Enzyme Finance is an asset-management protocol built on the Ethereum blockchain. The project was previously called Melon Protocol but was later rebranded to Enzyme. In this article, we’ll look at what is Enzyme and how it works.
Traditionally in finance, the idea of ‘managed funds,’ where investors pool capital together and assign a manager to trade with the total money, has been a luxury only large investors could afford.
Even if retail investors had a way to become part of a managed fund, they probably wouldn't have access to advanced tools to execute trading strategies in the same vein as large investors. So, what's Enzyme doing to change all of this?
As a decentralized finance (DeFi) project, Enzyme allows users to invest in different managed funds with no barrier to entry. The platform includes advanced trading tools, the ability to create your own investment strategy, start your own fund, etc.
The protocol’s primary objective is to empower retail and enterprise-level investors to leverage DeFi when managing their assets. Each fund, commonly referred to as a ‘vault,’ has a vault owner that dictates how the fund will be managed.
What is Enzyme: key features
Custom investment strategies: Any user can create their own fund based on a custom investment strategy of their choice and automate the fund to handle money based on that strategy.
Open-sourced: The open-source nature of the protocol implies that any new user can make additions and collaborate on the code. In fact, there’s a maximum bounty of $400,000 for anyone who can find and submit a bug.
Diverse group of users: The list includes Asset managers, treasury managers, investors, and even Decentralized Asset Organizations (DAOs).
Community-driven DAO: The project encourages community participation by allowing users to participate in protocol changes using the MLN token.
Regular third-party audits: Contracts on the protocol are audited by renowned firms such as PWC and are publicly available.
Integration with leading DeFi projects: Enzyme’s DeFi integrations include leading projects such as Uniswap, Aave, Compound, Curve, Convex Finance, and many more.
How does Enzyme work?
Because Enzyme is built on Ethereum, all costs required to run the protocol are paid in Ether, such as the cost of using Ethereum’s computational power to run Enzyme smart contracts.
To answer the question, “How does Enzyme work?”. We’ll need to look at the two layers that make up its architecture:
Fund layer: Funds/Vaults are created and managed in the fund layer. Users interact with the Enzyme blockchain here. The tools required to manage funds/vaults are also part of the fund layer.
Infrastructure layer: As the name implies, Enzyme’s infrastructure is stored and managed in the infrastructure layer. This layer is governed by the Enzyme Council, a DAO overlooking the rules by which the entire blockchain operates.
This layer includes smart contracts for managing asset prices, MLN to ETH conversion for computation payments, etc.
The Enzyme allows users to create three different kinds of vaults. These include:
Public vault: Any investor can deposit funds into a public vault.
Private vault: The vault owner approves all depositors in a private vault.
Hybrid vault: The vault owner approves only certain depositors based on custom settings.
Where is Enzyme used?
Enzyme’s native token MLN is used for different utility purposes across the network. The token's value is directly tied to how much users use it.
To be more specific about Enzyme and how its native token MLN is used, let’s dive deeper into particular use cases:
Source of revenue: Enzyme Finance charges an AUM-based ‘network’ fee (introduced with the latest upgrade) that can be paid using the MLN token. Users can get a 50% discount for using the token, which is the primary incentive for paying fees with the MLN token. The referral fee, collected from integrations with different DEXS and DeFi protocols, also serves as an additional source of income.
Fund development projects: The MLN token helps fund development projects for the Enzyme network. Besides the network fee serving as a source of capital to achieve this, 300,600 MLN tokens can be minted in a year to fund the protocol’s development.
Voting incentives: The MLN token is used to participate and vote in the DAO’s governance proposals. To incentivize those participating in the Enzyme Council, there’s currently a two-year inflation rate of 20% for the token’s total market cap at the time of the supply increase.
Enzyme’s founders and history
Formerly Melon Protocol, Enzyme Finance was founded in 2016 by ex-Goldman Sach VP Mona El Isa and mathematician Rito Trinkler. The protocol was initially developed by a private Swiss firm called Melonport, to allow anyone to operate their own fund.
