In the event you assume DeFi is useless, Attempt DeFi 2.0
Though the primary DeFi protocol Bancor was launched in 2017, the massive adoption wave solely began in 2020 with the onset of Defi summer season. Decentralized Liquidity Provisioning(LP) was an rising mechanism that didn’t exist in conventional monetary markets. It opened up the potential for broader and extra aggressive involvement in market making.
It’s undoubted that DeFi’s innovation opened the flood gates of capital into crypto. The summer season of 2020 minted many millionaires amidst the beginning of the covid pandemic, unfavorable political local weather, racial unrest, and so on. Regardless of this humongous run in 2020 DeFi trades are lower than 1% of the worldwide financial institution’s market cap. This exhibits there’s lots of room for the upside and lots of innovation. We might be masking the improvements that may emerge this yr in addition to discussing what went fallacious or not as anticipated.
DeFi summer season veterans typically hold forth concerning the degen yields of the DeFi summer season. There have been individuals who misplaced their baggage with DeFi as effectively. Because of not so clearly understanding mechanisms equivalent to Liquidity Mining (LM) and what it entails. And The DeFi protocols confronted the rooster and the egg drawback earlier than popping out with yield farming rewards mechanisms.
Almost all the DeFi protocols subject “reward tokens” that are their governance tokens as rewards for offering liquidity to their protocol. This permits the protocol to ‘align’ incentives however there are a number of flaws that are actually evident:
- Important promote stress from mercenary LPs
Loads of LPs who present liquidity achieve this so they’re uncovered to the excessive APYs, however as soon as the juicy rewards begin declining they dump their tokens and transfer to a different protocol.
- Misaligned objectives between the protocol and the liquidity suppliers
For the reason that inception of the protocol, mercenary LPs are solely right here for the excessive reward charges and never due to their sturdy perception within the protocol’s imaginative and prescient. The exit and worth dump trigger a panic amongst the precise long-term believers, thus additionally shifting to a shorter-term mindset and dumping the tokens out of FUD. This adverse suggestions loop finally decimates the entire protocol.
- Influence of Impermanent Loss
Because of the nature of the AMMs, if somebody is LPing and one token experiences a big rise within the worth relative to the opposite, the whole worth of the liquidity goes down.
DeFi 2.0 : ‘reliable liquidity’
Addressing the misaligned objectives and promote stress from mercenary LPs got here the arrival of Protocol owned Liquidity (POL) [first popularised by Olympus DAO]. Protocol owned Liquidity differs from Liquidity Mining packages in that liquidity is bought from customers as a substitute of rented. Within the LM mannequin, liquidity would move into the protocol to mine for rewards however as soon as the rewards dry up, so does liquidity.
With the brand new liquidity mechanism, as soon as liquidity is supplied, the supplier is instantly rewarded upfront with governance tokens and on the opposite aspect of that commerce, the liquidity is distributed and locked into the protocol. One appropriate analogy is housing possession and renting. The best state of affairs for the protocol is to personal its ‘liquidity home’ for perpetuity with no mortgage charges, slightly than renting indefinitely. This fashion the extra buying and selling quantity, the extra liquidity, and likewise the protocols personal all of the charges from the buying and selling exercise.
Whereas the Protocol Owned Liquidity seems like a aid there are nonetheless some drawbacks that must be addressed:
- Influence of Impermanent Loss
The pool tokens are nonetheless uncovered to impermanent loss, because the pool nonetheless exists though the governance tokens are actually owned by the protocol, the costs might be risky.
- The gradual depletion of the treasury
The protocol affords the tokens at a reduction, which results in arbitrage. This arbitrage is slowly depreciating the protocol treasury because of fixed debasing and defending token costs. Therefore it’s nonetheless removed from being ‘reliable’.
Staking Derivatives
One frequent pitfall in Liquidity Mining and Protocol Owned Liquidity is that PoS chains (equivalent to cosmos, Polkadot, and Eth2) have staking mechanisms for validation (equal to mining in PoW chains equivalent to BTC and ETH). Staking positions in DeFi are illiquid, as important positions of the native token are bonded into the community to generate block rewards and take part in consensus and governance. The illiquidity of staked belongings is solved by Liquid Staking or Staking Derivatives, the place staked belongings are staked in protocols that lock the staked belongings and mint a spinoff token which might now be utilized in liquidity mining swimming pools.
SuperFluid Collateral
SuperFluid Collateral = Liquidity Mining + Staking Reward
The selection of whether or not to supply liquidity or to do PoS Staking to supply safety to a community is not legitimate, Each might be dealt with by this innovation of SuperFluid Collateral (also referred to as rehypothecation in TradFi)
With mixed values locked in staking and Defi greater than $233B+, SuperFluid Collateral has huge capital that’s addressable.
