Today, we’re going to dive into a couple very interesting options protocols that are pushing the cutting-edge innovation of DeFi forward.

This article is probably going to be long enough as it is, so I’m not going to include a detailed background of what options are. But if you’re unfamiliar with options, I’d recommend looking at the “Options Trading 101” guide produced by Panoptic, which you can find here.

Now that that’s out of the way, you should know that the two projects I’m summarizing today take traditional options and make them almost unidentifiable from traditional options – so, those resources probably won’t help you much today!

That’s because these projects are in the business of perpetual options. Basically, they create options using DeFi-native liquidity. And to do that, you have to significantly alter the characteristics of what we know as options. So, without further ado, we’ll have a look into Panoptic first and then dive into Predy Finance before we wrap things up.

Option Perps #1: Panoptic

Panoptic aims to solve the problem of liquidity fragmentation, specifically pooling liquidity in order to create a sustainable on-chain options market with what they call XPOs: expirationless perpetual options.

XPOs vs Perpetual Futures

With XPOs, we have the same benefits that perpetual futures brought to traders. Perpetual derivatives in general are great because they eliminate the need to roll positions before they expire. This removes the bunching of trades that happen before each expiration date and can manufacture unnecessary volatility, which improves liquidity conditions in general.

But there’s also a key difference between perpetual futures and perpetual options: perpetual futures allow traders to go long and short. But XPOs contain the same advantage that traditional options bring to TradFi: you can structure a trade to carry out a wide variety of different payout profiles. You can even create synthetic perp futures positions with options; for example, you can combine a long call and short put position to emulate a long futures position:

Another difference is that futures in general are way more straightforward to use than options. But as we’ll see, Panoptic is changing the way we look at options (literally) – instead of having complex option chains, users will choose a strategy based off a simple layout of its payoff profile, like this:

XPOs vs Traditional Options

Now, let’s look at some of the key differences between XPOs and traditional options. Since “perpetual” is literally in the name, you’ve probably already figured out that these options don’t expire. This eliminates a key trait of traditional options: the expiry date. The implication of this is that options can now be held for an indefinite amount of time. That also puts another key characteristic of options into question: exercising.

In TradFi, you either have American or European options (in most cases). Both of these types of options can be exercised at the expiration date (and American options can be exercised at any point beforehand as well). So, if you don’t have an expiration date, what happens to exercising?

On Panoptic, the action of exercising your position is unorthodox, but effective. To understand how this works, it’s helpful to keep the following in mind: 

In order to buy options on Panoptic, someone first needs to sell them. So in theory, a buyer could hold onto their long option forever, but that would mean the seller is forced to do so as well. 

However, that’s not exactly fair – so the seller can force the buyer to “exercise,” or close out, their position. Additionally, the buyer can “exercise” their position at any point in time (equivalent to an American option in traditional option markets).

As we’ll see later, the seller pays the buyer in return for forcing them to exercise their options.

How XPOs Work

Since Panoptic’s goal is to de-fragment liquidity to create a viable market for options, it would make sense to use liquidity that’s already concentrated in a certain area. And since we’re talking about on-chain creation and exchange of options, common sense would point us in the direction of DEXs, the biggest of which is Uniswap with over $3B in TVL. More specifically, Panoptic uses UniV3 (which still has a ton of liquidity).

However, Panoptic isn’t using a DEX the way you’d expect. Instead of using the AMM or CLOB model or some combination of the two to support option trading, they’re going a completely different route: using Uniswap V3 LP positions to facilitate option trading.

Before we get into the details of that, there are many reasons that building on top of UniV3 is a smart move. Here are a few:

First, UniV3 pricing is very efficient because of its deep liquidity – that means options on Panoptic will inherit minimal slippage and efficient pricing.

Second, that efficient pricing means that things like liquidations and forced exercise aren’t easily manipulated.

Third, UniV3 earns a ton of fees, which flow through to Panoptic users.

Fourth, UniV3 is notoriously safe, and since a portion of Panoptic’s liquidity is deposited into UniV3, it inherits that feature as well.

How UniV3 Positions are Option-Like

Yes, you read that right – it turns out that moving liquidity to and from UniV3 creates similar payoff profiles to options. But how is that even possible, you ask?

If you’re familiar with options, you’ll know that buying a put is essentially betting on the price of an asset to go down. So, selling a put means you’re betting that price will stay flat or go up. Let’s use the ETH/USDC pair as an example.

When you deposit the ETH/USDC pair into UniV3, the auto-rebalancing gives you more USDC when ETH goes up, and more ETH when USDC goes up (relatively) – in other words, you buy the dip in the asset that’s relatively dipping.

Therefore, depositing ETH/USDC is like selling a USDC-denominated put on ETH – if ETH stays flat or goes up, you profit in USDC. On Panoptic, to sell a put, you deposit USDC and get the payoff of the ETH/USDC pair. This process is well-illustrated here:

Just as buying a call is betting on the underlying asset to go up, selling a call is betting on the underlying asset staying flat or going down.

So, the reverse is true for selling calls: depositing ETH/USDC is like selling an ETH-denominated call on USDC. You’re really betting that the relative value of USDC stays flat or goes down, in which case your ETH-denominated balance will grow.

If you want to dive deeper into this concept, a really really smart guy by the name of Guillaume Lambert explains it in great detail here.

Providing Liquidity on Panoptic

You can think of the liquidity on Panoptic as being a layer on top of UniV3. This liquidity is used to facilitate trading on Panoptic, and deposits/withdraws from UniV3 based on users’ orders.

To provide liquidity on Panoptic, you’d simply deposit a token pair at any ratio (it doesn’t need to be 50/50 like on UniV3). This liquidity is then moved to and from UniV3 based on buy and sell orders The incentive of doing this, of course, is earning fees:

Panoptic LPers (PLPs) receive fees in the form of commission on options traded. The amount of this fee hasn’t been set in stone, but the team is currently testing 0.1% commissions on the total notional value of options traded as the project is in beta. However, that may change going forward.  

Buying and Selling on Panoptic: How it Works

We’ll go over selling first, since we now (hopefully) understand how UniV3 LP positions represent short option positions. When someone enters a short position on Panoptic, they essentially borrow liquidity from the protocol, which then deposits it into UniV3.

If we take this notion a step further, this is where the strike price enters into the equation.

Going back to the ETH/USDC example, let’s use the following parameters:

·       ETH is currently trading at 1800 USDC.

·       Sell ETH/USDC put at 1500 strike price at 5% width.

In this case, the following steps would occur:

User deposits 1500 USDC.

Panoptic deposits LP into UniV3 with a range of 1428-1575 (+/- 5%).

Now, we get into the “moneyness” of the option. For traditional put options, the option is “in the money (ITM)” when its strike price is above the underlying asset’s price. It’s “at the money (ATM)” when its strike price is equal or very close to the price of the underlying. And it’s “out of the money (OTM)” when its strike price is below the underlying asset’s price.

For these options, it’s a little different. In this case, we’re dealing with an OTM put option, as 1500 (strike) < 1800 (underlying). It’s also important to note that ATM in this case refers to the range at which liquidity is provided, which is between 1428-1575. Here’s how the position looks when it’s ITM, ATM, and OTM:

When the price of ETH is above 1575 (OTM), the position is 100% in USDC (buying the dip in USDC – good for put seller).

When the price of ETH is between 1428 and 1575 (ATM), the position is a combination of ETH and USDC, as well as earning fees as it’s in range.

When the price of ETH is below 1428 (ITM), the position is 100% in ETH (buying the dip in ETH – bad for put seller).

When the underlying asset is in range, the position earns UniV3 trading fees, which then get passed to the seller on Panoptic.

Now, let’s move onto the role of the buyer on Panoptic. First, the way that Panoptic works, there can’t be a buyer without a seller, which alludes to the absolute importance of market makers and consistent liquidity flowing into this protocol. But anyway, let’s look at the previous example from the perspective of the buyer.

You want to buy a put with 5% range on ETH/USDC with a strike price of 1500, and the price of ETH is currently 1800 (making this an OTM put option). The Panoptic protocol then makes sure there’s a seller to match your order with, and if there is, it removes the respective amount of the ETH/USDC UniV3 LP position.

In this case, you’d borrow the money taken out of the pool (1500 USDC), which was taken out of the 1428-1575 range we mentioned in our earlier example. Now, since you’re effectively short USDC, you benefit when the price of ETH/USDC goes down. As we saw earlier, when the price goes below 1428, the option is ITM, and the position is 100% in ETH – this is good for the long put position.

Buying and Selling on Panoptic: Fees and Leverage

The fees earned by options sellers on Panoptic are similar to the idea of a premium paid to the seller of a traditional option. However, there’s one big difference: traditional options pay the premium all upfront, while XPOs pay the premium over time. This brings us to Panoptic’s “streamium” payment method.

Now, just as depositing liquidity into Uniswap represents a sell order, withdrawing liquidity represents a buy order. There’s one problem: if the seller’s liquidity was just withdrawn, what happens to the fees that would’ve been earned by the option seller? Simple: the buyer pays the fees that would’ve been earned by the LP position to the seller.

This is where the streamium comes into play. The seller earns gradual income, either from Uniswap LP fees, or from their counterparty (option buyer).

Option buyers can also earn forced exercise fees from sellers. This is simply compensation for having their position closed against their will. The farther away the underlying asset’s price from the strike price, the cheaper the fee.

Now, let’s talk about “pool utilization” and how it affects leverage available to users. The pool utilization just refers to how much liquidity on Panoptic is currently sitting in UniV3.

If the PU is high, it means there are a lot of option sellers. If it goes above 90%, the protocol disincentivizes further selling by disabling leverage for new sellers.

If the PU is low, it means trading activity is probably low and LPers earn fewer fees in aggregate as there’s less liquidity deposited in UniV3. If it goes below 10%, and the collateralization ratio is 20% (meaning new sellers can use up to 5x leverage).

So, the activity of the protocol will incentivize balance between buyers and sellers by adjusting max leverage of 1x-5x for sellers. Option buyers, on the other hand, will have anywhere from 5x-10x leverage capability.

Future of Panoptic

In the immediate future, we can look forward to the long-awaited gated launch of Panoptic. To give you an idea of how anticipated this is, there were more than 4,000 users who signed up in as of July 28^th, under a month after the whitelisting process started. Talk about a strong and eager community!

All we’re waiting for at this point is for OpenZeppelin’s audit of Panoptic to be complete. This should happen by the end of the month.

At first, only ~32 participants will be chosen for the first epoch’s (1 epoch = 1-3 weeks) trading competition, but this will quickly expand in all future epochs. Eventually, the goal is to allow all 4,000+ applicants to participate.

After that, we can expect the official mainnet launch sometime this fall, potentially in Q4. Here’s a broad view of the future, where you can see that the Panoptic team has quite a lot of going on!

We can certainly expect lots of expansion in Panoptic’s future. First, the team has already stated that they want to make their way onto L2 chains at some point (Arbitrum, per chance?).

But it doesn’t stop there, it’s only a matter of time before they also expand onto different DEXs; the protocol is actually able to integrate into any CLMM DEX, giving them many avenues for expansion via chain as well as liquidity source.

Overall, this is an extremely interesting (as well as complex) use case for DeFi liquidity, and I’m excited to see what sort of traction Panoptic is able to generate once it goes live!

Option Perps #2: Predy Finance

Next up, we have Predy Finance, which has somehow flown under the radar despite providing a similar service to what Panoptic is aiming to achieve. Since we already went over how UniV3 LP positions are similar to options in detail in the Panoptic section, this overview will skip explaining it once again as it builds on a similar concept. However, there’s still much to go over, and we’ll see how Predy has evolved over the past year amid 3 new protocol upgrades, as well as what they have in store for the future.

Predy V3

V3 was a massive breakthrough for Predy, bringing perpetual options onto the DeFi scene. By showing the relationship between UniV3 LP positions and traditional options, this product truly was a catalyst for the entire space.

As we discussed earlier, UniV3 LP positions have similar payoff profiles as short puts (as well as covered calls). The problem is: gamma (convexity) is way more expensive when bought through UniV3 LP positions than it is for traditional options. So, in Predy v3, users can use leverage by borrowing ETH using USDC as collateral. This article shows how Predy V3 actually allows users to get 7x the gamma using their leverage feature as they would by simply LPing on UniV3.

Predy V3 gave users the ability to go long and short puts and calls, as well as different combined strategies like strangles, which we’ll describe in more detail shortly. V3 achieved this in a similar way as Panoptic is looking to achieve on-chain options trading via concentrated liquidity LP positions, with a stronger focus on providing cheaper gamma via leverage. But as we’ll see, later iterations of the project make this function even more efficient. 

Next came v3.2, which introduced Squart – a big step in revolutionizing DeFi options.

V3.2 and the Dawn of Squart

Squart is a novel derivative that basically represents a less volatile version of the underlying asset. As we’ll see, there are some huge benefits that go along with this feature.

You may be familiar with Opyn’s Squeeth product. Squeeth is basically “ETH squared,” and it tracks a squared version of ETH. 

Squart is a similar concept, except it tracks the square root of the underlying instead of the squared version. So, say ETH doubles in price from $1,000 to $2,000. Squart would go from $31.62 to $44.72, resulting in a less volatile return of 41.4%. So, one clear benefit is that it reduces volatility for an asset.

Why Squart?

I know, I know, the degens out there are wondering, “why would anyone want a lower return??” Don’t worry, we’ll get to the leverage aspect of this soon.

But first, arguably the most important feature of Squart is the fact that it makes the market for perpetual options way more capital efficient.

In the pre-Squart era, liquidity in Predy’s perpetual options market was fragmented by strike price. As you can see here, the liquidity is spread out across multiple strike prices in the bottom right corner:

As we saw in the Panoptic overview, in order for there to be an option buyer in this model, someone first has to sell that option. But why would anyone want to sell an option with an out-of-range strike price? The simple answer is: they wouldn’t, because out-of-range LP positions don’t earn trading fees. This takes a toll on liquidity and concentrates it into a very narrow band of strike prices.

However, Squart’s key benefit is that it condenses all of this liquidity into one position (Squart), as you can see here:

Instead of having a range of available strike prices, Squart provides the synthetic form of a constantly at-the-money option, which means the strike price is very close to the spot price of ETH. 