During its development period in 2017, the protocol raised $2.9 million in an ICO, reportedly within 10 minutes of the token sale beginning. The protocol remained in development until Feb 2019, when the mainnet officially launched.
After its launch in 2019, Melonport shifted from a centralized governance model to becoming one of the first Decentralized Autonomous Organizations (DAO). Melonport relinquished management control and passed it on to the Enzyme Council, a decentralized group of members that operate the protocol to this day.
Enzyme V2, the second version of the protocol, launched in January 2021 with a completely new smart contract architecture. The latest version, called Sulu, went live on Feb 14, 2022. Sulu offers several new features, such as more vault customizability and new risk management tools.
Enzyme tokenomics
To learn more about Enzyme and its tokenomics, let’s look closely at the underlying mechanism that governs how it works.
The value of the MLN token boils down to two main factors: minting and burning. Minting, a process that increases the total supply, helps use the newly created MLN tokens to fund the protocol’s development. Burning and decreasing the total supply helps stabilize the token's value.
An implication of the ‘mint and burn’ mechanism is that the MLN token doesn't have a maximum supply. As of August 2022, there are 2,038,528 MLN tokens in circulation.
Minting
Although 300,600 MLN tokens enter into circulation annually, the MLN token is intended to be deflationary over the long term. The argument is that new tokens are created to fund critical development projects. But as development requirements slow down over time, the need to create new tokens will also decrease. Additionally, token burning is another step taken to control inflation.
Burning
The burning mechanism is built into the MLN token, and the Enzyme Council approves all burns. As of 2019, when the MLN token migration occurred, a total of 382,125 tokens have been burnt (till August 2022). As a percentage of the circulating supply, this would imply that almost 18% of the tokens in circulation have been burnt.
How are Enzyme MLN tokens created?
MLN tokens are created through minting. Leveraging the Ethereum blockchain, new MLN tokens are minted using the Proof-of-Stake (PoS) consensus mechanism. Minting to create new MLN tokens involves adding new blocks to the blockchain.
Enzyme’s DAO, known as Enzyme Council, decides when new MLN tokens should be minted. Since there’s no limited supply, an endless number of new MLN tokens can theoretically be created.
Enzyme's competition
Enzyme Finance has one primary competitor offering digital asset management solutions: Unido Enterprise Platform (EP). While Enzyme Finance targets retail and enterprise-level investors, Unido is centered only around enterprises.
If we compare both protocols in terms of technology, both effectively achieve the intended outcome: provide a platform that lets users manage their digital assets. Concerning specifics, Enzyme Finance is built on Ethereum, while Unido EP is built on Polkadot. Here, Unido EP is better in terms of allowing cross-blockchain support.
But on the other hand, Enzyme Finance targets a broader demographic: retail investors. For now, retail investors might not represent a major source of revenue in this space. But in the future, a potential ‘retail boom’ can accelerate Enzyme Finance’s growth more than Unido EP.
If both were compared, Enzyme Finance has been around longer, has developed greater trust among investors, and has more users on board. Enzyme Finance also has more Assets Under Management (AUM), which reflects Enzyme’s growth being more than Unido EP.
Enzyme partnerships and investors
Venture Capital (VC) fund Placeholder, DeFiance Capital, and Collab+Currency are one of the lead investors in Enzyme Finance. But given the decentralized nature of the protocol, anyone can become an investor by purchasing the MLN token.
Asset Managers can enter into strategic partnerships with Enzyme Finance by launching their vaults on the Enzyme Blockchain. In February 2021, Techemy Capital partnered with Enzyme Finance to launch an ETH-BTC portfolio using the hedge fund’s in-house trading strategies.
