TLDR:

• Our V3 only allowed for minting and redemption of vault shares, and those ERC-20 tokens were not transferable to third parties.
• On our V4 Sulu, vault managers can enable an alternative option for depositors who want to exit by transferring their shares instead of going through the classic redemption process.
• By default shares are now transferable, but you can disable the feature if you prefer to prevent all transfers. Or you can opt for a middle ground and reserve the right to whitelist all secondary buyers before any transfer takes place.
• This new feature allows for the best of both worlds: the possibility of opening up a flexible secondary market without losing control over who owns what. Especially useful if you need to implement KYC checks and stay 100% compliant.

First off: how are shares created and burned in the first place?

In case you are not 100% aware of how Enzyme creates and destroys shares (i.e. minting and burning) here’s a convenient visual.

Every time a new depositor deposits funds into a vault, new shares are minted by the protocol. The same happens on the way out as the same depositor can request a withdrawal, which triggers the burning of his/her shares and the fund redemption.

This process used to be the only option until our V3. Since V4 we have created another option for depositors who want to liquidate their positions. Now shares can also be transferred to anyone outside the vault.

Managers can play an active role in determining whether shares are transferred freely or if other conditions should apply.

Let’s see how managers can control the process

Let’s analyse this new feature step by step, considering best practices and implications.

• Vault managers can tweak their settings and enforce a whitelisting policy on both primary depositors (person A) and secondary buyers (person B).
• The whitelisting of both primary depositors and secondary ones is best suited for vaults (and vault managers) who want to keep their vault private, need to comply with KYC/AML regulations or simply want to keep a firm grasp on who their shareholders are at all times.
• The transferability policy acts in concert with but not as a replacement for the depositor whitelisting.

Best practice: if you restrict the secondary market of vault shares that are already in circulation, you should also restrict who can deposit into your vault in the first place. So we recommend either using both policies or not using them at all.

• By default shares are transferable so if you do not enforce any restrictions, your depositors will be able to transfer them freely peer to peer or to any third party.

Default settings: restriction disabled = shares are freely transferable P2P

• Do you want to avoid P2P buying & selling of your vault’s shares? Then you need to restrict the transferability. The most basic restriction is to enforce a whitelist on who can purchase existing shares.

Restriction enabled = shares can only be purchased by authorised buyers

• Do you want to be even more restrictive and prevent any type of share transfers? Then you need to disallow all transfers. Keep in mind that you can always edit this policy and change the setting later on.

Disallow all transfers: nobody can buy or sell existing shares

The override switch: use with caution

Regardless of the settings that you have used in the creation (or reconfiguration) of the vault, there is another setting that overrides all rules that makes shares permanently transferable. You can find this under Settings > Policies > Enable Freely Transferable Shares.

A word of warning: setting shares as freely transferable enforces a permanent guarantee on shares transferability. This transferability guarantee might be required by liquidity pools and other smart contracts that hold/treat shares as generic ERC20 tokens. So once you enable this setting, you cannot disable it any longer, and will persist through upgrades and reconfigurations.

In the image below you can see a convenient screenshot of the options for vault managers, which hopefully helps you make a confident decision on how you want your vault’s shares to be traded among depositors.

How to transfer shares in practice

The transfer can happen Peer-to-Peer by simply sending vault tokens from one wallet to another and settling the payment among parties. That obviously requires a lot of trust among buyer and seller. Once the tokens are received in the second wallet, the latter becomes the new shareholder.

In the future we might go one step further and develop a marketplace for secondary shares which lets users buy and sell vault shares and settle the transaction on chain without leaving the Enzyme app. However, we currently have no timeline on our roadmap for this extra feature.

Important implications

Having the ability to transfer shares has some important implications:

• Some depositors will be able to exit their positions without going through the classic redemption process. If you charge an exit fee, they would effectively bypass it by transferring shares and settling the payment off the vault.
• Receiving a token may be operationally simpler than going through the whole approve, deposit & mint process, which could increase the level of first adoption from less crypto native investors. Therefore, enabling a secondary market may well have a positive net effect on AUM in the long term.
• The effective combination of depositor + transfer whitelisting gives vault managers the best of both worlds: the flexibility and liquidity of a secondary market, together with the control and transparency required by those who want (or need) to stay 100% compliant.

Get started or get an upgrade!

It’s time to connect your wallet and create your own vault if you haven’t done so yet. And if you already have a vault, it’s time to upgrade to V4 Sulu to enjoy a fully revamped vault management experience!

If you’re still on the fence or have additional questions, do not hesitate to get in touch with us through our Telegram or Discord channels.

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