This maintains the payoff profile of options, while actually using perpetual Squart futures as the core asset that users are exposed to. By combining liquidity all into one place, this design makes for a much more efficient protocol. 

Strangles using Squart

Now, let’s take a look at how you can trade volatility with Squart by going long or short strangle spreads.

First, what on earth is a strangle? Basically, it’s an option position consisting of a put trade and a call trade. More importantly, the put and call must both be at-the-money. Remember how Squart is basically a synthetic at-the-money option? It’s a perfect product to mimic the return profile of long and short strangles. Let’s see how these work:

A long strangle is going long an at-the-money put and an at-the-money call. This is a relatively expensive option trade, where you’re betting that volatility will increase on the underlying asset.

For example, say ETH is trading at $1800. A long strangle would consist of an $1800-strike call and an $1800-strike put (both long). Say these both cost $300, making your total cost $600. One of these positions is going to end up being worthless, so in order to make a profit, ETH must make a relatively big move in one direction. Thus, you’re betting on future volatility. 

A short strangle consists of a short call option and a short put option, both at-the-money. The intent here is the exact opposite of a long strangle; instead of betting on future volatility, you’re betting that the price will stay range bound in the near future. 

Now, what I’ve described so far represents a “neutral” strangle position, meaning that the strike price for both options is perfectly at-the-money. However, not all strangles are done this way. As such, Predy gives users the choice to adjust their positions based on their future expectations of the underlying asset’s price as well as its volatility. As you can see here, in addition to choosing a long or short strangle, you can also specify whether you want the trade to favor the asset going up or down, or remaining stable:

For both long and short strangles, if you select down, the trade will be adjusted so that your max profit occurs if the underlying asset (ETH/USDC for V3.2) moves down 2.5%. If you select up, you’ll max out your profit if ETH goes up 2.5%. This is a valuable feature, and shows that Squart can be dynamic as well while still avoiding strike prices. 

So far, we’ve described strangles from the perspective of volatility. However, you can also look at them from the angle of going long or short gamma:

Long strangle = long gamma

Short strangle = short gamma

Now, remember how Predy V3 solved the gamma expense problem of using UniV3 LP positions as options? Squart’s ability to mimic strangle trades takes full advantage of this feature as well. Not only does the user have access to a novel, synthetic at-the-money option, they also have access to cheap gamma and the ability to go long/short volatility. This is equally useful for speculators and hedgers alike.

Predy’s Delta Neutral Strategy 

Speaking of hedgers, Predy has a separate feature in their “Strategy” tab where you can add automatic delta neutrality to a short strangle position. This is basically the same short strangle position using Squart, but it adds an automatic hedge as well.

Without getting into too much detail, the delta of a stable (perfectly at-the-money) short strangle is basically neutral when you initiate the position. If you choose to open a short strangle with a stable market view, you’ll need to adjust your position or a separate hedge to keep your position delta-neutral. Otherwise, as the price of ETH drifts, your delta will become lopsided in either direction, depending on the movement of ETH. 

Predy V3.2’s Strategy improves on the strangle positions listed above because it keeps the position hedged as the price of ETH moves. This rebalances the delta hedge when one of two factors have occurred: 48 hours have passed, or ETH has moved 7.5%. 

This feature has been a huge success thus far for Predy, generating some very nice fees. As you can see here, the APYs are amazing, with ETH/USDC nearing 40%, ARB/USDC at 57%, and even the stable LUSD/USDC pool almost at double digits:

Now, let’s see how V5 has improved on these features, as well as added some new ones.

Predy V5

Moving to the present, we’re now at Predy V5, which introduces delta-neutral strangle positions using, you guessed it, Squart. 

Just like in V3.2, Squart is used as a perpetual futures position that represents a synthetic at-the-money option. However, there are some important upgrades in V5 that bring Predy to the next level.

More Trading Pairs

First, there are more trading pairs available. In addition to ETH/USDC, Predy has added ARB/USDC, GYEN/USDC, and LUSD/USDC. All of these pairs have the same options as V3.2 – users can long or short strangles on any of them, and customize the trade based on their market view. ARB/USDC and LUSD/USDC have also been added to the list of trading pairs available for Predy’s delta-hedge strategy.

The LUSD/USDC pair is particularly interesting to me as it opens up a new type of trading; if you open a long strangle, you’re essentially betting on one of the two stables losing its peg, which can be seen as an insurance product. This shows the versatility of using UniV3 pairs as options – you can tie it into a wide variety of strategies that fit all sorts of market views. 

In addition to these new pairs, V5 allows users to adjust their positions while they’re open. This is a nice upgrade from V3.2, where the only action available for open positions was to close them. 

We’ll likely see many more trading pairs added to Predy down the road, as they can basically add any token pair on UniV3. But simply expanding beyond ETH/USDC in V5 is a big step forward.

Lending Markets

Personally, my favorite addition to Predy V5 is their new lending market. This functions very similarly to Aave, and users can lend/borrow ETH and USDC as shown below:

The creation of this lending market actually helps Predy to run much more efficiently and enable users to use leverage when creating their short strangle trades. As you can see below, the USDC and ETH lenders act as a source of liquidity for strangle traders:

When the assets deposited into the lending pools are used to open short strangle positions, those assets are then deposited into UniV3. The more users deposit into the lending pools, the more short strangles can be opened, which enables more long strangles to be opened as well. Soon, I would expect to see ARB, GYEN, and LUSD available to lend as well in order to facilitate liquidity for their respective short strangle positions.

Overall, both of these projects are contributing something useful to DeFi by building on top of currently-existing products. This is what I personally love to see, and it’s really just the beginning. There are many other projects out there building all sorts of other interesting option-based products, and I’ll be covering them as well in upcoming articles. I hope you enjoyed this overview of Panoptic and Predy!

In TradFi, to open up an account with a hedge fund, you need a ton of money, connections, and you’re usually subject to a long lockup period where you can’t get it back.

Oh, and you get shafted by the giant fees.

It’s beyond obvious to me that direct access to actively managed trading strategies with little to no lockup periods are going to find gigantic product-market fit in DeFi – it’s only a matter of time.

What I’m saying is: SocialFi is inevitable.

Right now, we’re still in the first iteration of SocialFi, and it’s very simple: users go to an app, deposit their crypto into a vault, and the vault manager trades those assets on the user’s behalf. However, it’s going to become much more than that over the coming months and years.

My bull case on SocialFi doesn’t lie in current platform stats or token prices – that would be too easy. In crypto, if you’re investing in things that are already hot, you’ve left most upside on the table at least 90% of the time. No sir, my bull thesis lies in the fact that this is a sector of DeFi where everyone can be a winner, and you don’t need some gimmicky narrative to explain how.

People naturally are uneasy when it comes to investing their own money, which is totally understandable in this ponzi world we love. For one thing, navigating DeFi is currently annoying and cumbersome (mobile apps soon plz), and just about nobody *wants* to do it. For many people who actually do it, the motivation is profit. But also, people want to trust someone else to manage their money – preferably someone “smarter” with a proven track record.

This is where the blockchain comes into handy. Every trade you make is permanently recorded and tied to your address – that means anyone with trading skills (or luck) can build an established reputation, and larpers are weeded out as they should be. SocialFi takes this to the next level and allows anyone to capitalize on the ability of traders – all you need to do is deposit into their vault and let them cook!

So, that’s the upside for SocialFi users. But what about the vault managers? It’d be kinda dumb to assume the best traders in crypto are just going to volunteer to make other people rich. But there’s an easy solution to this, of course. For now, SocialFi platforms have adopted the TradFi method of giving a cut of the profits to the managers.

There you have it. Users (potentially) benefit from degen (talented) traders managing their money in any way they see fit. Managers benefit by earning fees and a cut of the profits from money they otherwise wouldn’t be managing. Easy!

But again, we’re only in phase 1 of SocialFi. As you’ll see, there’s so much more to come.

In this article, I’m going to cover 3 SocialFi platforms: STFX, Perpy, and NestedFi. These projects are not only leading the charge for this unloved DeFi niche, but they also have some pretty amazing visions to turn asset management into a much more community-based, social part of DeFi.

With that, let’s start with STFX:

STFX

STFX, which is built on Arbitrum, stands for Single Trade Fund Exchange. This is arguably the platform that kicked off the SocialFi scene earlier this year. Since then, the hype has faded, but the future actually looks brighter than ever.

STFX’s flagship (and only current) product is the Single Trade Vault (STV). As the name suggests, there are vaults that are only live for one single trade.

STVs

Using STVs, managers simply set parameters such as the asset they’re trading, their buy/sell target prices, and leverage. In the meantime, users can deposit assets into the STV and wait for the trade to be executed. Once the trade is over, that’s it – users get their initial funds back plus/minus any profit/loss. If the trade ends up profitable, the STV manager gets a 15% cut of that profit.

This is a really simple product, but simplicity can be a good thing! STVs cater to the short-term nature of crypto markets and investors. However, you can imagine that as bigger and more risk-averse players come into the space, there will be more demand for the “usual” fund traits below as well.

STFX 2.0

Back in March, STFX 2.0’s beta went live, which added many new features:

These are all definitely upgrades from 1.0, but there are a few that stand out to me.

First, ETH L1 spot vaults are a massive improvement. DeFi perps are nice, and the space is growing rapidly, but there still aren’t that many assets available to trade. For the true degens who want to ride quick trends in alts rather than trade a 10x BTC perp, spot trading is a necessary feature. That’s STFX’s key demographic right now, and probably will be for a while, so I really like this move.

Another great but simple improvement is the increase in capacity to $5,000. This doubles the amount of money users can deposit into STVs, which means higher potential use for the platform (and higher profits for STV managers).

Investor history is also a nice move for convenience. This incentivizes traders with good track records to show off their performance on STFX, which just speeds up the flywheel: more good traders = more users looking to profit from good traders = more profits for both parties.

Finally, STFX 2.0 added integrations with 1inch and Uniswap, which are both obviously a huge deal when it comes to asset selection. This was part of the addition of spot trading (STFX uses GMX for perps), and the team says there are about 10-15 more exchanges they’re planning to integrate!

STFX Token

Right now, $STFX is simply a governance token, which opens the door for a lot more demand going forwards. Stakers can earn 10% APY by locking up their tokens, and they have to be locked for 6 months, but as of now there’s no real yield. However, I think that’s definitely on the table for future platform upgrades.

Here’s the current allocation of vault profits:

80% to depositor

15% to manager

5% to buy/burn SFTX tokens

Right now, this is the only source of protocol revenue for STFX. In the future, it’s been made clear by the team that real yield will be distributed to stakers, but it’s unknown when that will happen.

Staking just started on May 2^nd, and as of June 9^th, over 16.2 million STFX tokens are being staked. That’s almost 10% of the circulating supply in less than 6 weeks, which is pretty solid considering there’s no real yield or utility for staked STFX. However, that’s all about to change with STFX 3.0.

The Future: STFX 3.0 And Beyond

This is where things get REALLY interesting. From what I’ve heard, STFX 3.0 is going to be a game-changer for SocialFi in general. On a recent Twitter space, their founder mentioned that the goal here is to be right in the middle of the DeFi/SocialFi/GameFi triangle.

Quite a noble goal! So, how do they plan on achieving this?

Let’s start with the basics – on STFX 3.0, creating a vault will be a 3-click process. Efficiency is key with this; if I had to guess, most traders don’t want to even figure out how to create a vault, which creates a big barrier for growth. A 3-click, simplified model will make that barrier way smaller.

Major gamification will also come with 3.0 – at the heart of this transformation is, like any good game, XP. As your stats get better, your XP grows. For example, vault managers can increase XP by having positive PnL and having more deposits in their vault, and stakers can grow XP by locking their STFX tokens for a longer time period.

This new XP system will give rise to all sorts of other features, such as achievements, medals, tournaments, championships, clans, and more. Each one of these rewards-based systems are going to incentivize users, and also create a competitive environment for vault managers, which will (theoretically) result in a better experience (more profits) for users.

Upon the launch of 3.0, the STFX token itself will also gain some interesting functionality. It won’t necessarily be real yield for stakers (yet), but some of the perks for stakers will be fee reduction, access to VIP perks (boosted staking rewards?), and higher staking rewards for locking your tokens longer.

Finally, STFX 3.0 will increase the vault limit tenfold – from $5,000 to $50,000 – and allow leverage up to 20x. That vault limit increase is insane (in a good way), and definitely makes the platform more friendly for users and managers alike. More users can pile into profitable strategies (with more leverage), and managers can earn more profits from a bigger asset pool.

If all that wasn’t enough, STFX has even more vision into the future with 4.0+. In my opinion, this is when the platform takes somewhat of a “professional” turn.

Some things will probably change between now and then, but right now the team plans on integrating the following things:

A trading subscription service, which will allow users to get more efficient access to their favorite vault managers, and also bring in much-needed steady revenue to STFX. Right now, STFX only brings in fees if vaults are tradable, which isn’t something anyone wants to rely on.

Auto-allocation of funds to multiple vault managers (outdated TradFi translation is probably something like a fund of funds). Basically, users will be able to invest in a portfolio of strategies instead of just a portfolio of altcoins.

Different types of orders, which caters to more effective and professional active management as the platform evolves from STVs.

A Twitch-like activity feed, as well as local/global chat forums – this is where the real social aspect comes in. I also think of this as an entry into the DeFi intelligence space.

Cross-chain leveling/trading, which will allow vault managers to simultaneously hold assets on multiple chains in the same portfolio (pure speculation – this seems like the start of a wider account abstraction integration).

In conclusion, I ask you: what’s not to love? The goals are massive, but if STFX can pull this off, this is going to be a giant improvement to DeFi in general.

Perpy Finance

Perpy is the smallest project on this list, but there are big things coming very soon that should attract more attention. While the project is live on Arbitrum, it’s still in beta, but over the next few months we’ll see several key new features be implemented.

As for the way Perpy works, you know the basic SocialFi product by now – traders can create vaults on Perpy and trade assets of depositors to earn fees. Traders have more power on Perpy than the other two projects we’ve discussed, as they can set their commission to any rate between 10-50% of total profits. The traders can also offer incentives to promote their vault, such as PRY emissions.

Currently, Perpy traders are limited to GMX. However, since Perpy has its own trading engine, it makes it a lot easier to integrate more protocols in the future – and it just so happens that that’s exactly what they plan on doing!

