Sommelier Finance, an on-chain investment protocol, has launched its first-ever community-governed product called Cellar. 

On a technical level, Cellar is a smart contract representing a community-governed investment strategy. It’s operated by Sommelier, an on-chain investment protocol that runs as its own application-specific blockchain on the Cosmos network.

On Thursday, Sommelier activated the first Cellar on Aave, a popular lending protocol on Ethereum. With Cellar, users can deposit funds and the protocol will automatically allocate to different DeFi platforms. 

The Cellar is programmed to automatically rotate capital across stablecoin lending pools, like USDC or DAI, whichever offers the maximum yields.

Cellars have been programmed to leverage off-chain computation. So they can take in various data feeds to dynamically adjust investment strategies based on changing market conditions. They will also leverage machine learning, a form of artificial intelligence that continuously trains itself using a stream of data to improve prediction outcomes. 

The team claims that this automation makes Sommelier an improvement over other protocols, such as Yearn Finance, that allow users to optimize yields on their crypto assets through lending and trading services.

“Vault-style portfolio managers like you find on Yearn have static algorithms, and when you visit those platforms you can see that there are many strategies that have simply stopped working because they were unable to adapt to changing conditions,” Sommelier co-founder Zaki Manian told The Block.

In October 2021, Manian, who is a former lead developer for Cosmos and Tendermint, raised $23 million for Sommelier in a Series A funding round led by Polychain Capital.

Given Sommelier is originally based on Cosmos, it relies on a cross-chain bridge called Gravity to manage the Cellar on Ethereum (in this case Aave).

The Aave Cellar is the first among future Cellars planned by the community. Besides Aave’s stablecoin strategy, the team says there will be many Cellars on various DeFi protocols, both in the Ethereum ecosystem and on other blockchains. 

As more Cellars launch on Sommelier, the protocol — with its broad array of strategies — is hoping to attract a lot of capital.

"We are targeting 500m in TVL [total value locked] in the coming year and it is quite achievable given the product pipeline we have is superior to current offerings in the market around ETH deposits, stablecoin lending which have massive amounts of liquidity across many of the platforms,” said Manian.

Sommelier's focus on decentralization

The Sommelier community will govern Cellars using its independent blockchain on the Cosmos network. 

Operating as an independent chain, Sommelier claims to be more decentralized than other on-chain investment funds in the crypto space that may have centralized operations.

Usually, on-chain investment funds rely on multi-signature contracts to execute the investment strategy. The private keys to multi-signature wallets can be controlled by a central group of developers, which may prove to be a single point of failure.

In contrast, on Sommelier, there are network validators who oversee the Cellar strategies. This eliminates the need to rely on manual actions taken by the team via a centrally-managed smart contract. In exchange for their contributions, validators are rewarded with SOMM tokens.

“Many on-chain investment platforms that allow for off-chain computation rely on multi-sigs to execute the investment strategy. In contrast, the Sommelier validator set is what executes Cellar strategies with the security guarantees of Tendermint consensus. As a result, Sommelier is more decentralized than many other on-chain investment projects,” Manian said.

Anyone will be able to propose new Cellar strategies and become “Cellar strategy providers” if the strategy is approved by Sommelier's governance. This is because it’s designed to be non-custodial, and the capital supplied is not dependent on a centralized team.

There may be risks, however, originating from a flawed strategy or algorithm. In June, a Korean firm called Uprise lost 99% of its client funds due to an automated trading strategy that failed to work amid an extremely volatile market.

In response, the Sommelier team said the project plans to avoid such situations due to checks and balances built into its decentralized setup. In the event of misbehaving strategies, the team said, Sommelier validators will remove a strategy provider’s access to the Cellar smart contract.