Other strategic partners that power the Enzyme protocol through DeFi integrations include:
Enzyme SWOT analysis
Strengths
One of the few survivors of the 2018 bear market, Enzyme Finance has shown significant resilience against market downturns. As a result, the investors that the project has been able to onboard over time represent one of the significant strengths of Enzyme Finance.
The protocol has developed a solid user base with almost $85 million in total Assets Under Management (AUM) and 1148 vaults as of August 2022.
Weaknesses
Currently, new MLN tokens are minted every year to fund development projects. Enzyme assumes that development needs will slow down over time to ensure the token remains deflationary. But, this assumption represents an inherent risk attached to MLN’s tokenomics.
If the protocol runs into any issues or if development needs to grow as the project needs to scale, this assumption can backfire. Although the burn mechanism can control supply in this case, we’ve seen in the past with Luna that burning tokens might not always work out as intended. Additionally, there’s no maximum supply restricting the number of tokens in circulation.
Opportunities
The lack of competitors working on similar technology represents Enzyme's opportunity to capitalize and grow. Additionally, the fact that the protocol has survived past and recent bear markets shows that users see a clear use case. These facts show that the protocol has significant room to onboard many new users and add to Assets Under Management (AUM).
Threats
Bear markets push capital out of risky assets. And while DeFi projects such as Enzyme Finance have a promising future, the market collectively still views the space as a high-risk investment. Because of this, a bear market is perhaps the greatest threat to the project’s future.
If, in severe circumstances, the market goes too deep into a state of panic, the decline in Enzyme Finance’s Assets Under Management (AUM) could halt the protocol’s ability to generate fees and function. An absence of revenue required to function could cause the project to shut down.
Roadmap
Enzyme Finance’s latest and perhaps most ambitious upgrade, Sulu, went live in February 2022. The protocol has successfully executed development projects despite crypto's unfavorable year, from lowering gas fees to redesigning the User Interface (UI).
The team has already announced that it’s working on the next upgrade, Eve. Although no specific date has been given, Enzyme disclosed that the v5 release will include a ‘limitless asset universe.’ Users will be able to integrate any asset (including NFTs) with the platform. Eve will also have custom price feeds, a feature that allows users to add alternative price feeds based on custom assets.
Enzyme updates, news, and highlights
Enzyme’s latest upgrade, ‘Sulu,’ goes live. Changes include a new User Interface (UI), lower gas fees, borrowing capabilities, additional curve pools, etc.
Enzyme integrates with DeFi credit protocol Goldfinch.
Enzyme announces a token burn worth $1.5 million (54,669 MLN tokens).
The protocol conducts periodic elections to add new members to the Enzyme Council. Enzyme announced Enzyme User Representatives (EUR) elections for the Enzyme Council.
The Enzyme Council approves Messari’s $35,000 grant.
Enzyme Council adds seven new projects to its ecosystem. It includes Ocean, SNX, WSOL, FXS, TUSD, PAXG, and GNO.
Enzyme adds a new feature allowing users to white label their vault, giving more customizability to vault managers.
Enzyme announces support for Convex Finance.
Enzyme announces Polygon Deployment. Integration with Polygon allows for creating and managing vaults at extremely low gas fees.
Creating crypto index funds: a unique new feature with Enzyme
What are index funds?
Seasoned stock-market investors have, time and time again, relied on index funds as a way to keep their portfolios diversified, for many, investments in index funds such as the S&P 500 act as a proxy for the entire market.
For those unaware of how this works, index funds pool different assets together and provide an average return based on the returns of the underlying assets. For example, the S&P 500 takes the top 500 U.S. companies on the stock market and spits out an average return.
The benefit for investors is that they stay diversified enough not to be overexposed to any company. If one company fails, it still doesn’t mean a massive loss, as it’s only a portion of the entire fund.
But most importantly, an index fund such as the S&P 500 is automatically updated periodically without the investor having to do anything. The underlying companies in the month might change every month, but the investor always stays invested in the “top 500 U.S. companies” at any given time.