But before we go into more details, let’s take a look at their native token.

PRY Token

Perpy’s native token is PRY, but all the value is actually gained by staking it for xPRY.

The top feature of xPRY is that it receives 100% of Perpy’s protocol revenue – true real yield. For now, this comes in the form of 20% of trader commissions, as well as exit fees (0.3% for exiting vault, 1.5% if you exit while a trade is open). However, that’s only the beginning of the benefits!

Some other features granted to xPRY holders are:

Access to next-gen products – for example, anyone who’s converted >100k PRY to xPRY can get access to Perpy V2 vaults (more details on V2 soon!).

Reduced fees:

One common critique of PRY (as with many tokens) is the inflation. As you can see, it’s going to get pretty steep in the second half of 2023 through 2024 with the 6-month unlock for team members (red) and the foundation (green) as well as a constant stream of 18-24 month linear vesting for each.

Of course, the fact that tokens will be unlocked and vested doesn’t necessarily mean dumping has to occur. In fact, I’d argue a lot of the dumping has already happened in anticipation of this (after all, the circulating market cap has dipped below $1m). The team also has a couple methods to fight token inflation. One is the potential for 10% of protocol revenues to be bought back and burned, which is subject to DAO voting.

The other way has to do with the way the staking mechanism works. When you stake your PRY for xPRY, you’ll eventually want to unstake and get your PRY back. The absolute soonest you’ll be able to unstake is 15 days after staking – but if you do that, you’ll only get half your original PRY, and the other half will be burned. The only way to get your full PRY holdings back is by staking for at least 6 months, so if you unstake at any point between 15 days and 6 months, some amount of PRY gets burned. The burn amount is linear based on how long your PRY has been staked, so 15 days = 50%, ~180 days = 0%, and the average ~97 days = 25%.

Currently, about 9% of PRY are staked, but I think Perpy in general is flying way under the radar. The rest of 2023 will change that, however. Now, let’s take a look at what they have in store (and why I’m so bullish).

Perpy’s Future: Social and V2

Earlier this week, Perpy made their first public announcement of their upcoming Spectra upgrade, which is the next implementation of their protocol.

The core update here is Perpy’s vault architecture, which includes several amazing new features. Perpy’s revamped vaults are going to extend many more functionalities to traders beyond the current limitation to GMX perps trading. Ultimately, Spectra will bring multi-asset, multi-DEX, multi-chain trading to Perpy – all wrapped up in a single vault. Let’s run through some examples:

Multi-asset: Beyond perps, Perpy will enable the trading of more asset classes like commodities, stocks, forex, and options.

Multi-DEX: Beyond GMX, Perpy’s vaults will first integrate Level Finance, but there’s also planned integration of MUX, Lyra, Gains Network, and Vertex. Also, Gains and Vertex have previously announced their integration of Perpy V2 vaults once they’re launched to expand the use of SocialFi – you love to see it!

Multi-chain: With their integration of Level Finance, Perpy will officially expand beyond Arbitrum onto BNB chain. Additionally, we can expect Optimism compatibility via Lyra, as well as more chains via future integrations.

We can expect these integrations to unfold over the rest of the year, and it makes me think that Perpy could actually end up being something like a perps DEX aggregator for traders as they have more options to trade on. Perpy also takes it to the next level by having their own trading engine, which routes orders to whichever DEX has the best price.

The Spectra closed beta is expected to be live in mid-July (once their PeckShield audit is done), and there are a few ways to gain access. One way, of course, is to be a whitelisted trader/user – but for us common folk, there are alternatives. Anyone who either has a Perpy NFT or has staked over 100k PRY will have access as well. The team has also teased some incentives and a “Trade to Earn” model for the beta, so there could be some nice payouts here as well!

But that’s not all! Perpy’s vault architecture revamp has even more benefits for traders and users alike.

The new vaults will allow traders to place multiple take profit and stop loss orders at once, as well as simulate potential PNL before setting those orders. There will even be a DCA function!

V2 will also introduce two new types of vaults: private vaults and meta vaults.

Private vaults are pretty self-explanatory – managers will be able to whitelist and/or charge depositors. I see this as basically a premium feature that top traders can take advantage of.

Meta vaults are basically bigger vaults that contain several “regular” vaults. Put simply, it allows depositors to invest in strategies of multiple traders at once, which is helpful for diversification and risk management.

As for the social side of things, Perpy’s V2 will have an in-app chat function between a vault manager and all depositors within that vault. That way, managers can explain their trades directly to their “funders,” as well as any future setups that they’re watching.

Taking a longer-term view, Perpy plans on integrating with Lens Protocol to tap into the biggest social platform in all of web3. This would obviously be a huge step for SocialFi in general; think of a more community-oriented version of Crypto Twitter with built-in DeFi and more. The team has kept their Lens plans almost completely under wraps, but I have a feeling we’ll hear more around the time of the V2 launch.

Nested Finance

At its core, Nested provides the same service as STFX and Perpy: users can invest in strategies put on by other traders. However, they do it a bit differently.

One major difference is how the fund management works. Instead of users simply depositing tokens into a trader’s vault, they buy a NestedNFT, which represents the trader’s portfolio of assets. This makes the trader an NFT seller, and they earn royalties whenever their NFT is sold (someone copies their strategy).

Nested also seems to encourage more of a passive investment strategy, as a single NestedNFT can hold up to 12 tokens at a time, as opposed to STFX’s one-trade vaults. There’s also the fact that withdrawals have a higher fee (0.8%) than everything else (0.3%). For now, all of these fees are split 50/50 between Nested Finance Ltd. and the portfolio creator. However, once Nested’s DAO is live, which should commence along with their NST token (more on that later), a portion of those fees should pass through to the token holders/stakers, and the fee rates will also be adjustable.

Another standout feature for Nested is their integration with web2. Currently, users can log into their Nested accounts via services such as Twitter and Google. While this might draw some criticism, I actually see it as a net positive since it’ll only improve the efficiency of the onboarding process.

Another solid feature of Nested is that it’s live on 6 different chains (Arbitrum, Optimism, Polygon, BSC, Ethereum, Avalanche), which means there’s lots of diversity in terms of available assets and DEXs. Nested also offers creators some interesting options when it comes to funding their portfolio. For example, creators can automatically DCA into their portfolio positions via Gelato Network. On top of that, the underlying assets of each portfolio can be invested in various DeFi platforms to generate extra passive income.

NST Token

So, that’s where Nested is today. And if you liked that, you’ll absolutely love what the future holds.

Something that’ll not only boost adoption but also unlock even more rewards for vault managers is the upcoming launch of the NST token. Despite the fact that NST isn’t live yet, you can already earn tokens by taking part in Nested’s trading competitions. The first competition is currently live until June 21^st, but if you missed it, there will be plenty more over the next 6 weeks. In addition to a total prize pool of 20,000 NST, Nested is also giving out 250,000 OP tokens to participants thanks to a giant OP grant.

In addition to governance, the NST token has several use cases. First, stakers will earn real yield (a cut of the protocol fees) as well as NST emissions from the rewards reserve, which will presumably get a large portion of the total token supply. To encourage stakers to keep their NST staked, there’s a 60% fee on rewards if NST is unstaked within a year of depositing.

Some more token features are:

Bribes – vault managers can incentivize users to deposit by paying out extra NST.

VIP – NST holders will get discounted fees.

Access to premium content – creators can charge extra NST to invest in “premium” portfolios.

Users will also be able to tip managers in NST.

We should expect to see more information about Nested’s token generation event (TGE) soon – I’d say it’s even likely to happen in Q3. Along with this announcement should be more details about token distribution.

For now, we know that NST’s private sale price was $0.80, which gives it an FDV of $120m. That might sound high, but it’s kind of misleading because only 1.75% of the supply will be distributed during the airdrop. The airdrop also won’t be evenly distributed – more tokens will be given to users with the most consistently high activity over the prior 1-week period. But beyond that, there’s not much public info about the distribution.

Nested V2 and Beyond

Prior to the token launch will be the launch of Nested V2. This is expected to happen before the end of the year, and it comes with some pretty incredible upgrades.

One thing that blew me away about V2 is the fact that Nested will be adding account abstraction functionality. What does that mean, you ask?

One way to think of it (at least it makes sense to me) is that Nested will become sort of an “app of apps.” When you connect your wallet to Nested, you’ll deposit money into your Nested account, from which you can deposit into various portfolios, stake NST, borrow against your NestedNFTs on money market platforms like Aave and Compound, and more.

Account abstraction also means that Nested will be able to integrate with additional chains and apps in a much easier and faster way. In fact, the team estimates that new protocols will be able to add to the Nested ecosystem in just 2-5 days. That means portfolio managers will have access to a wider variety of platforms from which they can add assets to their vaults as well as earn on portfolio assets, which will even include ETH staking.

On top of that, all fees on Nested will be paid in USDC, rather than having to hold an array of gas tokens to use on different chains. All in all, integrating with Twitter and Google is nice, but I believe account abstraction will be the holy grail when it comes to onboarding new users into web3, so this is something I’m personally excited about.

On top of having more protocol options to invest in, portfolio managers will be able to create portfolios in a much easier manner. In V2, a portfolio can be created in just 3-4 lines of code and submitted to the DAO for voting.

Very bullish on Nested V2 and account abstraction in general! (But wen mobile app?)

Conclusion

By this point, if you’re not at least a little excited for the potential of SocialFi, I’d recommend checking your pulse!

To me, this is the clear path DeFi is headed – directly connecting traders/investors with anyone via social media and p2p interaction to create an all-in-one public asset management platform. Nowhere in TradFi can you find something like this; it’s the 0-to-1 moment for disrupting the traditional hedge fund industry.

There’s no doubt SocialFi is still extremely early, but all 3 of these platforms will soon vastly upgrade their features and create a path for further adoption. A few years out, I think the leading SocialFi projects will have portfolio managers of all different types – from passive income/staking to degen alt flipping, and they’ll service everyone from newbie individuals to large institutions.

Now, just as there are services popping up left and right that aim to efficiently manage liquidity on some of DeFi’s top DEXs, there are entirely new DEX models being implemented to put liquidity management front and center. Which method is “better?” To me, it doesn’t really matter – what’s most important is that efficiency will win either way, and that’s one of the most important qualities we need if we want to attract major capital into the DeFi space.

In part 2, we’ll go over two projects at the forefront of DEX-integrated liquidity management: Carbon DeFi and Maverick Protocol.

Carbon DeFi:

We’ll start with Carbon, which is a new trading protocol from Bancor. The contributors behind both projects have a long history of massive innovation, with Bancor being the first AMM in DeFi, and pioneering major efficiencies like single-sided LPing. With Carbon, they’re bringing an equally disruptive protocol to DeFi by introducing an entirely new liquidity structure called Asymmetric Liquidity. If I’m being honest, the upside potential here is the biggest I’ve seen from a new DEX.

Let’s not forget that one of the entire reasons the Bancor team created a DEX is to bring permissionlessness to crypto trading. In other words, CEXs can be inefficient in onboarding new tokens, and being permissionless means that anyone can add any new token to an exchange. The obvious downside to that is the potential for scam tokens, but the upside is far greater – a much cheaper, faster, and easier way to have access to any asset possible.

Next, I’ll reiterate one of the problems that I highlighted in the Arrakis Finance section of Part 1: providing liquidity to a DEX currently puts LPers at the mercy of the market. Whereas in TradFi, the “liquidity providers,” also known as market makers, control the price and flow of assets, in DeFi, the market “takers,” meaning the buyers and sellers, essentially control the price and flow of assets. This is a big problem, as market makers need to be incentivized in DeFi like they are in TradFi.

Asymmetric Liquidity: Built Different

Carbon is unique in that it isn’t an AMM or an orderbook, and technically there are no pools at all, which means there’s no such thing as IL. Instead, when a user deposits a token pair, each token has one custom “curve” based on the settings decided by the depositor.

For example, say you deposit ETH and USDC. You can create a strategy to buy ETH between 1300-1400 and sell between 1900-2000. The tokens are acquired in the first curve (buy low) then become available in the second curve (sell high). Once Carbon identifies a taker willing to take your trades against your strategy within your predefined price ranges, the trade goes through. Takers can be direct traders on Carbon’s interface, traders on DEX aggregators, or arbitrageurs.

After the first curve is used, it basically shuts off, and orders on that curve no longer fill. So, if your entire order to sell USDC/buy ETH happens at a price of 1399, you’re now all-in ETH. In other AMMs, if you wanted to provide liquidity from 1300-1400, you’d be at the mercy of the market. For example, on UniV3, you can set a range to DCA into a token, but then you sell back out if the price breaks above the range and goes back down.

With Carbon, once you buy your desired token in the desired range, that’s it – no selling, trading, or rebalancing until it hits your sell target (if you have one). All in all, it ends up working like a set of limit orders.

Clearly, all of this vastly improves on the current LP experience. Instead of providing liquidity and simply hoping that the fees you earn outweigh your IL, you actually have control over where exactly you buy and sell. In other words, you’re actually making a market, rather than letting the market decide where you take action. However, this is only part of the bigger picture. Let’s take a look at how Carbon plans to expand from here:

While the P2P model has its benefits, it’s usually very hard to bootstrap liquidity because you need participants constantly placing orders around the current price. So, while this will be a feature of Carbon going forward, it’s only part of the equation. To understand the bigger picture, we need to take a look at what happens when there’s a live strategy but no matching orders directly on carbon.

This is where external liquidity sources come into play. Say you have a live strategy to sell ARB for USDC at $1, and there are no direct buyers offering 1 USDC for your ARB. Carbon can still find willing buyers elsewhere in the DEX ecosystem. If the current market price begins to overlap with your preset price range, it usually means there is a profitable arbitrage trade, or there is a user of a DEX aggregator, willing to trade against your strategy.

In both cases, Carbon is providing the means through which external liquidity sources can be used to execute your order. In essence, Carbon is using the entire crypto ecosystem's liquidity to ensure your orders get efficiently executed in your desired ranges.

Carbon has an open-source arb framework (https://github.com/bancorprotocol/bancor-arbitrage) for anyone to perform these kinds of arb trades, and Carbon strategies are already being arb'd against Uni V2 and V3 and Sushi, along with more and more DEX aggregators plugging in.

Addition by Subtraction

Just as Carbon implements new features into the DEX universe, they also remove some of the pain points that have plagued DeFi’s short history.