Whereas there are tasks popping out on completely different chains equivalent to Osmosis and Fuse, there is a significantly attention-grabbing implementation that addresses all of the issues mentioned beforehand in LM and POL together with capital unlocking with superfluid collateral.
ENTER BANCOR 3
Fixing the capital inefficiencies and over-collateralization of DeFi and PoS staking locked capital collectively.
Bancor’s answer addresses the issue customers face when deciding native staking tokens in protocols vs. offering liquidity. Bancor 3’s single-sided pool tokens curiously allow the superfluid collateral.
- A protocol helps Bancor 3 single-sided pool tokens as native staking collateral i.e if staked these tokens might be delegated to the validator or turn out to be validator to validate the blocks. For instance bnDYDX
- Staking of Pool tokens wasn’t viable till now due to publicity to Impermanent loss. E.g if we may stake DYDX/ETH pair within the liquidity pool, the pool token could be uncovered to cost deviations and therefore making it infeasible
- Whereas utilizing Bancor’s single-sided pool tokens, the consumer bears zero impermanent loss and these tokens rise relative to the hodl worth of underlying belongings and accrual of buying and selling charges. So there can’t be surprises which makes the economics ugly. (test https://il.wtf/)
- The consumer now has no danger publicity to IL, accruing buying and selling charges of the pool – LP and in addition to the staking rewards on the protocol. Win-Win-Win for Consumer, Protocol, and Bancor.
- The protocol can even use BancorDAO to regulate ranges of buying and selling liquidity within the LP pool. (The flexibility for the BancorDAO to scale buying and selling liquidity up or down in its swimming pools is a key a part of Bancor 3, and is designed to additional meet the liquidity wants of third-party DeFi protocols.)
- This may be additional used with liquid staking protocols equivalent to Stafi or Lido and use bnETH to stake natively. This may be chained additional so the protocol economies keep wholesome.
For instance, a fictitious RNDM protocol, a DeFi protocol that permits customers to lend or borrow belongings and likewise earn random token RNDM as a reward for utilizing the protocol.
Customers deposit RNDM token (with Single-Sided Liquidity) into the Bancor’s RNDM token pool to start out incomes IL free- LP charges, and for LPing they obtain bnRNDM pool tokens. This token can be utilized for staking to safe the community, taking governance choices, and/or incomes Staking Rewards. The tokens may very well be staked on the RNDM Protocol itself or perhaps by means of third-party staking as service suppliers (contemplating they permit RNDM token staking) like stake.fish, Lido, and so on.
One other attention-grabbing and highly effective add-on in Bancor 3 is the Auto-Compounding rewards program. In most DeFi protocols that allow auto-compounding, the rewards accumulate for a time-frame and the swimming pools of rewards are then reinvested, saving up fuel charges in contrast with doing individually. Equally, in most Liquid Staking protocols, to gamify the protocol the rewards should be manually reinvested within the staking.
In Bancor rewards might be accrued in a set and overlook trend and can be utilized as liquidity from day one. How this works is straightforward: Auto-compounding system can be utilized in any occasion the place the reward token is identical because the staked token. Third-party Protocols can create rewards by offering liquidity on the bancor pool.
Once more, taking the instance of the RNDM Protocol
RNDM Protocol’s treasury (thanks to IL protection and dual-sided rewards) and Customers are utilizing Bancor’s single-sided liquidity swimming pools to earn LP charges. RNDM protocol can use Bancor’s auto compounding program to allow staking functionalities and specify the inflation (or deflation charges) and different particulars to start out producing staking rewards.
Not like many of the staking mechanisms the place the rewards are minted, right here the RNDM protocol additionally earns the buying and selling charges for LP on its pre-minted tokens and burns to provide rewards to the customers whereas utilizing the rewards price range for liquidity since inception.
That is the way it works:
- The tokens are added to the pool and corresponding consultant LP Pool tokens i.e bn(Tokens) are minted
- The Pool Tokens are staked right into a rewards contract which might be paused, terminated, or restarted and might be personalized with parameters for staking:
Provide/Tokens to be distributed
Kind of emissions profile: linear or exponential decay ( try Polkadot’s staking mechanism to get an concept)
Emission fee
- Pool Tokens (and never the native tokens) might be burned to distribute staking rewards or “rebalance” the possession of native tokens to customers
- Bancor’s Vortex might be triggered for the Pool tokens burning. Because the pool tokens are burned, the token worth they signify is distributed to the remaining pool tokens holders as a rebalancing of native tokens within the swimming pools.
- All that is utterly automated and no interactions are required by the customers holding the pool tokens.
This auto compounding instrument can be utilized in artistic methods equivalent to advertising and marketing campaigns utilizing pausing or restarting with larger staking APYs, designing Stakedrops, and so forth. Moreover notice right here the tokens are utterly liquid with none further transactions (and likewise fuel) for staking/unstaking, including LP rewards to stake or staking rewards to LP.
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