner to allocate funds to an arbitrary set of strategies. This allows for the development of new strategies over time and rapid adaptation to ever-changing market conditions.
The developing issue with this approach is that it is not entirely decentralised nor permissionless. Whilst it is secure, and subject to heavy security audits it can be construed as custody of funds. A hard line had to be drawn rendering this an absolute impossibility to release opening to third-party funds.
Therein lies a clue for a possible road forward which entails a pivot towards a sufficiently decentralised and entirely permissionless architecture where community and ecosystem, as well as developer groups, can contribute on-chain strategies to a DBLP vault/epoch architecture.
The current reward market mechanism, as well as fee distribution, need to be carefully examined to not inadvertently create unregulated securities under upcoming regulatory framework changes. The current tokenomics as agreed by the DAO find their way inside the smart-contract fee distribution mechanisms. Further clarity from the DAO and proposals will result in crucial changes in this section.
The smart contract as-is and mechanism will be submitted for audit as the majority of the contract will survive any changes proposed in the near future and audits are difficult to plan. The smart contract will however solely be available on devnet until a clear path forward has been agreed.
DBLP-B Supporting Infrastructure
There is ongoing continuous development in the supporting infrastructure required to provide the right data oracles to optimally extract yield from an ever-changing market. The technology is developed by the basis.markets project has become increasingly advanced.
A benefit of the current architecture is more fine-grained control over fund allocation and strategy selection with the help of a mature data infrastructure. Efforts continue at full speed in this area to ensure readiness and adaptability to both the markets and architectural changes in DBLP-A.
Recently, global regulators have released and proposed legislation that intends to provide greater clarity on definitions, regulatory bodies, and rules which govern participation in the cryptocurrency market. Of particular note is the newly-released ‘Responsible Finance Innovation Act’ (RFIA) proposed on June 7th 2022 by US senators Lummis & Gillibrand, this bill is likely to lead to similar policies being implemented across the world.
The basis.markets project is decentralised and does not collect any personal information on its stakeholders. Given this fact, the basis.markets project could unknowingly be enabling participation in illegal activities by users residing in jurisdictions where new regulatory requirements are now apparent.
This is likely to impact a large majority of projects in this space, many of which will have to adapt to comply or rethink their offering. Some will continue unaffected — those who are fully anonymous, risk-taking entities willing to flaunt regulations, and those with an offering already on the market, who will be afforded time to adjust. But this will, and is already starting to, affect the whole DeFi landscape.
As a project that is yet to launch its flagship product, basis.markets are in a ‘pre-product position’ and therefore must consider regulations up front, no matter how distant they may be from being implemented in the real world. This is a position of strength, the project can be flexible and ensure that the sustainability of any product is considered before launch.
Implications for the basis.markets project and the DBLP
According to the advice received, the current form of the basis.markets project will fail to comply with key aspects of the aforementioned regulations. With this knowledge, it is inadvisable to continue in the current shape. Areas that are of particular concern include:
- Yielding NFTs
Providing yield to the NFTs places these into a regulated asset framework.
- Yielding BASIS Tokens
Places it within the same category. Careful thought will need to go into how value is shared with token holders within a future-proof setting.
- bmNOW market
In essence, an algorithmic stable coin has been created backed by a tentative yield not exposed to directional risk but still exposed to risk (counterparty risk, execution risk, liquidity risks, smart contract risk, etc). As evidenced by the UST collapse and subsequent legal proceedings in the works, algorithmic stablecoins can’t fly under the regulatory radar any longer, and the RFIA formalises this. Value appreciation of invested assets will need to find a wholly decentralised and permissionless path back towards their contributors.
- Custody of Funds
As can be seen in the technology architecture above, the DBLP in its current form transfers funds from the permissionless space and is allocated to algorithms and mechanisms which are developed, controlled and executed by the basis.markets project. This again triggers EU and US regulations.
Some other projects may choose to take a more laissez-faire approach to comply with regulations. For example, they may have a product already on the market, which gives some leeway with regulatory compliance, or they may be fully anon or in lower-risk jurisdictions. However, this is not an approach the project is willing to take — doing so would be knowingly exposing all stakeholders to risk that can be mitigated with the right architectural adjustments and pivoting approaches.
DBLP devnet release and beyond
Based on these implications, whilst the DBLP has been developed for release this month, we cannot release it to mainnet-beta in its current form. We can, however, have the entire infrastructure running on devnet and a mechanism returning simulated yields to the contract so that the contracts can be publicly tested. This will also be a perfect opportunity to test future DAO governance tools (multisig smart-contract parameter adjustment for example) of the epoch and vault orchestration.
Once the DBLP is released to devnet, the priority will turn towards developing strategies and a path forward with the DAO that pivots the project towards regulatory/legal compliance whilst delivering utility to the $basis token/NFT.
These frameworks are vastly complex and legal teams (as good as they may be) have not had any legislative experience in these areas and are also new to the topic. At this point, there are a lot of unknowns, and advice is being obtained from as many sources as possible to get further clarification.
Impact and next steps
This news raises some crucial hurdles the project needs to pivot around. Several potential avenues exist and when these mature to a point of articulation they can be shared with the DAO.
All the project contributors are fully committed to finding a path through the challenges and getting to the best possible outcome. Whilst the DBLP will look slightly different in some of its mechanisms, there is an unwithering commitment toward delivery! Some ideas gathered internally point to a more widely adoptable DBLP design whilst being fully permissionless and decentralised. Consider a well-documented strategy SDK and strategy marketplace in which multiple vaults can decide their deployment strategies based on strategies available and contributed.
As a community-owned project, major changes will be run through the DAO governance framework for voting by NFT holders (The DAO). There are several areas where input will be provided towards possible proposals (e.g. reallocating away from NFT yield) and look forward to the community inputting and shaping what the final DBLP looks like. Keep an eye on the discord for updates!
The project will open up a channel to offer DAO members and token holders the opportunity to digest and ask questions, which will be covered in an upcoming AMA.