First, it minimizes the amount of LP transactions, and therefore fees. Unlike typical AMMs, Carbon LPers can easily adjust their strategy’s price ranges without withdrawing and re-depositing their tokens, which takes up time and gas fees.

MEV is also a thing of the past as Carbon’s Asymmetric Liquidity model basically makes it irrelevant. Most MEV attacks go something like this:

Bot sees pending big buy order

Bot places similar buy order milliseconds before the big buy order is filled

Original big buy order fills, pushing the price up

Bot sells milliseconds later for a profit

So, why can’t MEV work on Carbon? Simply put, the fact that buy and sell orders are placed on different bonding curves means that orders can still be front run, but the sell order would be placed (and executed) on a different curve with different parameters than the buy order.

It also gets rid of IL – since LPers are basically just placing limit orders where they want to provide liquidity, there’s no rebalancing of the token pair as they make transactions. Reusing the last example, if you want to provide USDC liquidity at an ETH price of 1300-1400 (buy low), you’re simply swapping USDC for ETH, and there’s no need for your USDC and ETH balances to remain an even 50:50.

Because there’s no risk of IL, there’s also less urgency for LPers to earn trading fees. For typical AMMs, trading fees can be seen as a way of compensating liquidity providers for the loss they take via IL. However, for Carbon, trade execution is front and center. LPers design custom strategies, which can be very simple or very complex, with the same goal: make a profit. In order to function, those strategies need reliable execution at precise prices with no slippage and no bad side effects like IL. Overall, this is more comparable to the TradFi model, where market makers rely on trading the bid/ask spread to make money, whereas DEX LPers have always relied on fees and extra token emissions to generate income.

To me, that means all of the fees can then be passed through to the protocol, and presumably the users at some point. In fact, contributors have already hinted at this by saying fee allocation will be decided by DAO governance. The DAO’s current plan by vote is to use all fees to buyback/burn BNT to offset the deficit in BancorV2.1 and V3. However, that plan is open to change down the road.

But that still leaves the question: wen token? Right now, the governance is still held by BNT holders, but personally I think that will change as the BNT deficit is resolved and Carbon continues to grow.

The shift of focus from fees to execution also means that liquidity mining won’t be as relevant, which gets rid of unnecessary token dilution. We might actually see incentives being paid out in other tokens, as the community recently held an event where users are paid USDC to create strategies on the platform.

Speaking of strategies, let’s take a look at the real magic that Carbon offers!

Carbon’s Customizable Strategies

Asymmetric liquidity creates a way for users to implement many types of strategies that have previously only been available to CEX market makers.

The above example highlights how you can DCA into a token within a certain price range (ETH between 1300-1400) and DCA out within a range as well (ETH 1900-2000). Both of those orders can exist simultaneously, or you can simply have one or the other. Carbon also allows limit orders, where you buy or sell at a specific price with no slippage. This is a standard option for CEXs, but a rare feature for a DEX!

You can also customize a ton of other things. For example, if you want to DCA in just a little bit, you can set the specific amount of USDC that you want to buy ETH with, and once that limit is reached, the strategy will automatically stop. But if you want to go big, you can set up a “recurring strategy,” which will DCA into ETH until you run out of USDC entirely or manually stop the strategy.

To take this a step further, say you want to buy a certain amount of ETH between 1300-1350 and 1350-1400. To ensure your average cost is lower, you can tell Carbon to put 80% of your designated USDC into ETH between 1300-1350, and the other 20% between 1350-1400.

You may be wondering: what does one do with all these features? Good question! There are plenty of scenarios where Carbon’s features can shine – let’s take a closer look at two of them.

One such use case is protection against stablecoin depegging. Anyone using DeFi has some amount of PTSD from the USDC depeg back in March, which highlighted the risk inherent in even the most perceived-safe crypto assets (and we don’t even have to get into UST). Carbon fixes this!

LPers can create a strategy where they automatically sell a stablecoin if it breaches a certain price and buy back in if/when the price recaptures that level. Traditional AMMs sort of have a solution to this, as you can stop providing liquidity below a certain price, but then you’d still hold 50% of the LP in the depegged token. Otherwise, you’d keep providing liquidity, rebalancing (buying the cheap asset, selling the expensive, or in this case, the correctly priced one) all the way down. Both of those options could end up blowing up an account, whereas Carbon offers a much more concrete and useful solution.

The other use case is that of new projects who want to distribute their token while avoiding the dreaded post-launch dump pattern we’ve all gotten to know.

Using Carbon, they can enter a strategy that distributes their token within a certain price range, and even specify where in that range they want to distribute most of the sell order. The reverse is also possible – if a project has a price level in mind where they’d consider their token to be insanely cheap, they can set a strategy to DCA at that level. This would not only provide support for the price, but also for morale surrounding the project as it shows that contributors are putting their own money on the line.

Finally, here’s a sample list of potential strategies that Carbon users can make:

Backtesting  

Not only does Carbon allow LPers to create a wide variety of buy/sell strategies, but it also lets them backtest any strategy they create using the Simulator.

In all honesty, this is where things get a bit out of my wheelhouse as there’s a lot of programming involved, but what I do understand is that there’s a ton of value in Carbon’s tech if you want to passively range-trade in a rangebound (crab) market. (Warning: what you’re about to see may make you question everything you’ve ever been told about HODLing).

Let’s take a look at how this is possible. The following chart uses a simple strategy:

·       Buy ETH with USDC when ETH price is between 1000-1250 USDC (buy low)

·       Sell ETH for USDC when ETH price is between 1500-2000 USDC (sell high)

·       Start with 750 USDC and 1 ETH worth of liquidity

Here’s how it turned out. You don’t need to be a gigabrain dev to see the value here:

In that chart, the blue line is the total portfolio value (in USDC) and the gray line is the price of ETH (also in USDC). As you can see, the ETH price went down from ~1500 to ~1100 during this time frame, but the portfolio went up from ~1300 to ~3000! Imagine making a 130% return with such a simple strategy while the market actually goes down.

If you’re not convinced, there are many more examples out there of how these strategies can be mega winners. You can see another example here by @Here2DeFi, who compares performance of providing liquidity in certain ranges between Carbon and Uniswap (v2 and v3). Spoiler alert: Carbon blows both out of the water!

https://twitter.com/Here2DeFi/status/1659598134765588480

Personally, I bet we see a ton more examples like this as Carbon gains mindshare in the DeFi community. With a current TVL approaching $500k, it’s still insanely early, but I think this project is simply too impressive to remain a sleeper.

Carbon’s Future

As I mentioned, the immediate goal for Carbon seems to be boosting the efficiency of their DEX in two ways.

The first way is the continued development of their arbitrage bot, which is how Carbon currently keeps their markets efficient. Right now, the bot uses UniV2, UniV3, Sushi, and BancorV3 to find the most updated prices for each listed asset, and executes trades on Carbon to profit from any discrepancies.

Second is by integrating a routing system, which would unlock a ton of liquidity and opportunities. For now, that seems to be the best of both worlds, and the team is currently in talks with 1inch, which aggregates orders from all the major DEXs around DeFi. If/when Carbon integrates with 1inch, it would essentially make the platform a frontend for creating various strategies using the liquidity on other DEXs.

An integration with 1inch would definitely grow awareness for Carbon, which would lead to the next phase of growth: new products. I don’t mean products launched by Carbon, necessarily, as the contributors are dedicated to focus on perfecting their current products at this time. But since Carbon is a new animal in a world full of forks and copycats, I think other projects would be lining up to build on top of their unique liquidity model. For example, social trading is a part of the market that somehow (to my own surprise) has yet to achieve product-market fit. Carbon is pretty much perfect for this, as it allows anyone to backtest and run passive and active strategies alike with fully transparent and simple instructions.

Overall, I see major potential in Carbon for all the reasons I’ve listed, and I’m very excited to see where they go from here!

Maverick Protocol:

Last but definitely not least in the Concentrated Liquidity Management series is Maverick Protocol, a new DEX being built on zkSync.

Maverick is putting a new spin on the best part of the UniV3 concentrated liquidity model. So, not only do users get to provide liquidity in a given range, but they can also program that range to move along with the price of the LP token pair.

This is basically what CEXs do behind the scenes, but Maverick is doing it with one goal in mind: improve incentivization.

As it turns out, it’s pretty hard to incentivize concentrated liquidity LPs. For example, how do you split incentives across different ranges? Especially if there aren’t fixed ranges.

One solution that’s being attempted by liquidity managers like Steakhut is to have a set of fixed ranges available. When users deposit their positions, actively manage their funds and give an ERC-20 receipt token that accrues rewards.

However, Maverick is coming at this problem from different angles. First, they’re a DEX rather than a third-party liquidity management service, so they’re creating an all-in-one solution where users can trade as well as provide liquidity directly and be rewarded. Second, the ranges in Maverick aren’t fixed. Instead of having a third-party service manage the ranges, users still have to do it, but Maverick makes it a lot easier.

So, how does this help with incentivization?

We’ll get to that, but first let’s go over how Maverick is changing the game with their auto-adjusting ranges.

Providing Liquidity

When users deposit liquidity into Maverick, they’re faced with a set of choices for how to do so: the categories include token pair, fee tier, bin width, liquidity mode, liquidity distribution

Token pair and fee tier are pretty straight forward. This just depends on the tokens you want to deposit, and how much you want to get paid for doing so (in terms of trading fees). Another thing to mention about the fee tier: the higher it is, the harder it is to earn fees. For example, say the ETH/USDC trading pair has 3 fee tiers: 0.1%, 0.3%, 1%. When someone buys/sells ETH with/for USDC, the default trading fee would be 0.1%. However, if volume spikes and there’s no available liquidity at the 0.1% fee tier, their fee will jump to 0.3% and ETH/USDC LPers for the 0.3% fee tier will get paid. The same process is used to bring volume to the 1% fee tier. Under these parameters, ETH/USDC LPers at the 1% fee tier don’t get much action. However, less liquid altcoins might only have a 1% fee tier, so if volume spikes, LPers can make a ton in fees.

Moving to bin width, this measures the range of prices you want to provide liquidity for. I’ve talked a lot about this in part 1, so I’m not going to go into much detail, but the wider the range, the less fees you earn. You can earn more fees by using a shorter width, but along with those fees comes an assumed increase in volatility and therefore higher IL. So, there are pros and cons for each.

Now, getting into what makes Maverick unique: liquidity mode and liquidity distribution.

·       Liquidity Mode

There are for “liquidity modes” that users can choose from (for now): static, right, left, and both. Basically, these describe how the LPs are adjusted. Let’s take a look at what they mean:

Static – will not move with price (what you get with Univ3/Joev2)

Left – will adjust downwards when price goes down (bullish on left/quote asset)

Right – will adjust upwards when price goes up (bullish on right/base asset)

Both – range will shift in either direction. This strategy captures as much fees as possible while keeping liquidity close to the active price. Of course, the risk of higher IL is present here as well, so this should be used when the belief is that the asset pair will maintain a relatively stable price relationship.

Let’s run through an example using the Mode Right option: say you add ETH in the USDC/ETH pair. That means you think ETH will go up in terms of USDC, which means that people are buying/will buy ETH at higher prices. If that’s the case, market takers (traders) are selling USDC for ETH, which means the pool ends up with more USDC and fewer ETH.

When traders swap their USDC for ETH, there’s more USDC in the pool for each ETH, therefore the USDC/ETH active price moves to the right. Using Mode Right, the LP is kept concentrated in the bin to the left of the current active bin, so it’s basically a dip-buying strategy. In this example, you’d be buying the dip in ETH.

·       Liquidity Distribution

The final option is liquidity distribution, where users can control the “shape” of their liquidity. In other words, users can deposit liquidity into multiple ranges at once.

For example, instead of providing a set amount of liquidity at ETH price $1500-$2500, you can put 20% in the $1500-1700 range, 20% in the $2300-2500 range, and the remaining 60% in the $1700-2300 range. The percentages are fully customizable, but you’re limited to 3 bins.

One advantage of this setting is that is allows users to create a stacked limit order by providing liquidity in a non-active price range – e.g. provide ETH liquidity at 2300-2400 USDC when the price is currently 1800 USDC. However, in order for it to be a true limit order, you’d have to stop the strategy after ETH moved above 2400.

Another use case for this feature is DCAing. For example, you could provide 10% of your total ETH liquidity every 500 USDC.

Lastly, one benefit that I find really underrated is that you basically can trade or average into or out of a position and get paid to do it, rather than pay a fee. There’s no token (yet), so all fees go right to LPers!

Max Efficiency

Ultimately, this is already resulting in massive improvements in capital efficiency. In other words, you can get way more volume out of the same TVL.

Let’s look at capital efficiency of Maverick vs Uniswap, which is the biggest DEX by far in terms of volume.

Since April 1^st, Maverick has generated $1.2 billion in volume, with its TVL rising from $14.4 million to $28.6 million. If you divide that volume by the average TVL of $21.5 million, the result is that volume is about 56x TVL for about a two-month period.

Uniswap, during the same time period, had an average TVL of $4.06 billion and total volume of ~$68 billion, which comes out to 16.7x average TVL.

All in all, Maverick is just getting off the ground and its capital efficiency is already 234% higher than Uniswap! You can decide for yourself how useful that comparison is, but I think it’s definitely worth mentioning.

Another efficiency comes in the form of gas savings: since trading fees are auto-compounded into users’ LP tokens, there’s no need to continuously redeem rewards, saving LPers time and money. And as zkSync grows, due to the scaling mechanism of zk proofs, fees will drop the more people use it. So, we could be looking at insanely cheap gas fees if/when Maverick continues to gain adoption along with zkSync.

Permissionless Incentives

Maverick is also packed with permissionless features, which is consistent with the entire point of DeFi.

For example, anyone will be able to deploy a permissionless pool for any unlisted pair, as long as they can provide liquidity for said pair. The only other requirement is that each new pool needs to be in Mode Static to begin with.

And now for my absolute favorite feature of Maverick, permissionless Boosted Positions (BPs).

First, what’s a Boosted Position?

Basically, it’s like a regular LP except for 2 important distinctions:

·       Other users can add liquidity to a BP (like buying a share of it)

·       BPs can pay out additional rewards to LPs

Anyone who deposits tokens into a BP not only earns the regular trading fees, but also extra LP incentives. So, if a project wants liquidity, they can add a BP and pay their token as an additional reward out to people who buy part of that BP – just like a bribe.

