How DAF’s Work: Decentralized Autonomous Funds
Buying NPX tokens will allow you to be part of the first crypto asset manager linking fiat and crypto investment universe. At the end, it will offer the major perspective to bring scalability to crypto investment solutions while reinforcing the crypto world transferring value from fiat to crypto universe.
“THE BUSINESS OPPORTUNITIES ARE HUGE AND TAKING PART IN THIS UPHEAVAL IS EXTREMELY EXCITING “
Coinist was recently fortunate enough to chat with the team behind the NapoleonX project. Before we jump into the interview, take a moment now and watch their short explainer video which will help you familiarize yourself with their project.
Hi and thanks for joining us today to talk about the NapoleonX initiative. It seems that Napoleon Capital was the launchpad for your subsequent crypto projects. Before we jump into the discussion on NapoleonX can you tell us a bit more about what Napoleon Capital does?
Hello and thanks to you for giving us the opportunity to present our project. Ok, let’s explain what Napoleon Capital is, and what are the links with the project.
Napoleon Capital is an existing French company, created and majority-owned by Stephane Ifrah, Arnaud Dartois and Jean-Charles Dudek. Napoleon Capital specializes in designing and selling low frequency quantitative trading strategies on the biggest world financial indices. Quantitative means algorithmic and low frequency means at most a trade per day, minimizing execution risks and offering additional scalability. As a consequence, these strategies may handle several hundreds of millions as assets under management, with the same KPIs as if you were only trading 20 millions on it. That’s a crucial point if you want to scale your business on these strategies and also be attractive to big investors.
Can you tell us what the relationship is between Napoleon Capital, NaPoleonX and Napoleon Crypto?
Napoleon Capital is the sponsor of the NaPoleonX project. NaPoleonX itself will be the first 100% algorithmic crypto-asset manager encoded into a smartcontract (the one issuing the NPX token at napoleonx.eth). Napoleon Crypto on its side is the Financial Advisor of NaPoleonX. It shall create the platform that will host the DAFs (Decentralized Autonomous Funds), propose the strategies from Napoleon Capital or external Asset Managers, and execute the trading orders sent by the trading bots. It shall be created post ICO and acquire an asset management license.
I got the impression that the trading process was 100% automated. However, on your website you state that investment managers must only be paid when they deliver on their promises. What role do humans play in this process?
Yes, the process is based on algorithms that will be automated as much as possible. For the time being, the process can’t be nevertheless 100% automated, even if we are convinced that it will be the case in the coming years, for two main reasons.
The first one is that decentralized exchanges are not mature enough to provide huge liquidity. At the moment, you can’t automat the acquisition of ETH versus BTC without a liquidity risk that shall convert into a less good trade. This explains why we will have to execute ourselves at this stage, with systematic rules, those kinds of trades.
The second reason is that some of the assets we will trade are not tokenized already. Hence we need to pass trough the real world to make the orders. We definitely need to trade these assets (execution fully automated in this case) if we want to develop a step further the crypto market. Indeed, volumes are much higher than in the crypto-world today, even with the recent increase in market capitalization.
However, the value proposal is based on performance delivery for DAF investors. So, in order to make sure that the right algorithms are implemented, fees will only payable if performance derived from these trading bots is positive to perfectly align investors’ and bots makers’ interests. This is what we call Performance Fees. As a whole, we can say that you won’t earn money by providing a trading bot, you will earn money by providing a trading bot that will make a financial return for the investors. We are no more in the 2%/20% (management fees/performance fees) usual scheme in the hedge fund industry: we are engaged within a disruptive plan so that a fund manager (ie a designer of trading bot) may not earn money when its investors are losing some!
Nonetheless, algorithms are designed by human beings, hence our remark.
You also mention that “NaPoleonX will profit from 85% of all performance fees generated by the various DAFs and 100% of the performance on its participation in these vehicles.” Where are these fees coming from? Where are these fees going?
As mentioned previously, the trading bots used by a DAF shall generate a positive return. 25% of this return will be perceived as Performance Fees to remunerate the efficient use of the trading bots for such DAF. As part of the deal, most of these fees (85%) will be paid to NaPoleonX while Napoleon Crypto will keep 15% to cover operational costs.
Hence DAF investors will get a net performance equal to gross performance minus Performance Fees. This mechanism will be obviously included in the DAF’s smart contract.
Let’s not speak in the abstract. Let’s use a real word example of how all of this fits together from the perspective of an investor. Let’s say I have $10,000 and I want to invest it in NaPoleonX because of its use of quantitative / algorithmic trading strategies. What does the investment process look like from my end? What should my expectations as an investor be? Can investors gain transparent access to the past performance of the NaPoleonX fund?
