Max Hsu from Digital Asset Hosts Daml Finance Masterclass at Hong Kong Fintech Week 2022

Captions as YouTube publishes them, usually machine-generated, so names such as Daml and Canton can be misheard.

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   hi everyone my name is Max I'm the developer Advocate at digital asset today I have the pleasure of introducing demo Finance demo Finance is a developer toolkit written in demo that makes it extremely easy for companies to model Financial assets and Carry Out tokenization projects now before I introduce the toolkit let me tell you about digital asset digital asset is an Enterprise software company that modernizes Legacy Financial systems with

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   demo our smart contract language and Canton our privacy enabled blockchain platform together this platform Powers cutting-edge smart contracts and blockchain solutions helping customers unlock new networks of value with sophisticated applications demo applications run on Canton a scalable privacy enabled Enterprise blockchain demo applications running on one Canton blockchain are composable meaning they can connect and transact with download applications running on separate Canton instances this will bring us to

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   application composable ability that I'll speak about later why is our technology needed well the landscape today is that Legacy transaction technology permeates Global Financial Services Gartner ranked Capital markets as the top industry preparing for massive change predicting a 45 increase in the number of financial markets with modernized tech Stacks by 2025. other issues noted are the average age of core financial assistance is 13 years old clearing and settlement

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   technology is 16 years old which causes a four to five delay in settlement time and what do these Legacy systems all have in common these Legacy systems all have a few painful things in common such as burdensome privacy and regulation requirements convoluted multi-party workflows think of the end users the banks the custodians and the countless intermediaries and finally complex trust requirements among all the stakeholders and so this is where digital asset comes

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   in to provide a solution for these pain points your peers are already tackling these challenges by disrupting traditional Financial infrastructure with demo and here are just a few key examples there's Goldman Sachs building their tokenization platform using damel specifically an iteration of this demo Finance library that I'll be sharing with you today there is the Hong Kong exchange and Australia Stock Exchange

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   the demo Finance library is the culmination of working with these leading institutions the library helps speed up development times and brings digital assets and tokenization projects to life and today we finally get to share it with you you can see here that this is the documentation link and if you have any questions you can visit the community Forum to post your technical questions or general questions regarding daml and damel finance I'll be talking

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   about why we decided to create demo Finance what did we actually build and examples of when you might use the library there are essentially two main drivers that sparked the creation of damel Finance first to increase the efficiency of delivery teams and shorten that time to value that it takes them to build something and get into production quicker second around asset compatibility by creating a common foundational layer to

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   represent assets and interact with them we allow our customers to build applications on top that seamlessly compose with each other so how do we get increased efficiency we allow developers to immediately start writing their asset classes and related Financial life cycles using the standardized asset model instead of writing everything from scratch the point of asset composability is a very important one digital asset is

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   creating a global economic Network and eventually we will want to bring all our customers into that Network and have them interact so with that in mind that implies that there is some way of exchanging and interacting with assets the applications that our customers build are inherently composable and compatible with each other an example of that is if a company would decide to for example create a price

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    Risk Service on top of download Finance they would immediately be able to offer that to all customers that built on top of the library the other aspect here is asset Mobility assets that are created in context of one application can be moved in context of a different application an example for that is if the company would decide for example to create a pricing Risk Service on top of

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    the daml finance Library they would immediately be able to offer that to all customers that built on top of the library the other aspect here is asset Mobility assets that are created in context of one application can then be moved in the context of a different application and be used there without any need for translation or integration between the applications for example obtaining a bond from a bond issuance

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    platform you should be able to use that in context of maybe a repo platform to provide it as collateral without any need for changing in the form of the asset and this speaks to the point of application composability having a common asset model underneath your application allows you to build let's say a higher level of functionality that leverages several applications the example here is what

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    you observed in the decentralized finance space where essentially erc20 tokens are the standard and has enabled applications to be built on top of multiple other applications so that's what we're trying to achieve with this so let's get to the actual unboxing first regarding asset tokenization that's a word that's been thrown around quite a lot and it relates to operational efficiency risk reduction speeding up the Innovation cycle shortening time to Market and so on and

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    ultimately growing your business but the question is how and what is our take on tokenization so in this slide I'll be talking about the tokenization stack that's provided in this Library essentially at the very bottom of the at the very bottom of the stack we have the asset layer that represents the ownership and very basic Primitives that come with for example on which account

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    are the users holding the security what is the actual security and the certain primitive behaviors and we'll see what those are later on top of that we have the instrument layer the definition of an instrument is the economic terms and conditions of certain Financial contracts so while the asset layer purely represents the record of ownership for example I own certain amount of X Y and Z the instrument layer essentially defines what XYZ is and along with it of course some of the