But wait, it gets better!

Any user can add ERC-20 incentives (permissionless incentives!) – you’d just need to specify the amount paid out and for how long. This is one of the most interesting features I’ve seen in DeFi yet, and it brings a new social element to bribing.

Another interesting feature of Boosted Positions is that bribes are paid out in specific price bins, which incentivizes LPers to add liquidity at prices that are the most relevant for any given asset. For things like stablecoins and LSDs, this makes a ton of sense, as a project could pay tokens out to users to provide liquidity in a narrow range around the peg price.

One such example of this is Ankr with ankrETH. Right now, they have a BP on Maverick where they’re paying ANKR tokens for LPers to provide liquidity at an ankrETH price of 1.1041-1.1052 ETH:

Overall, this is a really exciting feature when you consider all of the up-and-coming protocols with tokens on zkSync. It’s clear that Maverick has its sights set on becoming the go-to DEX on this exciting L2, and capturing market share early-on can do wonders, especially if they can also serve as a *permissionless* incentivization hub. It’s not hard to see how this can become a huge trend setter in the wider DeFi space.

Conclusion:

Between the 6 protocols I covered in this two-part series, there’s a ton to digest. Personally, looking into these projects has only made me more bullish on the space than ever, as DeFi is certainly looking more mature by the day.

Here’s something to consider as DEXs continue to evolve: will the future of liquidity management be dominated by third-party services like the four protocols in Part 1? Or will DEXs ultimately adapt and create ways to manage liquidity more efficiently (like Carbon and Maverick), making third-party services less necessary?

Maybe the two models will coexist, as innovation will continue to run rampant in both. Maybe DEXs will continue to innovate and market makers will use them, while liquidity management services become more of a B2B model, mostly servicing DAOs and institutions who need their assets managed directly.

I think both models will continue to thrive for the foreseeable future, as there’s still a ton of money out there for DeFi to first absorb and then properly manage. That’s a process that will take years and years, and considering UniV3 created the concentrated liquidity trend just over 2 years ago, it’s safe to say that we’re very much still in the first inning when it comes to innovation in this space.

Judging by the $88 billion in collective TVL, I think we can say that DeFi has a somewhat solid foundation of users. However, this is still really scratching the surface. Next up is going to be a slew of crypto-native funds and organizations with plenty of money to put to work. And deep down, we all know that at some point we’re going to have to welcome TradFi into the ecosystem, too. The point is, the next stage of DeFi is going to involve large, market-moving players, and that’s a net benefit if you ask me!

But, there’s still lots of work to do before we’re ready. For example, LPing is a good sell for passive income strategies when you’re talking about receiving trading fees and sometimes even extra incentive rewards, but do you really think that any multi-billion-dollar organization is going to want to deal with impermanent loss? Not a chance. What about rebalancing in concentrated liquidity pools? Yea, no. In the traditional world, you have a team of people to do the grunt work like that for you. In DeFi, you have code do that for you, which is a big productivity booster. That’s the major advantage.

But you also need people to build the code to sort out these inefficiencies. Thankfully, the people building and shaping DeFi (and I’m not talking about the shills) is full of the people who left TradFi and big tech because they see the potential in the disruptor that is Decentralized Finance. And one of the things these geniuses are doing now is building strategies to manage liquidity for individuals and institutions alike, while minimizing the impact of IL and rebalancing fees. I hardly see anyone talking about this, but it’s a crucial part of the future of DeFi. So let’s talk about it!

For anyone who’s unfamiliar with the process of DEX liquidity providing (LPing), I want to do a quick run-through of a simple LPing scenario

The way it works is that anyone who wants to provide liquidity to an exchange deposits their assets into the exchange via a “pool”

Whenever those assets are traded, the exchange charges a fee, and a fraction of that fee goes to the liquidity provider (LPer)

For example, say you deposit 10,000 USDC and 5 ETH into Uniswap, and the price of ETH is 2000 USDC

You’re depositing into the ETH/USDC pool: half the deposit (in $ value) is ETH, and half is USDC

The total value of the pool after your deposit is 100 ETH and 200,000 USDC, which means that your deposit is 5% of the pool

Now, say that the total amount of fees from Uniswap users trading ETH/USDC that day is $100

Since you own 5% of the pool, you get $5 in fees for the day

We’ll get into the issues like impermanent loss, but for now check out this impermanent loss calculator to see what it can do to LP returns.

Concentrated Liquidity:

In the days of old, when people provided liquidity to DEXs, it was used at all prices. This was an inefficient way to do things, however, because it spread the total liquidity too thin over prices that are pretty much impossible to hit (everything between 0 and infinity).

However, Uniswap changed the game with their concentrated liquidity Univ3 implementation. Now, 80% of DEX volume now comes from concentrated liquidity DEXs.

On UniV3, liquidity providers can choose the price range to provide liquidity within. When the price of the underlying asset is within any given LPer’s range, they earn a cut of Uniswap’s trade fees.

However, one of the main concerns about typical DEX LPing is that LPers are more like market takers than market makers. In other words, they are the “uninformed flow.” In UniV2, the user placing the buy/sell orders commands what price the tokens are bought and sold at. UniV3 fixes this a little bit, but the LPs still have to try and guess where the market will be at any given time; they’re still being commanded by the buyers and sellers.

If concentrated liquidity LPing is used right, a ton of volume can be handled by a small amount of liquidity. However, for the users who want to earn trading fees, it’s a pain to have to monitor your LPs and move them into “better” price ranges (e.g. the range that includes the current price of the asset).

For example, say ETH is trading at $2,000 and you have an ETH/USDC LP on Uniswap v3 that earns fees every time that pair is trading between $1,900 and $2,100. You’re earning for now, but as soon as the price moves outside that range, you have to adjust your LP; otherwise, no fees for you.

Enter the heroes: concentrated liquidity management services.

These services are amazing in many ways as we’ll see, but one thing they’re really good for is attracting liquidity into token pairs that otherwise wouldn’t see much action. This helps the assets maintain a more efficient price and also incentivizes more activity within the greater DeFi world.

For now, most liquidity goes into stable pairs and big coins like BTC and ETH, but I think we’re going to see that change over the next year or so, and definitely in the next bull market.

As you can imagine, several teams jumped on the opportunity to make this process more efficient

We’ll go over 4 of them in this article:

Arrakis Finance

Orange Finance

Gamma Strategies

Steakhut Finance

Let’s begin!

Arrakis Finance:

When it comes to LP managing services, Arrakis is the OG. It’s essentially a liquidity manager built on top of UniV3, so all of the money deposited into Arrakis gets put into Uniswap V3 LP pools.

Arrakis’ main product is still their v1 pools, which were launched back in mid-2021 when Arrakis was still known as G-UNI.

Basically, v1 created a wrapper that made UniV3 LPs fungible – the standard UniV3 LP is an ERC-721 token, which is non-fungible – this is why LPers have to withdraw and re-deposit their tokens every time they want to change their range. However, Arrakis’ wrapper converts them into ERC-20 tokens, which makes the process much easier and also saves a ton of fees.

So, Arrakis v1 users deposit their UniV3 ERC-721 tokens into their respectable vaults, Arrakis turns them into fungible ERC-20 tokens, and those LP positions are managed in a way that seeks to earn as many UniV3 trading fees as possible.

There are currently dozens of Arrakis V1 vaults live – here are some of the most popular ones:

Let’s go over a few of the traits of these vaults.

In the leftmost column, you can see which LP pool that you can deposit into as well as the chain it’s on.

For example, looking at the first vault, you have to deposit WETH and UNIDX into UniV3 on Optimism. Then, you’ll get a WETH/UNIDX LP token. That LP token can be deposited into this Arrakis vault, and Arrakis will manage it to earn lots of fees on your behalf.

Fee tier – this tells you the % that UniV3 charges users to trade each token pair. For example, it takes a 1% fee for every WETH/UNIDX trade. LPers earn a cut of that fee based on the size of their LP.

As you can see, there are also two types of fees that users can earn upon depositing their UniV3 LP tokens:

Fee APR – the annualized yield that Arrakis earns for each LP vault

Reward APR – extra incentives for Arrakis users to use specific vaults. Using WETH/UNIDX as an example again, depositors get an annualized 80.74% return in the Optimism token (OP) in addition to the Fee APR. Basically, Optimism is rewarding users who deposit their tokens into UniV3 on their blockchain.

Looking at DeFiLlama, we can see that total TVL for Arrakis stands just under $217 million. This is about 7.4% of the total Uniswap V3 TVL ($2.92 billion) – meaning Arrakis is managing 7.4% of the liquidity on UniV3.

It also turns out that those OP incentives really help! Currently, there’s $84.65 million in UniV3 TVL on Optimism, and Arrakis is handling $29.42 million of that – about 35%. Makes you wonder if we’ll soon see an $ARB incentive campaign – Arrakis is only managing about 0.5% of Arbitrum’s UniV3 TVL.

In any case, this tells me that Arrakis still has a ton of room to grow from here. There’s still over $2.7 billion of UniV3 liquidity that’s not held by Arrakis, and I think we’re going to see that change in a big way. There are two catalysts that will drive this: Arrakis V2 and the $SPICE token.

Arrakis V2:

While V2 vaults aren’t live yet, the actual V2 infrastructure is. That means that anyone with enough technical prowess can go in and create a V2 vault for themselves. But for anyone like myself, we have to wait – although, I think it will be worth it.

The premier feature of V2 is allowing multiple liquidity positions per user per vault. That means that when users deposit their LPs, they’ll be able to choose to split up their liquidity into different ranges. For example, if you deposit USDC/ETH LP tokens, you could provide 20% of ETH liquidity between 2000-5000 and 80% between 2000-3000.

This also means that liquidity can be split among different fee tiers. For commonly traded pairs like USDC/ETH, typically UniV3 charges a trading fee of 0.05%. However, if volume surges, there are “reserve” pools with higher fees that get tapped for extra liquidity. Here, you can see that USDC/ETH has 2 fee tiers: 0.05% and 0.3%. The 0.05% tier has 142% more TVL, but 1,689% more volume over the past week. So, if you think there are volatile times ahead, you could elect to put a big chunk of your USDC/ETH LP tokens into the 0.3% fee tier and earn more fees.

V2 also increases capital efficiency by putting assets to work that aren’t currently earning fees on UniV3. Keep in mind that the entirety of Arrakis’ TVL isn’t constantly in the active price range earning trading fees, which means that at any given time, there’s money just sitting there (a big no-no, especially in DeFi!). With V2 vaults, Arrakis will deploy that idle capital to earn yield on other “blue chip” protocols like Curve, Balancer, and Lido.

Private vaults are another interesting feature of V2. Of course, like V1, there will be many vaults open to the public, but V2 users will also have the option to create a custom vault for a custom list of whitelisted addresses. This would make sense for something like a DAO that wants their liquidity managed in a more efficient manner.

Users can also create their own custom strategies for vaults. In this way, V2 is more of a core piece of infrastructure for DeFi liquidity, as anyone can use it to create their own strategy. Down the road, this will benefit Arrakis as it harnesses the overall ingenuity of DeFi builders and traders, and it will potentially serve as the center of liquidity management.

This all begs the question: with Arrakis, why would anyone LP directly on Uniswap? Well, it turns out there’s a lot of demand for this service as a ton of different protocols are now using Arrakis to manage their liquidity via their newest service: PALM.

PALM:

PALM, which stands for Protocol Automated Liquidity Management, is the first service built on top of Arrakis V2. For now, it’s a B2B service provided to a growing list of DeFi protocols and DAOs to manage their liquidity.

One major hurdle for a lot of DAO treasuries out there is the fact that they’re mostly comprised of the project’s governance token. As we all saw in 2022, the downside in a bear market can be relentless for altcoins, and as a result a lot of treasuries want to improve in 2 ways:

1.)    Diversify their holdings – have a bigger % allocation to ETH, BTC, stables, etc.

2.)    Have better liquidity for their governance token on DEXs to help reduce slippage and volatility

PALM provides a solution to both of these actions. For each protocol, a custom vault is opened on Arrakis that manages an LP for the governance token as well as a base asset (typically ETH or a stablecoin). The best part is, the protocol can deposit any ratio of governance token/base asset. So, if they don’t have a lot of ETH, USDC, etc., they can deposit 95% of their own token and 5% ETH, or even 100% of their governance token.

The core function of PALM is to level the received token ratio out to an even 50/50. So, if Arrakis receives 100% in UNI and no ETH, they can use PALM to manage it in a way to end up with 50% of each. The way it does this is by adjusting by changing the amount of each asset that it provides to the market, and best of all, it doesn’t result in slippage or affect price impact in any way.

Clearly, there’s demand for this, as some big names are already using the service. Gelato (Arrakis’ “parent” project) and Kwenta were among the first to use it, and that list has expanded to include Fuse, Reaper, Threshold, Stader, TapiocaDAO, Perp Protocol, and many more across 6 blockchains.

Combined, those protocols have deposited over $2.2 million of assets into PALM, and have earned about $71k in fees. Not bad considering it launched less than 4 months ago and isn’t available to the public. Arrakis gets a cut of that as well: 1% of AUM and 50% of all fees earned – could be a good steady income stream for future $SPICE real yield!

SPICE:

Speaking of SPICE….when’s that token supposed to drop, anyway??

The simple answer is, nobody knows exactly when – your guess is as good as mine. However, the team has said it’s launching in 2023, and there’s reason to believe it’s “soon.”

The SPICE token has been highly anticipated for a while now. The way to qualify was by locking Gelato Network $GEL tokens (Arrakis was incubated by Gelato) between May 19^th and June 10^th…of 2022. Here’s the Medium article about it from over a year ago. So, people have had their $GEL locked up for a year now, and still no $SPICE.

I think it’s safe to say we can expect some solid SPICE incentives on Arrakis vaults, and it would make sense (to me, at least), to use those incentives to bootstrap liquidity into their V2 vaults once they’re released to the masses. So, we’d see the official public launch of V2, and the token would quickly follow to pay people boosted rewards for using the new vaults. Makes sense to me!