Buying NPX tokens will allow you to be part of the first crypto asset manager linking fiat and crypto investment universe. At the end, it will offer the major perspective to bring scalability to crypto investment solutions while reinforcing the crypto world transferring value from fiat to crypto universe. And because it is a global business model and not only a product/service that you buy, you will have 2 kinds of incentives: the access to 85% of the Performance Fees generated by every launched DAFs during their whole life, as well as 100% of the net Performance of the investments in DAFs by NaPoleonX (everything above 40kETH at ICO shall be used to invest in DAFs).
We will list our several DAFs into our website so that the Net Asset Value of each DAF will be available on a daily basis. Investors will have thus access to historical performance of their investment vehicles.
Explain the process of DAF multiplication? What are the characteristics that distinguish one DAF from another DAF? Do they use different trading signals? Are they entirely different trades?
The main characteristic that distinguishes a DAF from another is that they don’t operate the same. We will propose a fully diversified investment universe, by creating DAFs that are not overlapping, so that investors may easily and clearly build their own diversified portfolio of DAFs.
That is the first intent. But we can go further if the success is even bigger than we think! We can imagine indeed to create several DAFs for the same underlying, notably because DAF investors may choose their financial leverage, so that we can imagine two DAFs on the same underlying, but with different financial leverage or also different trading bots. And due to the cost efficiency of a DAF creation, we will not be limited in the proposals for our investors to match as much as possible their needs.
The process of DAF multiplication is the way to create as much DAFs as possible to generate as much Performance Fees as possible and to maximize the value of the NPX tokens. In practice, NaPoleonX shall create a first bunch of DAFs from the fund raised during the ICO. As soon as a DAF has performed enough NaPoleonX may decide to sell part of such DAF A tokens that it holds in order to create a new DAF from the proceeds, and so on.
Let’s talk about the function and utility of Napoleon crypto for a moment. You say that when Napoleon crypto proposes a new DAF, NaPoleonX decides whether to follow the advice. Then it launches the DAF smart contract. How is Napoleon crypto being fed information? How is that information filtered? What threshold needs to be reached before a new recommendation is submitted? To me Napoleon crypto seems to be a useful tool to help you separate signal from noise. Is my understanding correct?
Let’s explain in details how a DAF works. The A tokens holders of a DAF shall regularly decide which trading bots they want to use from a trading bots selection presented by Napoleon Crypto. After that, the trading bots sends signals to the DAF smartcontract that filters the signals from the selected trading bots.
Napoleon Crypto has a major role in presenting audit reports for each trading bots and other financial analysis so that the A token holders may vote with a good information. Napoleon Crypto shall also select new trading bots and bear the asset manager responsibility towards the real world. It shall also ensure the proper execution of the selected trading strategies as long as the process can’t be fully automated.
You mention that “NaPoleonX will vote on the effectively launched DAFs. In exchange, Napoleon crypto will benefit from 15% of all performance fees.” How are performance fees used in the case of Napoleon Crypto? Are they reinvested, distributed as dividends, or do they add underlying value to the crypto in any way?
Performance Fees perceived by Napoleon Crypto will be mostly used to cover operational expenses, develop and maintain the platform used by NPX and DAF token holders.
These fees are born by special B tokens that shall distribute dividends.
Are you running on top of the Ethereum platform? If so what has been your overall takeaway from using Ethereum so far? Has the process been fairly straightforward, or has it presented some challenges that you didn’t foresee?
Yes, the smartcontracts are deployed on the public Ethereum blockchain (ETH). Ethereum brings a new paradigm for managing our project, the business opportunities are huge and taking part of this upheaval is extremely exciting.
The development on the platform was not as easy as we expected thought. On one hand, getting a working Proof of Concept and testing some functionalities is fairly easy for experienced developers. On the other hand, the security and the soundness protocol wise of our approach had to be challenged and tested over and over again. For example, we are running public bug bounties and taking security advices at the moment. Overall, we feel confident and happy with the technology.
What would you say some of the biggest downsides to using Ethereum are?
It is still somewhat hard to find developers with a solid trackrecord on Ethereum but this is to be expected on a young technology. We thought at first that the cryptocurrency valuation would be a problem as time goes by since one has to pay in ETH for the smartcontracts to run but what we have seen so far is that miners are adjusting their fees properly. On the fee issue, the process of looking for gas optimization of our code has been very usefull for our blockchain understanding.
Thank you for taking the time to speak with us today! We wish you the best of luck with your project. To our readers, if you want to learn more about NapoleonX please visit their website at: http://www.napoleonx.ai/
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