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    rules and life cycles then on top of that we have the settlement layer as you would expect it to do atomic settlement of complex asset movements on the right Dimension so here we have a multi-leg example so different legs go into a different direction multiple assets involving multiple parties can all be essentially settled in one go this of course then includes intermediate settlement where you want

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    to settle across a chain of custodians so this provides you with means of coordinating potentially complex and massive movements on top of that leveraging the settlement layer sits a life cycle layer so that's really around evolving instruments during their lifetime an instrument can have let's say intrinsic or contractual cash bills like a bond so a coupon payment would be one type of event that needs to be processed but there are also instruments that deal with external events like for example

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    stock stock would have dividend payment and that dividend payment is not contractually agreed in the beginning that's just announced in a discretionary way by the issuer so we'll see in a minute how that how that works and then the I and then the idea is that the customer use case is laid on top of all of these layers and you can see here that basically if you're able to leverage any of this by using the

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    library it will get you a good way along the delivery of the application so I'll go through each layer on a high level and the first layer is the asset layer the very core of it is the concept of holding which is really just a record of ownership and that holding reference is an instrument as I said the economical terms and conditions of what I'm holding and what are the rights and entitlements associated with that asset now an account is an artificial concept

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    but what it really boils down to is in the context of this library is that the account serves as a proof of relationship between a custodian where the account is held and the asset owner because we're mainly dealing with exclusively regulated Financial Services world you wouldn't really want a token or a holding to be transferable to any party in the world because usually a custodian needs to actually first vet that party to see if this party is on a

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    sanctions list or not there needs to be a relationship between the account and the custodian so these are represented as interfaces in the library to expose certain actions that we can do with them for example fungible Behavior would provide you with ways to split and merge different Holdings the transferable property allows you to transfer beholding and then the lockable property provides a

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    way to lock an asset to a third party so that is useful if you pledge an asset for guaranteed settlement or you want to lock lock the asset to be used as collateral moving one level up the instrument layer this is where it gets interesting what we use at the heart of modern financial instruments is the framework called contingent claims which describes a financial contract by its cash flow

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    properties and this is represented in the tree structure which carries the semantic behavior of the financial contracts we actually describe we describe it using a set of primitive nodes when certain things are happening on this instrument and we have different combinators here available so if you look at one of these subtrees this is essentially just a payment happening so say when we're on that date we'll pay 16 US dollars

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    there are other operators that introduce optionality so here for example this or node or to introduce observations so in this case we observed the closing price of the Tesla stock now there's a couple of important aspects of why we chose such a seemingly odd representation for financial instruments for one this framework is completely agnostic as to the asset class as mentioned they just described

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    the behavior of the financial instrument so whether it's actually a stock or an interest rate or an fx rate or a commodity it doesn't matter the framework treats it all the same and that way we can come up for example with different asset classes and exotic instruments the second important aspect here is that we can provide functionality that works on top of these trees that is also

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    completely agnostic to what the actual instrument is and what I mean by that is to give you the example of Life cycling if we want to process an instrument to find out what the cash flows that are due on any given date we can write a function that works on top of these trees you can feed it in any kind of tree whether that tree represents a bond or a credit default swap or an option or

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    any kind of instrument everything that fits within this tree framework is then supported by the function and that really gives us the horizontal scalability across the product landscape so that that's really important when it comes to the flexibility and the agility that you're actually not hard coded into a specific asset class the third aspect is that these trees are composable so what is actually on the

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    right hand side is a very short Bond style payoff so you have two co-payments and a Redemption payment at the end and what you see on the left is essentially a put option that is Cash settled and by combining these two through a simple operator here at the top and in this case reversing the direction of the option essentially making it a short option that's embodied in this product we create what is known as a reverse

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    convertible so it's a type of structured product that is typically structured out of these two components and you can already see that if we built a library out of let's say prohibitive instruments then these can be combined in new ways exotic ways or just to represent standard instruments that exist today I'm jumping away to the demo finance app that you can download and run locally

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    and I want to show you demo Finance in action and how we can use the this asset agnostic model to create Financial products so I've skipped through a few steps but at the instruments page which shows us all the instruments that we have say we want to create a new instrument here on the Fly we can essentially build up a contingent claims trees on the spot so here we are choosing some of the fragments choosing

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    a European exercise and we're making it a two-legged strategy and here we'll add another put option and here we are observing the Tesla stock and I'm entering the strike prices what I've done here is a put option in one strike and a call option of a strike this scenario is perfect for when you want a particular exposure but you don't have the specific product made in your portfolio but now you can create this

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    product on the Fly and now you can originate it and now it's added to the platform and I can go through any of the processes I can issue it distribute it and we don't have to write any code specific to that instrument and to show you that it's true we can show you that instrument that the platform hasn't seen before it's a brand new instrument we can run the simulations on top of this so here