Arrakis’ Future:

Overall, Arrakis is an important and useful building block in the ever-growing tower of DeFi. If we want decentralized markets to be useful in terms of liquidity, execution, and incentives, we need LPers to be the market makers and protocol users to be the market takers. That means LPers should be able to earn steady yield while providing sufficient liquidity to users, and beyond that, all capital should be used as efficiently as possible (ideally liquid and/or earning yield at all times).

In the grand scheme of things, V2 and PALM are just a stepping stone towards Arrakis’ greater vision, which is to provide infrastructure for anyone to build on to create new and interesting ways to provide/manage liquidity in decentralized markets – and it will certainly be exciting to watch how it evolves!

Orange Finance:

Orange provides a similar service to Arrakis in that they provide UniV3 liquidity management services via vaults. However, there are some key differences which make Orange unique, which we’ll get to in just a moment.

First, let’s rehash the LPer’s biggest nightmare – impermanent loss (IL).

Any time you provide liquidity to an exchange using a token pair where at least one of the tokens is volatile, the tokens’ prices will move against each other. Since there must always be a 50/50 ratio of tokens (in UniV3, at least), LP tokens automatically buy more of the declining asset and sell some of the appreciating asset. This can obviously eat away at returns, and in many cases, it renders LPing futile.

IL is particularly troublesome for LPers who want to provide liquidity in a tight range. For example, if you deposit the USDC/ETH trading pair into UniV3 and only want to provide liquidity when ETH is between $1800-1850, you’ll generate a bigger percentage of overall trading fees when ETH is in that range than you would if you provided liquidity at an $1800-2100 ETH.

That, of course, means you earn more fees within the smaller range. However, the fact that you’re a bigger piece of overall liquidity for that range also means you get hit with more IL, which can easily outweigh the fees you earn.

Now – this is where Orange sets itself apart.

Vaults on Orange will aim to hedge against IL by using a delta-neutral strategy. What you’re left with is a pretty good combo – have your liquidity managed automatically via Orange’s contracts as efficiently as possible by always being where the money is trading, while also offsetting the downside by hedging.

However, this isn’t typical hedging – the entire point is to make money – therefore, Orange using a dynamic hedging strategy. Using different volatility metrics, the trading algo will aim to hedge when downside is likely, and allow positions to run when upside appears to be on the horizon.

Alpha Orange Vault:

Last month, Orange made their official debut on Arbitrum with their Alpha Orange Vault.

It was nice to see the community’s reception, as the $250k deposit cap was hit less than 2 weeks after its launch. More recently, the cap was raised to $350k, so we’ll see how long it takes to hit that milestone as well.

Compared to Arrakis, there are a couple clear advantages here in terms of UX. First, the process of depositing is way easier. With Arrakis, you have to first deposit your tokens into UniV3, get your LP tokens, and then deposit those LP tokens into the vault. But with Orange, you just deposit the underlying tokens directly into the vault.

More specifically, to use Alpha Orange Vault, all you need to do is deposit USDC, and Orange then deposits that USDC into the UniV3 ETH/USDC trading pair at the 0.05% fee tier.

The underlying strategy of this vault is to capture ETH upside while also taking in those nice UniV3 fees. Certain indicators such as Bollinger Bands and the 3-day ETH/USDC moving average will be used to adjust the dynamic hedge on the LP – simply put, when the indicators turn bearish, it ramps up the hedges, and it removes them when the indicators paint a more bullish picture.

It’s also worth pointing out that this strategy is semi-actively managed, although this is something the team has made clear is temporary. In the future, all Orange vaults are expected to be fully autonomous. We can think of the Alpha Orange Vault as a testing ground for future vaults – the team aims to learn from this and use it to further improve development of future products where possible.

While the live vault metrics are private, we know that this strategy had some pretty impressive backtesting results (measured from March 1, 2022 to September 1, 2022):

If the Alpha vault produces anything resembling this outperformance, we can expect a ton of attention from the greater DeFi community. But personally, I think that attention will come either way if Orange’s roadmap is any indication of the future.

Orange’s Future:

Once we get those Alpha results, Orange will be off to the races. Currently, they have 2 more vaults planned for this quarter:

·       The Delta Neutral Vault, which will aim to profit during low-volatility periods by keeping a permanent delta hedge on the ETH/USDC UniV3 pair – this is achieved by borrowing against the position via Aave

·       The ETH Maxi Vault, which also uses the UniV3 ETH/USDC pair, except users only deposit ETH rather than USDC

This is beneficial to ETH lovers in 2 ways:

First, it’s basically a DCA strategy on ETH – when the price goes down, you get more ETH as the pair rebalances – it can also be seen as a hedge in this regard. Second, it earns trading fees purely in ETH – gotta love that!

In Q3, the plan is to launch the Beta platform, which will increase the vault cap and allow more people to use their vaults

We can also look forward to integrations as Orange expands into LP vaults on other DEXs. We got a sneak peak at the potential here with their Honey Jar partnership, which gives them a nice entry into the Berachain ecosystem as well as the broader Cosmos IBC universe – could be big!

Q4 should bring us the official launch of Orange with their v1 platform. By that point, Orange should have several solid vaults as well as more exciting partnerships. That means different strategies for different market conditions, and lots of opportunities to earn yield.

Here’s the TL;DR:

In any case, it’ll be exciting to see what Orange does as they emerge as a contender in one of the most important areas of DeFi!

Gamma Strategies:

Like Arrakis and Orange, Gamma’s goal is to manage LP positions in a way that they’re kept concentrated at the active price of the underlying assets to earn fees, but avoid impermanent loss as much as possible. However, there are a couple key differences. First, they have a broader reach than other liquidity managers, as they manage liquidity on Uniswap, Quickswap, Zyberswap, and Thena. They also have a token, which we’ll dive deeper on shortly. These advantages definitely show up in their growth this year, as we’ll see.

The Strategies:

So, what type of strategies does Gamma use?

For now, there are four different strategies employed by Gamma. First, we have the narrow range and wide range strategies. Both of these are dynamic strategies, meaning the pool funds are rebalanced and moved into different price ranges when necessary. The other two are the stable strategy and the pegged asset strategy, which are used for stables/pegged assets and are static rather than dynamic.

As the name suggests, the narrow range strategy keeps liquidity in tight ranges with the goal of earning higher fees (remember, when you have a tight range, your funds are a higher % of that range, which means more fees go to you). The risk is that higher trading means more asset turnover, which means higher IL as well as higher swap fees to rebalance. Generally, the narrow range strategy is better for short-term positions with low volatility.

The wide range strategy is also self-explanatory, in that it holds liquidity in wider price ranges. This is a less risky strategy, as a wider range doesn’t have as much turnover or IL. However, since a wider range means you take up less “real estate” in the overall liquidity landscape, you won’t earn as many fees. This strategy is better suited for low-risk, long-term yield and is expected to outperform the narrow range strategy overall.

Finally, the stable and pegged price strategies seek to earn fees by providing liquidity around the price of stablecoins and other pegged assets like LSDs. For stablecoins, the less “risky” the coin, the tighter the range. For example, it might provide liquidity for the USDC/USDT pair when it trades between 1.001 and 0.999. But for something like USDC/MIM, it could expand that range to between 1.01 and 0.99. As for LSDs, it will provide liquidity for something like stETH at a fixed range that straddles the ETH price.

As I mentioned earlier, the key difference with the stable and pegged asset strategies is that they’re static, meaning there’s no rebalancing. This saves on fees, but it also means that if the asset goes outside the range, it also won’t earn any trading fees. This is a decent tradeoff, as rebalancing and potential IL from LPing de-pegged assets could get pretty ugly.

Gamma provides these strategies in two “tiers.” The first is their Gamma Automated products, which are public in their dapp. They also have a Gamma Enterprise tier which is dedicated to help specific protocols/DAOs manage their liquidity. The Enterprise pools are private and whitelisted, and can use customized versions of the three strategies listed above, depending on the partner’s objectives.

Gamma Ecosystem:

Gamma is currently live on 7 chains and 4 different DEXs:

UniV3 – Ethereum, Arbitrum, Optimism, Polygon PoS chain, Celo

QuickswapV3 – Polygon PoS chain, Polygon zkEVM

ZyberSwap – Arbitrum

Thena – BNB Chain

Overall, Gamma Strategies has about $100 million in TVL, with Polygon and BNB chain accounting for about 70% of that total. Most of the Polygon TVL is on Quickswap, which is the top DEX on Polygon in terms of TVL.

You can also see that the TVL has increased considerably over the past few months. Breaking the TVL down by chain, we can see that the biggest causes of this have been parabolic moves in Polygon (purple) and BNB chain (blue):

Back in late January, Gamma had the advantage of being the first liquidity manager for QuickswapV3 LPs, and so money poured in on Polygon. Of course, the $dQUICK and $WMATIC bonus rewards on their Quickswap vaults helped onboard new users as well.

Less than 3 months later, Gamma pools were live on Thena, which has been a rapidly growing part of the BNB chain DeFi ecosystem:

https://twitter.com/ThenaFi_/status/1648794675959025664

Currently, Gamma is carving out a nice market for themselves on Quickswap and Thena. They currently manage over 61% of QuickswapV3’s TVL and 48% of Thena’s TVL. Basically, these markets are theirs to lose!

As you might expect, the pools on Polygon and BNB chain have some pretty great incentives. The QuickswapV3 pools, for example are paying out thousands of dollars per day to depositors. Take a look at these massive rewards in the right hand column:

And rewards on Thena pools are no joke either!

Lastly, Gamma’s Optimism vaults have been crushing it as well as the $OP rewards keep flowing strong. In fact, Gamma is currently in phase 3 of their $OP rewards program – altogether, the 3 phases have paid/are paying out 300,500 $OP tokens to UniV3 Gamma depositors on Optimism

$GAMMA:

One feature of Gamma that hasn’t been present (yet) in the previous two protocols is a token: let’s talk about $GAMMA

Gamma takes a varying portion of the fees from each pool, which is typically 10% but in some cases that number will vary. Those fees are then redistributed to GAMMA stakers, typically on a daily basis.

When you stake GAMMA, you receive xGAMMA in return. The xGAMMA price includes the fees that it accrues, so it’s worth more than the underlying GAMMA.

It’s also important to note that GAMMA stakers don’t receive xGAMMA at a 1:1 ratio, and the price of xGAMMA is denominated in GAMMA. What does this mean? Let’s run through an example.

Stake 1,000 GAMMA

xGAMMA price = 1.1 GAMMA

Receive 909 xGAMMA (1000/1.1)

While staked, your xGAMMA accrues fees and is now worth 1.3 GAMMA

Exchange your 909 xGAMMA at a price of 1.3 GAMMA

Receive 1,182 GAMMA

Your profit is 182 GAMMA despite having a steady 909 xGAMMA the whole time

While this method may be a little more complex that most, it eliminates the need to pay gas fees every time you want to claim your rewards. Instead, those rewards are automatically built into the xGAMMA token’s price. Finally, xGAMMA isn’t tradable at this point since there are no DEX liquidity pools that support it, although this may change in the future.

Speaking of the future, let’s take a look at what Gamma is working on! (side note: this is a very heads-down team which I consider bullish, but when they do make an appearance on Twitter Spaces, etc., it’s worth listening to)

Gamma’s Future:

A lot of the work behinds the scenes seems to be on expanding the variety and scope of liquidity management strategies. Specifically, the focus is on delta neutral vaults on top of LP pools.

One idea in the works is a leveraged strategy: use the LP tokens as collateral to borrow more of each underlying token, deposit them into the LP, and repeat. For example, if you’re providing liquidity on the ETH/WBTC pair, you’d post the ETH/WBTC LP tokens as collateral, borrow ETH and BTC against it, and deposit them into the vault.

Another delta-neutral strategy would be to collateralize stablecoins and borrow ETH against them. In this case, if ETH goes up, you’re capturing that upside via LP in the pool. If ETH goes down, you benefit from the ETH loan since you’ll owe less in stables to pay it off.

Overall, fees + rewards – borrowing costs = delta-neutral yield.

The team has also mentioned more “risk-on” vaults, which would use perps to boost depositors’ yield in addition to the LP earnings. It sounds like this strategy wouldn’t be a hedge, but the opposite: it’d magnify the return in either direction. Higher risk, higher reward.

Steakhut Finance:

Another unique player in the concentrated liquidity game is Steakhut Finance. This project actually started out by boosting rewards on Trader Joe’s JOE token, with the aim of becoming to Trader Joe what Convex is to Curve. However, they’ve since evolved to being the primary manager of liquidity on JoeV2. Right off the bat, this sets Steakhut apart from Arrakis, Orange, and Gamma. But that’s only the beginning!

Without going into too much detail, JoeV2 is actually an improvement on the UniV3 model as it allows LPers to have more flexibility in how they provide and distribute liquidity. A recent update to JoeV2, called V2.1, actually enables automated strategies for LPers called Autopools as well.

As you read about Steakhut in this article, you may see how Autopools could be a competitor to Steakhut. It’s certainly a respectable stance, but as we get into some of the developments that Steakhut has recently made, you’ll see that they’re setting themselves apart and incentivizing the use of their platform through some pretty awesome products.

Also, JoeV2 is just the beginning. Steakhut’s ultimate goal is to manage liquidity across all major exchanges and DEXs and become the liquidity layer of DeFi.

Overview:

By now, you probably know the genera idea of how this stuff works. On Steakhut, you deposit tokens into various JoeV2 pools, and then they manage it to optimize your rewards.

One nice feature of Steakhut pools is that when a user deposits liquidity into them, they receive an ERC-20 wrapped version of the JoeV2 LP token. This seems similar to the Arrakis method of converting UniV3 LP tokens. Originally, JoeV2 LP tokens are ERC-1155, which is also different from UniV3’s ERC-721. However, both of them are similar in that you can’t do much with them, so converting either one into an ERC-20 gives it a lot more utility, so you can then go and use those Steakhut LP tokens elsewhere (spoiler alert: you can use them on Steakhut – we’ll come back to that later).

Currently, Steakhut is live on 2 chains: Avalanche and Arbitrum. As you can see below, they’ve got a solid selection of pools on both. Here’s their Avalanche selection:

And their Arbitrum selection:

The astute observer will see that there are two types of strategies in those pools: balanced and concentrated (with one labeled Balanced-Wide). Here’s what they mean:

Balanced – liquidity is spread out relatively widely, meaning you earn fees on a wider price range of the underlying asset

Concentrated – liquidity is kept in a tight range

For now, concentrated strategies are only available for stablecoin pairs (USDC/USDT, etc.), as they tend to generate higher IL albeit higher fees for volatile pairs. However, Steakhut has been working on concentrated strategies for volatile pairs, so we should see those be available in due time.

