This is How DeFi is Innovating The World of Finance
It’s taking the same path as the internet as a publishing platform. It began by recreating objects from the analog world. Then it came up with new ideas. Then, on top of the new things, more things were built. Finally, the analog world was overrun by the internet. In DeFi, we’ve reached phase 3: new things on top of new things. “DeFi right now has a snake-eating-its-own-tail quality to it,” said Tom Schmidt, a general partner at Dragonfly Capital, in a phone interview.
Drop-shippers are an excellent illustration of how the pre-blockchain internet did this in a variety of ways. There were first internet stores that functioned similarly to brick-and-mortar stores. Then there were stores like Etsy, which integrated shops in a mall-like setting. Finally, there were drop-shippers, which were websites that never touched inventory, instead advising wholesalers, such as Alibaba, where to ship sales generated by the drop-shipping website.
DeFi is becoming more reactive as well. Entrepreneurs are developing products that could only exist in DeFi, products that take advantage of the platform’s unique characteristics, such as on-chain transparency and the release of useful new tokens to encourage loyalty. Last year, as the launch of Compound’s COMP token, sparked a craze for earning extra tokens on top of fees for lending assets to various protocols (what’s come to be known as liquidity mining and yield farming, respectively), the excitement became a little out of hand as food memes made bizarre crypto projects all the rage.
That period was dubbed “Weird DeFi.” Some of it was fleeting, like Tendies and Wifey, which are no longer in the debate; others, like SushiSwap, proved to be really essential. DeFi, on the other hand, didn’t stop at food memes. It has continued to expand and evolve, and it appears that we have reached a new phase of Weird DeFi, one that is more finance than a meme. It’s strange because it’s novel, and it could only exist on blockchains where many teams’ work can be mixed and matched without the authorization of a gatekeeper.
It’s also strange since some of it is difficult to comprehend. “To obtain consumers and attract investors, you need to offer something genuinely unique in the market,” Schmidt added. “For some of these basic necessities, the need has been met.” The following are four projects that represent this new, self-referential, but a still innovative era of DeFi.
Loan that Pays Off – Alchemix
Let’s start with the most difficult of these initiatives to comprehend.
Alchemix allows users to stake collateral (at launch, only the dollar-pegged stablecoin DAI) and then borrow against that collateral in the form of a synthetic equivalent (alUSD). This is similar to MakerDAO, which allows users to borrow a part of a deposit in ETH, WBTC, USDC, or other assets in exchange for DAI. However, Alchemix differs from its predecessors in that it administers borrowers’ loans. They are not required to make any payments. They don’t have to keep an eye on the market. Alchemix will invest their entire deposit (most likely on Yearn Finance) and use the interest earned to repay the loan (while pocketing a small portion of the yield).
It essentially gives you a head start on future earnings. “You have a fixed income with Alchemix, but you don’t know when you’ll be able to pull your assets out,” Schmidt explained. If the user just deposited the money into Yearn, the user’s yield would be variable. To put it another way, Alchemix users are exchanging return certainty for liquidity.
“Alchemix appears to be divisive. Schmidt stated, “I don’t really get the appeal.”
Starting with DAI makes sense since it’s simple and has low volatility, but yield-generating vaults that accept other types of collateral are on the way, according to Beylin. In reality, the strategy begins to make sense as a means for investors who are long a certain asset to stay long while continuing trading. Alchemix has just released an ETH vault for that purpose.
However, it had a difficult start.
Nonetheless, the design satisfies the same desire as MakerDAO without the risk of slicing. (If a borrower’s collateral’s value falls too low, MakerDAO sells it and the borrower faces a severe liquidation penalty, forcing them to keep an eye on their positions.) As a result, one of MakerDAO’s main use cases is allowing users to make new bets without having to sell assets they already own.
Because many users on Alchemix are long ETH, they are likely to prefer the concept of borrowing synthetic ETH to make additional trades while hoping that the value of their ETH continues to rise. To Schmidt’s point, it’s a little tougher to understand why someone would want to borrow against a stablecoin in order to earn additional stablecoin, but one motivation could simply be to bet on Alchemix’s future.
The protocol provides holders with a number of liquidity mining options in exchange for the ALCX governance token, which the authors predict will begin collecting fees from Alchemix users.
Better Liquidity Mining – CRV
On Curve, Convex allows its users to earn extra CRV tokens. That is all there is to it. Convex was only discovered in April. It was able to secure almost $1 billion in less than two weeks. Users can also earn the Convex token, CVX, in addition to more CRV, but the main goal is to increase CRV payouts for liquidity providers.
“Curves are quite perplexing. It’s one of the most valuable things out there, but all the benefits you may earn can be a little confusing,” Defi Dad, community lead at Zapper.fi, an online dashboard for DeFi investment, explained. Schmidt concurred, claiming that Convex is a feature Curve should have constructed on its own.
Curve’s CRV is a popular cryptocurrency among liquidity miners, owing to its nearly 400 percent increase since the start of 2021. It’s difficult to figure out how to best provide liquidity on Curve. It’s simple with Convex. On Convex, users can pool resources and the protocol will figure out the best method to distribute them so that everyone receives the best CRV payouts.