The lack of index funds in crypto
Unfortunately, the cryptocurrency market still lacks a proper index fund. Cryptocurrency investors looking for a way to diversify their investments would have to do so manually. But, it would mean keeping track of the market and updating the index fund manually.
For example, say you want to put money into a fund that tracks the top 10 crypto assets by market cap. But, you have your own investment strategy you want the fund to follow. You want to allocate 15% each to the top three crypto assets and the remaining amount equal to the rest. And, you want the list to be updated (or ‘rebalanced’) every month.
Of course, you’ll have to manually rebalance your portfolio every month because no automated investment strategy is involved. If you had an index fund, you wouldn’t have to do anything, as it would automatically be updated based on underlying pre-set rules.
Building index funds with Enzyme
Built specifically for use cases such as this, Enzyme is perhaps the only platform that allows users to create cryptocurrency index funds. Not only that, the DeFi nature of the protocol implies that anyone can create an index fund on Enzyme. An index fund built on Enzyme allows you to:
Pick the cryptocurrency assets the index will have, such as a combination of BTC and ETH.
Choose a period after which the fund will rebalance.
Earn extra income on your index fund as ‘DeFi Yield’. Enzyme’s official blog details how this works.
Where to buy MLN?
OKX offers a safe, reliable, and easy way to buy MLN. Our exchange has the required liquidity to make sure there’s no slippage. You can purchase USDT through our ‘Buy crypto’ page and directly trade it for MLN.
How to store MLN?
MLN tokens can be stored on crypto exchanges such as OKX. For many, this is a much more convenient option than storing the tokens off-chain. You can directly trade your tokens for other cryptocurrencies if you store your MLN on the OKX wallet.
FAQ
What are the different kinds of fees charged by Enzyme finance?
An AUM-based fee of 25 basis points is charged for all assets on Enzyme. Additionally, vault managers can charge three types of fees: management fee, performance Fee, and entrance fee.
How many positions can I take at a time on Enzyme?
You can take up to 20 positions on Enzyme products at a time. However, the fee charged as a result will also significantly increase and should be seriously considered.
How does Enzyme work on Polygon, and does it reduce gas fees?
Yes. Connecting Enzyme to the Polygon chain can make gas fees 1,000 times cheaper. Enzyme can be connected to the Polygon chain, and Enzyme vaults can be launched on Polygon as a result. More info about Enzyme’s Polygon deployment can be found on Enzyme’s official blog.
What is Enzyme charging to create a vault on its platform?
The Enzyme doesn’t charge any fee to create a vault. But, because Enzyme is built on Ethereum, you'll have to pay a certain gas fee.
Can I create a vault and use my own investment strategy?
Yes, anyone can create a vault and their own investment strategy on Enzyme. Once implemented, the automated investment strategy will trade funds accordingly.
How does Enzyme work out its audits, and where can I find the report?
All contracts are audited by trusted and independent accounting firms such as PWC. The reports are publicly available and can be found on Enzyme Finance’s GitHub repository.
What is Enzyme Council and how can I join it?
The Enzyme Council is the decentralized autonomous organization (DAO) for Enzyme Finance. It's a decentralized authority responsible for running the protocol.
According to official documentation, applying for the Enzyme Council can be done by mailing your application to council@enzyme.finance.
© 2024 OKX. Acest articol poate fi reprodus sau distribuit în întregime sau pot fi folosite extrase ale acestui articol de maximum 100 de cuvinte, cu condiția ca respectiva utilizare să nu fie comercială. De asemenea, orice reproducere sau distribuire a întregului articol trebuie să menționeze în mod clar: „Acest articol are drepturi de autor atribuite OKX în anul 2024 și este utilizat cu permisiune.” Extrasele permise trebuie să menționeze denumirea articolului și trebuie să includă atribuirea, de exemplu „Denumirea articolului, [numele autorului, dacă este cazul], © 2024 OKX.” Nu este permisă nicio lucrare derivată sau alte utilizări ale acestui articol.