While balanced strategies are typically used on volatile pairs, you may have noticed that there are some stable pairs on Steakhut that also use this option. This makes sense for relatively illiquid stablecoins that may experience volatility such as USDC.e or USDT.e. However, for the more liquid stablecoins, a concentrated will probably outperform more often than not. For example, in the screenshot above, the concentrated USDT/USDC pool is yielding 1.75% while the balanced pool is only earning 0.16%.

In return for managing liquidity, Steakhut takes a cut of the overall fees earned by the users:

5% of total fees on stable and pegged pairs (stablecoins, LSDs, etc.)

10-15% on non-stable pairs

10-20% on custom strategies

Similar to Arrakis and Gamma, Steakhut is aware of the demand to manage liquidity for protocol DAOs and other organizations/institutions. This leads us to their professional service, Liquidity as a Service (LaaS). With LaaS, protocols can take advantage of additional features such as private vaults, custom-managed liquidity and incentive management for their LPs. Some of their partners so far include Buffer Finance, Colony Labs, Phuture Finance, and Unidex.

Boosted Rewards:

This is where that handy ERC-20 wrapper comes into play!

Steakhut has a nice feature called Concentrated Reward Farms, which is where users can earn boosted rewards in addition to Steakhut’s LP strategies. Here’s a step-by-step look at how it works, using the AVAX/USDC pool:

(steakhut3)

(That TVL tho, lmao)

Deposit USDC and AVAX into Steakhut AVAX/USDC pool

Get an ERC-20 token representing your share in Steakhut AVAX/USDC pool

Earn 24.67% (as pictured above)

Deposit the ERC-20 token into the AVAX/USDC reward farm, which is on the bottom right

Earn an additional 5.3% in STEAK and JOE tokens (Steakhut Boost)

In addition to paying more yield to users, the reward farms incentivize protocols to provide concentrated liquidity in certain ranges. The protocols can then offer users their native token (the boosted reward) in addition to JOE and STEAK which appear to be the standard bonuses on Steakhut.

Ultimately, when you deposit the ERC-20 wrapped LP tokens, Steakhut puts them into specific price ranges that help create more efficient markets on JoeV2. As you can imagine, this is a win-win for protocols that need the liquidity, especially for smaller/newer projects.

The users win because they get extra rewards in STEAK, JOE, and most likely the LP project’s native token as well.

The projects win because Steakhut manages their liquidity more efficiently and they don’t have to pay a ton of emissions to get the benefit of added liquidity. They can add their own emissions if they want (my guess is most if not all will do this on some level), but the Steakhut depositors already get rewards in STEAK and JOE, so there’s not as much pressure on the protocol that really just wants liquidity. Overall, it keeps at least some mercenary capital away and curbs the need for emissions/inflation.

Steaking 2.0:

The most recent development from the land of Steakhut is Steaking 2.0, which unlocks lots of rewards for $STEAK steakers.

With Steaking 1.0, users earned real yield from the protocol, but it was just in the form of fees from their v1 pools. After the launch of the v2 pools (which is what this article has focused on), the v1 pools were basically rendered obsolete and the liquidity (and therefore the fees) dried up.

But now, a revitalized group of steakers emerges stronger, as Steaking 2.0 pulls rewards from all pools, vaults, and any future products, right into the hands of STEAK steakers.

Here’s how it works:

Deposit your STEAK and receive xSTEAK

Deposit xSTEAK in the “Rewards” tab

Earn real yield in the form of USDC and xSTEAK

There’s also some extra incentive to keep your STEAK locked up. To begin with, you won’t be able to withdraw it at all until 15 days after you locked it. But if you withdraw between day 15 and day 90, you only get back 0.5 STEAK for every xSTEAK that you have. After 90 days, you’ll get back the STEAK at a normal 1:1 ratio.

One interesting feature with Steaking 2.0 is that rewards can be paid out in multiple token types. Currently, the rewards are all paid out in xSTEAK and USDC, but it wouldn’t surprise me to see some JOE rewards mixed in at some point, too. This also means the STEAK token itself could be a beneficiary of the growth within DeFi. As Steakhut becomes more prominent, more projects will want to bribe users to manage their liquidity, and they may even be willing to pay xSTEAK holders directly.

Steakhut’s Future:

Steaking 2.0 is just one of the many exciting things that Steakhut has on its roadmap for 2023. A couple more catalysts over the coming months include permissionless vaults, Strategy Marketplace, and expansion onto new chains.

Permissionless Vaults:

Now that Steakhut is becoming an established DeFi liquidity manager, the team is getting ready to hand control over to the users by allowing permissionless vaults. This means that anyone will be able to open a liquidity managing pool using their own management strategy. This will be attractive for individuals and other protocols alike, and it opens the door for more capital efficiency on JoeV2.

Strategy Marketplace:

This will be a new section on Steakhut’s dapp that will include Steakhut’s permissioned/whitelisted strategies up front as well as custom-made permissionless strategies

Up front, users will be able to see Steakhut’s featured strategies, but there will also be a section to see public vault strategies created by other users. Vault creators will be incentivized to create the best possible strategy as they’ll earn performance-related fees. Of course, a portion of those fees will also go to xSTEAK holders. Everyone benefits from this:

The protocol gets more liquidity as people flock to the top performing strategies,  

The strategy creators benefit by earning fees

Steakers benefit from getting a cut of those fees as well

Overall, Strategy Marketplace brings an element of social trading (another narrative I’m bullish on) to the liquidity management side of DeFi.

Chain expansion:

Trader Joe and Steakhut are aligned in their vision to becoming multi-chain winners, and so both of them have converted their tokens from ERC-20s to OFT-20s. An OFT-20 is LayerZero’s Omnichain Fungible Token standard, and can be used across any LayerZero-compatible chain (of which there are many). With JoeV2’s recent expansion to BNB chain, I think it’s fair to say Steakhut will make that their next destination as well. The sky is the limit!

Stay Tuned:

If you made it this far, congrats! I hope you enjoyed part 1, and I hope you learned something useful. I’d love to hear any thoughts, questions, corrections, etc. in the comments below. Stay tuned for part 2!

Despite the countless memes that question the “earliness” of crypto, I think it’s safe to say it’s still very early. Sure, we had the 2021 hype where everyone’s aunts and uncles that haven’t talked to them in years asked if Dogecoin was a good investment, but that’s a blip on the radar in terms of the actual growth within the industry. We are still early indeed.

One argument that solidifies how early we are is the narrative-driven price action that’s still very much a part of crypto markets. You see this to an extent in stocks, commodities, etc., but nowhere is it as pervasive as crypto (except maybe some penny stocks here and there)

As such, knowing the new, shiny narrative is part of the game that we all have to play. But another part is knowing the potential narratives that haven’t yet reached the surface. And if there’s any narrative in crypto that’s underhyped, it’s privacy.

I realize that governments around the world have been harsh on privacy features such as mixing services, with the recent attack by the USGOV on Tornado Cash and the subsequent arrest of one of the core developers of the project scaring a lot of people away from this space.

However, encryption is one of the core tenets of cryptography, and therefore it should have a large role in cryptocurrency – it’s literally in the name.

When it comes to personal finances, you can’t have a durable, viable system without privacy for the user. For example, it wouldn’t make sense if you broadcasted your entire financial history to the world whenever you made a purchase or sent money to someone – nobody would use that service.

However, that’s how a lot of major blockchains currently function. If you pay for anything with crypto, chances are it’s pretty easy to trace that payment back to your bank account and a lot more. Full transparency has its place, but we also need an option for privacy. There are a few projects working on bringing privacy to the mainstream in crypto, but Secret Network is the most unique and robust in the game.

How Secret Network Came To Be

As the name suggests, the Secret Network team is building a scalable, privacy-focused blockchain that allows people the option to disclose certain information to certain parties. You know, like how the real world works.

First, let’s go over a brief overview of their history.

What we know as Secret Network today was born out of a project called Enigma, which was started all the way back in 2015 by Guy Zyskind. Enigma actually held an ICO back in 2017 (one of the rare legitimate ICO’s of its time), and raised an impressive $45 million right off the bat.

Blockchain networks in general are typically made up of a collection of nodes, whose core responsibilities include executing, verifying, and storing data. The plan for Enigma was to build a blockchain where every node at any given time can only hold/process a seemingly random part of the data, such that influence over the network would never become centralized.

This type of system is known as “multi-party computation” (MPC), and Enigma planned on optimizing it for all sorts of use cases. However, in January 2020, the decision was made to rebrand the project as “Secret Network” and deploy it as a layer-1 network in the Cosmos ecosystem. Just 8 months later, Secret was successfully launched on mainnet, making it the first live blockchain with fully encrypted smart contracts

As it turns out, creating a private blockchain is no easy task! I guess that’s why nobody had achieved it before at scale. The strength of blockchains is their ability to store data and verify its accuracy, but making that data private is a whole different game.

In order to create true privacy on a blockchain, the validators need to be able to validate data without knowing exactly what it is. We’ll get into the details in a bit, but this is an ongoing process for Secret as they continue to chart new territory.

You may be familiar with other “privacy chains” like Zcash and Monero, which are great for transactional privacy, but the infrastructure used by these chains becomes less secure as you use it for more things (like smart contracts). However, Secret is taking this to the next level: programmable privacy.

This method takes “transactional privacy” offered by privacy blockchains like Monero and ZCash a step further. Not only are all your transactions private by default, but you can program (customize) your privacy depending on the circumstance.

Bringing Privacy to Cosmos:

Secret Network is built using the Tendermint software development kit (SDK), which is core infrastructure of the Cosmos multi-blockchain universe. Tendermint is a deep rabbit hole of technical information, but the most important thing to know about it is that Secret uses the Inter-Blockchain Communication (IBC) protocol, which allows it to communicate with other IBC-compatible blockchains in the Cosmos network. So, Secret Network uses Tendermint, which includes IBC, which lets Secret share information with other important Cosmos blockchains.

The ability to share information with other Cosmos chains is crucial because of the network effect: as more people realize the benefits Cosmos has to offer, they’ll most likely first use some of the bigger chains like Osmosis, Juno, Evmos, etc. But as privacy becomes a bigger use case (not just narrative) and Secret continues to build amazing products, it’ll be easy for Cosmos users to bring money into the Secret ecosystem.

Not only that, but the privacy aspect is a huge milestone for attracting institutional money. If big organizations use a big L1 chain like Ethereum, Solana, or even Bitcoin to transfer money, it won’t be long before some online sleuth doxxes them.

With Secret, they have privacy by default, which is the only viable option for a lot of these companies.

Think about it – would a pension fund want all of its holdings fully visible all the time? Would a hedge fund want everyone to be able to see every trade in real time? This would be a disadvantage for pretty much all financial companies.

This gives Secret a massive edge; they’re far and away the leader in terms of offering financial products shielded by a layer of privacy.

A Look At The Tech Of Secret Network

In this section, we’re going to take a look at some of the amazing tech that Secret Network uses to retain privacy for its assets. Going over all the tech would take days and is a bit above my pay grade, but I’ve broken it down into four main components:

Nodes

Secret Contracts

Trusted Execution Environments (TEE)

Access Control

Nodes:

Secret Network is run by a set of nodes that process and verify transactions. These transactions are bundled into a “block” every 6 seconds, and added to the blockchain which contains all previous blocks since the network began.

As a reward for securing the network, validator nodes are paid SCRT tokens every time they create a new block (we’ll go over the SCRT tokens in more detail later). Currently, there can only be a total of 80 validator nodes, but this number will continue to increase to make the network more decentralized.

Secret Contracts:

While many blockchains use smart contracts to run applications, Secret Network uses their privacy-focused version: Secret Contracts.

Essentially, Secret Contracts can do everything smart contracts do, plus they have some additional features. This gets very technical, but the summed-up version is that they allow encrypted transactions to be made, meaning that nobody can actually see the details of said transactions.

This allows all sorts of interesting services to exist on blockchains that previously couldn’t, like a lending protocol where nobody can see what your collateral is, NFTs with private content/ownership, and a lot more that we’ll go over a little later. They also prevent MEV, which has been a huge issue for blockchain users over the past couple years.

The details of MEV go beyond the scope of this article, but most of it has to do with users’ orders being front-run by bots. Overall, MEV has resulted in the extraction of nearly $700 million of user funds since 1/1/20. For more information on MEV, here’s a great resource.

Trusted Execution Environments (TEE):

As a non-technical person, this is part of the Secret Network technology that blew my mind when I first read about it. Essentially, a trusted execution environment refers to a certain area within a CPU processor where data is stored, and no other part of the system can access it.

There are different types of TEEs, but for uniformity’s sake, Secret uses the Software Guard Extensions (SGX) version, which is a feature of certain Intel processors. Think of the TEE as the only holder of a master key that can read anyone’s private data.

The TEE unlocks data, reads it, and locks it again before sending it back out into the viewable network. To ensure maximum security and privacy, this is the only place where the contents of Secret Contracts are seen (decrypted).

This is also where the “consensus seed” lives. All public and private keys are derived from the consensus seed – it’s essentially a string of random numbers that acts as the ultimate password for the entire network. Each validator holds it in their TEE, but nobody can see what it is.

Now, you may be thinking “if all computations are done in an area that nobody can see, how do people see their own account information?” The answer is that you can see it because you own your private key, which is specific to your account and not the same thing as the consensus seed.

Every time you sign a transaction, you’re signing with your private key, which proves that you own your private key, which the network recognizes and therefore it allows you to see your account information.

Access Control:

Taking that a step further, another thing that puts Secret in a league of its own is access control; that is, telling the network exactly who can see your account data, and exactly which parts they can see. Within access control, there are two key parts: permits and viewing keys.

Viewing Keys:

Viewing keys are a custom solution built into Secret Contracts that allows the network to cryptographically authenticate its users. In other words, anyone holding an account’s viewing key can see the contents of that account.

Note that this is different from a private key. Private keys allow the owner to not only see the account data, but also to make transactions. This is where Secret improves on public blockchain infrastructure, where anyone can go look up anyone else’s address and see everything they’ve ever done.