Yearn Finance, a yield-focused robo-advisor, has always been long Curve. Curve, which is an automated market maker for stablecoins, has always relied on it for liquidity. Yearn and Convex have a rivalry going on, but the truth is that Yearn uses Convex a lot.
And Yearn may have influenced Convex to some extent. The Backscratcher is a vault on Yearn where users can deposit CRV that will never be repaid. Users will, however, receive a token in exchange for their deposit, which will earn them money. Yearn then uses its Backscratcher assets to increase overall returns, creating a moat that gives Yearn a competitive advantage beyond its methods.
Convex’s discovery of a way to make earning CRV work better illustrates a greater truth about DeFi for DeFi Dad. “There is a lot of support in this group when you join and approach it in a collaborative manner and exhibit respect for what currently exists,” he said.
Credit Scores for Degens – ARCx
DeFi project founders have taken to liquidity mining in part because they seek to build communities around their projects. There are network effects in all of these things. The greater the number of people who use something, the better it is for everyone. However, even a smart design can take a long time to attract enough people, so an incentive can be beneficial. However, after the idea of rewarding early adopters with tokens gained traction, some of the largest whales, or significant holders, began to take advantage. They’d dump liquidity, harvest tokens for as long as they were valuable, and then depart.
Schmidt described them as mercenaries. “They’ll toss it in the trash and go on.” Users’ experience and the capacity to build a sticky, or loyal, community were significantly harmed as a result of this. What if platforms had a method to reward true protocol users with better rewards? What if there was an easy way to verify that a wallet had performed some transactions, made some deposits, and perhaps even held (or staked) an airdropped token for a while?
All of this is public information that can be viewed on-chain, but it would obviously take a lot of extra software for each new yield farm to perform the necessary engineering for each new user. ARCx is currently constructing that infrastructure. It’s doing it for its own produce farms, but ARCx, according to Schmidt, an investor in the initiative, wants to make it a platform.
“ARCx is determining the rates you should get on their system based on your previous on-chain activity,” Schmidt added. Consider it similar to a credit score. If a bank understands your track record of paying obligations, it may be able to offer you a cheaper rate than if the collateral pledged was the only criterion.
A unit Account of DeFi – Reflexer
“It’s a pseudo-Sybil system,” Schmidt explained, because whales could manipulate it, but it would take a lot of effort and money. Reflexer’s founder, Stefan Ionescu, soon confesses that the Ethereum world was not ready for his concept.
“I believe we introduced something extraordinarily sophisticated, difficult for the community to comprehend, and much ahead of its time,” Ionescu added. “I still wanted to build it because I believed it was the best method to create a reliable asset.”
Reflexer’s central premise is that DeFi’s unit of account (the method we figure out how much something is worth) should be native to DeFi. It should, on some level, reflect the price of ETH rather than, say, the relative geopolitical standing of the United States in the globe. Reflexer, like MakerDAO, is a lender. It creates a synthetic asset out of ETH, but rather than tracking the price of the US dollar, RAI tries to track the price of ETH, albeit slowly. Consider the following scenario: Bitcoiners like to display a long graph of the BTC price overlaid with a smooth line that follows the average bitcoin price over time. Even if BTC can bounce all over the place every few hours, that line is constantly climbing.
The same is true for ETH. What if there was an ETH derivative that followed that general trend? “Of all the projects, this is the one where I thought to myself, ‘This is new thinking,’” DeFi Dad added.
Although such praise is pleasant, it has proven difficult to make Reflexer stick. Ionescu admits that his project’s community is modest, consisting mostly of those who are deeply interested in economic theory. “Right now, I’d say the group is exclusively for weirdos or those who truly understand economic theory,” Ionescu added. “The vast majority of individuals are still interested in dollar stablecoins,” says the author.
The team may potentially change the governance token’s mechanism to provide a more equitable backstop insurance system on the network. Ionescu added that they had lately made significant headway in making RAI’s price less variable.
Reflexer’s other goal is to make a statement against the excess of governance in DeFi initiatives, in addition to providing users with a crypto-native unit of account. Ionescu stated, “We are still committed to eliminating governance from RAI by August of next year.”
However, gaining traction has proven difficult. Although DeFi’s degens are all about making money with ETH, they still think in dollars. Ionescu claims that getting people to understand the Reflexer viewpoint has impeded his team’s capacity to establish community and other projects. The team is now aiming to make some significant changes to the Reflexer protocol, which Ionescu believes will help turn things around. For example, for now, all holders of Reflexer’s governance token are basically the company’s backstop insurer.
Ionescu intends to provide a paradigm in which only those who choose to participate in staking give insurance and be compensated with inflationary revenue. This points to Weird DeFi’s greater psychological appeal. It’s wonderful to eventually figure out how to use these platforms successfully and come up with creative solutions. Teams can increase stickiness to some extent by allowing users to actively manage positions, even if taking the extra step isn’t necessarily necessary in practice.
“This whole thing has a little bit of a retail mentality to it. People enjoy doing things with their tokens, according to Schmidt.