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    we're looking at how the instrument behaves if Tesla is anywhere between 300 and 700 and what we get is this options payout diagram that in our scenario we could take to the customer or they could see for themselves that if the that if it's the exposure that they want then we can go through the issuer process with an asset that was created at runtime on the fly without writing any code and that really speaks to if you're building an asset on one platform then you're future proving

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    and being able to evolve that asset and build on top of that through this tree-like structure and this is just a quick look at the demo finance app and how to use the contingent claims to create various Financial products so now let's look at the other layers in the tokenization stack moving up a layer the second layer we have in the library the concept of a batch that groups a set

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    of instructions that are to be settled each instruction represents an individual asset movement as a sender or as a receiver and how much needs to be sent and the instructions are essentially the vehicle we use to collect the necessary authorization to execute that transfer so how that happens is essentially that the sending side will allocate assets to the instruction and the receiving side will approve the instructions providing the account that they want to receive the asset into and then we have a fully

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    approved transaction instructions that can now be settled essentially by anyone in the process but usually there is a designated settling party that then executes that batch and that will settle all the instructions atomically now the last layer is the life cycle layer and this is all about how instruments evolve over time so one concept that we introduce here that we version every instrument and every time an event happens on the instrument we can create a new version which means we

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    can clearly differentiate between the asset before and the asset after the event a simple example of this is a stock that is paying a dividend as you know there is it the concept of come dividend and X dividend now in the current world those are both still represented by the same Ison but we make this clear distinction because we want to be able to support essentially both versions at the same time so how will this actually work we have the instrument in its initial version

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    and we have a life cycle rule that defines how the instrument evolves and also how certain event is to be processed we then essentially call a choice on the life cycle rule providing the instrument along with a couple of other inputs like an event Market observations which might be required and also elections that asset holders might have done on this particular instrument and the output of that is a new version of the instrument

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    so in the case of so in this case this would be the X dividend version of the stock and this would be the com dividend version of the stock so we get a new version of the instrument and we get what we call the life cycle effect and this effect essentially describes the per unit payout for each unit of the stock which would indicate the dividend so the effect calls the settlement instructions and this is quite a general mechanism but it covers a wide range of different scenarios from corporate

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    actions to all sorts of asset servicing events now I want to go through a few scenarios and those are really meant to give you a picture of what to think and when to use the library so the first one is around Structured Products you have here an issuer book a risk book and the treasury represented these would typically be branches of a single large bank and you have a couple of investors so the simplified flow here is essentially the issuer sells a

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    structured note to the investor in return for cash they then hedge themselves against the risk book by essentially buying the structured product from the risk book in return for the cash that they've received from the investors and then the risk book would essentially deposit that cash into the treasury and receive an interest payment on the capital so if you look at this it's clear that

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    there are assets involved there is the structured note there is the deposit that already means that we can use the library to represent those assets there is certainly settlement involved effectively in all these three steps so the selling of the note the hedging against the risk book and the following leg against the treasury a settlement so clearly we can use the settlement layer of the library and during the life of

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    the structured product and then there is the life cycling events happening the structured note pays out a certain amount which needs to be essentially flown down to the investor and there is the regular interest payment that come from the treasury and this would be an ideal use case where you can probably use all the different aspects and different layers from the library the other case which is a bit of an

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    exotic one is brand loyalty nfts so Adidas did a while back quite a successful nft brand campaign where they sold a bunch of nfts that would then go through phases and each phase would come with some Associated entitlement that you could get and people were quite eager to get in on that action so the workflow here is the brand initially sells those nfts to the Fanatics and then those nfts evolve over time so the different phases in the scenario are essentially represented as

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    different versions of that instrument and the different versions that will come with the certain life cycle actions that are associated with it so in this case that nft can be redeemed for a pair of sneakers there is also settlement involved here and every time such an nft trades between two parties the nft May evolve into a different version and their life cycle events and rules that

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    Define how the nft evolves so these are just two scenarios where I wanted to show you how you can think about the different use cases and how the library can apply generally you can ask yourself these sets of questions so are there any assets of any kind and if yes you can use the the asset layer of this library and are there any asset movements and if yes that's another layer and do these assets evolve and that's the life cycle layer and finally

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    if they're if any of these questions that you answer no to you can come talk to us and we are always more than happy to see how we can improve and iterate upon this library and I just want to share some of the resources with everyone today so you can contact us at the website digitalasset.com contact us or visit us at Booth b29 today and we will be happy to answer any questions and finally you can always email us at

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    marketing digitalasset.com um the repository and the documentation is also linked on this slide and we have the download discussion forum for any questions and our Engineers are always on this form and they'll be happy to answer any questions that you might have and finally the reference application which you can see a um a working example that's leveraging this Library so you can really play around with it and that is all for the presentation today thank you guys so much and looking forward to meeting

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    everybody at the booth