When you create a Secret Network account, you’re the only one that owns the viewing key. However, you can share your viewing key within the network, which allows other entities to view your account without having any control over it – this fulfills the idea of programmable privacy.

Permits:

Permits were developed as an alternative to viewing keys to offload some strain from the network.

They basically do the same thing as viewing keys: they let another party view your account information, but they grant that permission for different time frames. Viewing keys are a one-time deal, where you allow another party to view your account, and they maintain that permission until you change they key. Permits, however, only grant access for a single session, so it’s much more temporary

The main advantage that permits offer is that they don’t generate transactions, which means that the network doesn’t have to store any additional data when permits are granted. Permits also don’t require the one-time fee that you need to pay when you share your viewing key since there’s no transaction occurring.

The Ecosystem And Use Cases Of Secret Network

In this section, we’ll look at the uses/functions of the SCRT token, the SNIP-20 standard, and some examples of how Secret Network’s privacy enhances things like communication, DeFi, and NFTs.

SCRT:

SCRT is the native token of the Secret Network blockchain, and it has 3 primary use cases

1.)    It’s used to pay transaction fees

2.)    Validators need it to secure the network

3.)    It’s needed to be able to conduct governance

Each transaction made by users of the network pay transaction fees with SCRT, which are then paid to validators. Validators also earn SCRT as a reward for keeping the network secure. Anyone can stake SCRT to earn part of these rewards by delegating their SCRT tokens to individual validators.

Because it’s constantly being paid out to validators, there’s no supply cap on SCRT; it’s constantly inflating. However, the inflation rate depends on how much SCRT is being staked.

If the ratio of staked SCRT to non-staked SCRT is under 66%, the inflation is 15%, which means that stakers and validators get paid more tokens. That incentivizes more people to stake, and as the ratio goes higher, the inflation rate gradually drops to a minimum of 7%.

Right now, there are about 192 million SCRT tokens outstanding. If 76 million are staked and 116 million are unstaked, that makes a ratio of slightly less than 66%. So, the inflation rate would be 15%. Then, as people stake more to get the higher rewards, as well as to avoid being diluted at 15%/year, the rate drops.

Between inflation and block rewards, Secret stakers consistently make over 20% APY, which is more than most blockchains; however, that comes at the cost of non-stakers being diluted, which isn’t great incentive to hold the token.

Finally, SCRT is the only Secret Network-native token that’s public by default, but there’s a way to convert it to a private version, thanks to the SNIP-20 token standard.

The SNIP-20 standard:

Just like Ethereum-compatible tokens are made using the ERC-20 standard, tokens that can interact with Secret Network use the SNIP-20 standard. If you want to convert your SCRT tokens into private tokens, you’ll need to convert them into the SNIP-20 equivalent: sSCRT (secret SCRT).

SNIP-20 also enables non-private tokens from other blockchains (like Ethereum’s ERC-20 tokens) to be integrated into Secret’s blockchain and made private. For example, if you want to use ETH on the Secret Network, you’ll need to convert it into “sETH,” and then it’ll be compatible to work with Secret Contracts.

Aside from SCRT, all tokens created on Secret Network have all the privacy features built in. As I mentioned earlier, this creates the potential for tons of use cases that aren’t possible on any other blockchain.

Apps/Use Cases

Back in January 2022, Secret Network revealed that they had raised $400 million in investments from all sorts of major players around crypto. This gives them massive clearance to create all sorts of exciting projects. While 2022 was a year of funding/prepping the network for adoption, I believe 2023 will be a year of some major app launches and adoption on Secret.

As I mentioned, the three use cases I’ll highlight are communication, DeFi, and NFTs.

First, Alter Network is enabling private communication via Secret Contracts, including encrypted messaging, data sharing, file storage, and more.

A while back, it was made known that social media giants like Twitter and Instagram had access to all of their users’ DMs, and at times they were actively censoring them. While not that surprising, this caused a brief moment of panic for lots of people, and many started using encrypted apps like Signal instead. Unfortunately, a lot of the “privacy apps” out there still have some form of KYC, which to anyone who values comprehensive privacy, sort of defeats the point.

Taking this idea a step further is Alter, which aims to be the killer app that merges privacy with communication. Whether you’re texting, calling, video chatting, or file sharing, Alter uses Secret Contracts to allow you to manage your own privacy.

Something that stands out to me with Alter is the fact that they will soon be compatible with mobile use; they plan on listing on iOS in the next few months. If web3 is going to make a push towards mass adoption this year, you need to be where the users are – and that’s mobile, without a doubt.

Alter’s roadmap is scheduled to come out within the next week, and I’ll update this article once that’s released.

Next, Shade Protocol aims to be Secret’s all-in-one privacy DeFi app.

Shade is the frontrunner to revolutionize the DeFi landscape and has the potential to bring major attention to Secret Network. DeFi is still the most popular facet of crypto, and Shade is cutting no corners as they plan on featuring a DEX, lending platform, liquid staking for SCRT, and a native stablecoin, SILK.

The added privacy inherent in Secret Network means that people will actually have control over who sees their crypto holdings. On other blockchains, if your address gets doxxed (and there’s really good software out there optimized to do just that), everyone will know your entire account balance and transaction history – that’s just not practical!

Liquid staking is also a huge deal, as it makes capital flows in DeFi way more efficient by allowing you to stake your SCRT while holding an IOU that you can move around and trade as if it were actual SCRT.

The thought behind SILK is quite interesting as well. Consistent with the ethos of Secret, the goal was to create an actual decentralized stablecoin. Most stablecoins out there are pegged to one single fiat currency; however, that’s really the opposite of decentralization and really goes against the point of cryptocurrency. So, instead of pegging SILK to USD, it’s pegged to a basket of currencies and commodities: Bitcoin, gold, USD, JPY, EUR, and CAD. As more assets become available on the blockchain, SILK will look to further decentralize the basket.

Right now, Shade offers wrapping (converting non SNIP-20s to SNIP-20s), bonding (buying discounted tokens for a set period of time), liquid staking, and bridging to other IBC-compatible chains. However, big things are on the way, as Shade Protocol’s DEX, ShadeSwap, is expected to launch on mainnet on February 7^th, and SILK soon after that. As more information comes out, I’ll update this post as well.

Last but not least, I’m convinced that privacy is going to revolutionize media/NFTs on web3.

Last year, Secret NFTs generated more hype than anything else on their chain for a couple reasons.

First, there were a couple massive partnerships with movie directors Quentin Tarantino and Kevin Smith. And second, the integration of Secret’s privacy with NFTs created a whole new dynamic for asset ownership.

Programmable privacy gives NFTs an added form of value – when you buy an NFT on Secret Network, you’re the only one who can view the contents by default. Of course, you can choose who else can see them by sharing your viewing key, but never before had this been possible. This is ideal for movies or similar media – when you pay to see a movie, it wouldn’t make sense if everyone else could see it for free. This allowed Kevin Smith to create the first ever NFT film: “Killroy was Here.”

Currently, Stashh is the biggest NFT marketplace on Secret, but activity has been extremely quiet during the bear market.

Another app unleashing the power of privacy-enabled NFTs is Eqoty, which is aiming to be a solution for the musicians who are being constantly ripped off by record labels and streaming services. With Eqoty, artists will be able to list their work directly while getting the benefits that Secret Network has to offer.

Just like the movie example, the buyers have exclusive access to the music via the encrypted NFT. This also allows artists to communicate in other ways and have tiered fan bases where superfans receive exclusive content like personalized messages, tracks, etc.

Other blockchains don’t yet have a good solution for this – you have to do some form of KYC or trust someone else with your data in some way in order to get “premium” content. But on Secret, the artist can just choose which products to make visible and price them accordingly.

Currently, NFTs are mostly associated with various forms of art, but at their core they’re the future of asset ownership. Secret takes it to the next level by incorporating privacy into that ownership via encryption, which is extremely valuable, especially with big-ticket items – imagine if everyone could see all assets owned by billionaires!

Going forward, I could see Secret Network being a perfect solution for asset distribution, storage, and sharing via NFTs.

How Secret Laid The Groundwork For Mass Adoption In 2022

If you’ve been paying attention, you’re (hopefully) coming around to the idea of a privacy chain being a fundamental part of web3. If that’s accurate, it turns out that Secret Network shares your enthusiasm, and they understand that mass adoption required a network that can withstand, well, the masses. In order to prep the network for potentially millions of users, they took a series of actions in 2022 known as the Shockwave Upgrades.

The first part, Shockwave Alpha, took place last May. This had 3 huge impacts on the network, and was a great first step to secure their spot in an interchain future.

The first impact was a 500-600x improvement in performance for certain types of actions, such as permits, NFT mints, and cross-chain airdrops. The NFT mints are the one that stands out to me; highly-anticipated NFT releases have been known to clog other blockchains like Ethereum. Considering the benefits of Secret NFTs, I think they’re very overlooked when it comes to future NFT releases, and Alpha was a big step in making them even more attractive. Airdrops are also a huge part of the Cosmos appchain culture, so it’s great to see the improved performance there as well. As SCRT becomes a more prominent part of DeFi and privacy in general, I believe the airdrops we’ll see in the future will grow in terms of both quantity and quality.

The second impact was enabling interchain accounts, which Cosmos enabled via IBC just weeks prior. The benefits of this are clear as well; easier access to other Cosmos chains via IBC makes for a much easier onboarding process and will attract more liquidity as the privacy hub of Cosmos.

The third impact was automatic updating of Secret’s state (the blockchain’s transaction history) whenever a network sync goes through. Prior to Alpha, each node runner had to manually do this, so Alpha was a huge help with handling Secret’s most critical infrastructure in more efficient manner.

In September, Secret performed part 2: Shockwave Delta, which upgraded Secret Contracts to the CosmWasm v1 contract standard. This has 3 huge benefits.

First, it makes it a lot easier for Cosmos developers to create Secret Contracts, since the format is aligned with other IBC chains.

Second, it enables Secret’s private contracts to communicate with smart contracts on other IBC chains.

Third, it makes SNIP-20 tokens transferable, which means they can be listed on other DEXs in the Cosmos universe, and tokens from other chains can be made private on Secret.

To summarize, Alpha set the stage for this interoperability by implementing IBC, and Delta drove it home. The new possibilities for Secret following this upgrade are endless; for example, a DEX aggregator on Secret could include swap routes from DEXs on multiple blockchains in its results . That means the user gets the best possible trade outcome across the Cosmos ecosystem while maintaining total privacy

Last but not least, Secret’s Shockwave Omega upgrade came in November, bringing the biggest improvement yet to the network: the upgrade to Wasm3.

Think of this as switching from a horse and buggy (clunky, slow, smelly?) to that nice shiny Lambo people keep talking about (fast, smooth, the envy of its peers). Both get you from A to B, but one does it much more efficiently.

Before Omega, Secret had been using the horse and buggy equivalent of bytecode interpreters called wasmi.

Before Secret’s mainnet launch, the launch was the top priority, and using wasmi back then made it much easier and faster to launch. Wasmi was also made for SGX, the core tech that enables privacy on Secret, so back then it made sense.

However, now that the time has come to prepare for mass adoption, Wasm3 is obviously the better choice. Overall, Wasm3 brings a 3.5x increase in transactions per second (TPS), and it also lowers gas fees. The apps on Secret will need to upgrade their frontends for this change to become noticeable, and any app that wants to have staying power will surely do that

The Future: Secret 2.0

Secret Network had its share of setbacks in 2022, but that’s bound to happen when you’re breaking ground in one of the most complex tech fields on the planet. As someone who strongly values data privacy, I’m very excited to watch Secret continue to grow and persevere, even when mistakes are involved.

First, Cosmos chain TVLs across the board were decimated with the implosion of LUNA last May, and Secret was no exception. Like many chains, user activity on Secret has slowed down considerably since the end of the bull market. However, developer activity is still surprisingly strong, and the optimism and motivation of the Secret team is one of the reasons I’m extremely bullish on the project.

It’s also clear that investors want in on what Secret has to offer; as I mentioned before, the $400 million in funding speaks for itself – Secret is just getting started! With the inevitable arrival of the next bull market, I expect Secret to get a lot of attention from people inside the crypto community as well as outside. There’s no question that privacy is top-of-mind for a growing number of people and institutions as authorities around the world continue to abuse their power.

Second, on October 3^rd, a vulnerability was discovered within the TEE of certain Intel SGX CPUs. Thankfully, it was discovered by a white hat team and the damage was minimized, but it’s still something Secret needs to fix if they want to maintain a position in the privacy blockchain arena.

Fortifying their privacy is Secret’s top goal going forward, which they’ve outlined in their Secret 2.0 plan.

While a whitepaper for Secret 2.0 hasn’t yet been released, the ultimate goal will be to integrate more than one form of privacy into the network. As I mentioned, the only form of privacy in use right now is TEE, but we’ve seen that even this piece of sophisticated security still has vulnerabilities.

However, there are several more possibilities that can be used in addition to that, namely multi-party computations (MPCs), fully homomorphic encryption (FHE), and zero-knowledge proofs (ZKP). I won’t get too into the weeds here, but each one of these has some form of trust assumption:

For TEE, you need to trust that the hardware (e.g. SGX) is secure.

For MPC and FHE, you need to trust that the validators won’t collude.

For ZKP, you need to trust that the prover (which proves validation of transactions) is accurate.

With TEEs, it’s very hard to get the consensus key from the secure part of the CPU.

If you add MPC and FHE in addition to that that, it means that not only do all the validators only have a tiny piece of the consensus key, but it’s stored in a TEE on each validator. So, you’d have to break through the TEE on each validator to get each part of the key, and then on top of that, a majority of the nodes would have to collude. This would make security exponentially more robust, and further distance Secret from the rest of the pack. For more details on each type of network, you can read this amazing rundown by Guy Zyskind.

To wrap it all up, Secret Network has an extremely promising future. They’re far and away the leader when it comes to privacy-focused blockchains, and I believe their adoption will boom in the next bull market as more people are once again onboarded into crypto. Additionally, as institutions look into integrating with blockchains, Secret will stand out, as it’s the only one with a track record of success and a wide variety of applications that use programmable privacy. As Secret 2.0 transitions from idea to reality, it will exponentially widen the lead that Secret has on their competition, making its future something I’m excited about and feel privileged to be able to witness.