DeFi Spaces Alpha -- Week 1
Projects to NOT Fade: LayerZero, Valio, Savvy, Lyra, Synthetix, Ethena, Resonate, Velodrome, Gravita, and Liquis
Space #1: LayerZero x Valio
The overarching goal of Valio is lowering the barrier to entry into DeFi, and the best way to do this is by creating the ultimate asset management protocol
LayerZero helps bring down this barrier – there are all sorts of assets and chains to track, the best protocols and assets aren’t all on the same chain – need access to all of them all in one place (Valio)
Asset management – the “last unsolved vertical” in crypto
Why is it unsolved? Because nobody had created a way for managers/traders to control assets without having to be trusted
Valio makes a cross-chain asset management platform feel like everything is in the same account
Absolute need for abstracting away the network, as well as abstracting away the wallets – this will get DeFi to the point where it can really strive for mainstream adoption
Cross-chain messaging is still in its infancy, eventually it’ll be normal to have chain-to-chain interaction, even between private and public blockchains, and ultimately different blockchains will share the same state. On that front, there are lots of things are being built on top of LayerZero that haven’t been announced yet (let your imagination run wild!).
Asset management needs that shared state quality to survive, and that’s why Valio is the leader in the space
Finality is insanely important – if Max could make one problem in DeFi go away, it would be reorgs – because blockchains don’t know each other’s state, cross-chain transactions are really slow and bad for UX, and in the worst case it can lead to people losing their money
7/24 – SZN0 launched private beta, got 36k applications – huge signal
8/7 – Valio goes public, everyone will have access to invest in all sorts of strategies
Space #2: Arbitrum x Savvy DeFi
Savvy is a relatively young protocol on Arbitrum, the team was originally formed in February 2022 – live on mainnet since June 15th 2023
Allows users to take out a loan against crypto with no up-front interest, it’s self-repaying, and also there are no liquidations, no lockups, and no deposit/withdraw fees
How?
The collateral that you provide actually earns yield (for example, from GMD) from a strategy that you pick
For example, if you deposit WBTC, that’s deployed in a strategy to earn yield, and your debt will be in svBTC (savvy BTC), which is pegged to BTC and should have very similar price to WBTC, so no liquidation (first non-liquidating loan against BTC in DeFi)
Original vaults are Aave-based (WBTC, ETH, USDC), but Savvy is also working with projects like Jones, Trader Joe, Beefy for more strategy options, also some LayerZero projects and LST projects – lots in the pipeline!
Savvy plays an important role in the Arbitrum ecosystem – allows users to keep holding their current tokens while unlocking liquidity in the form of credit, which they can then do whatever they want with – fosters margin/growth
Also gives utility to other ecosystem players (GMD, Jones, etc.), and it allows Savvy’s token derivatives (svETH, etc.) to be pegged via these other platforms’ liquidity pools – separation of bins on TJ’s liquidity book are very helpful to keep the peg
SVY token – incentive for liquidity providers – no-lock ve mechanism that gives yield to token holders as well as additional yield for users with outstanding debt, will also provide rewards to LPers who help keep sv-tokens pegged – rewards emissions voted on by SVY holders
Right now, users can pre-farm SVY by providing liquidity to sv-token pools on Trader Joe
Would be awesome to see projects building on top of Savvy at some point (self repaying loans using Savvy, launchpads, etc.), also want to see proposals to add more assets as collateral
Repayment mechanism – when you choose your collateral, you choose your vault strategy to earn yield, then that yield is automatically converted back into your collateral asset and reduces your debt position – 10% of the yield goes to Savvy which allows for no deposit/withdraw fees
There’s also a loan migrator which can switch your loan without you needing to re-deposit
Savvy is also going to be integrating with an offramp solution, allowing users to convert fiat to crypto and use the platform – pick your strategy as you deposit from your bank account – also working on integrating gasless transactions – lots of great feedback/ideas from users
August 8th – LBP (liquidity bootstrapping pool) on Fjord Foundry – only the 3rd project on Arbitrum to do this – after this is launched, deposit pool limits will be increased (currently full)
Space #3: Lyra V2
Lyra’s ultimate goal is to be the largest generator of on-chain options
Started back in 2021, first project to launch an options DEX on an L2 (Optimism) in August 2021
Very hard to scale this type of project without massive TVL ($100M+), so had to rethink the protocol from the bottom up – want to optimize the protocol for a 5-10 year horizon
Enter V2 – spot/perps/options trading platform (aiming to launch in Q4)
V2 is a stack modular stack with 3 layers – better than having all components built into one set of smart contracts which makes migration/feature additions/upgrades very difficult
V2 Layers:
Lyra chain – OP stack rollup (huge network effect developing, tons of projects building on OP stack)
Lyra protocol – risk engine, supports portfolio margin, cross-margin between options/perps, and cross-collateral (eg. sell BTC puts with ETH collateral), easily hedge perps with options
Matching layer – Orderbook-style matching engine
Modular stack is also more capital efficient – can do 3m notional volume w/1m TVL rather than 15m TVL
Currently working on proposal for V2 tokenomics – want to achieve 3 things:
Decentralization of protocol
Turn DAO into sustainable organization by introducing protocol revenue
Use token to bootstrap adoption by incentivizing key users
Recently launched mechanism to delegate tokens to voters
DAO needs to earn fees to sustain future expenses – fees generated will be in 2 ways:
Capture spread between selling blockspace on L2 and buying on L1 Ethereum
Trading fees – normal trading fees, liquidation fees, interest on borrowed positions (V2 will enable users to borrow against collateral)
Fees will all go to protocol security module – keeps funds safe in case protocol is compromised
Tokenholders will decide on how the fees are used
Can also combine security module with AMM to improve capital efficiency, can be used as a source of liquidity
Foundation – going to run the order matchers, may also charge fees which will also go to PSM
Incentivizing option market makers (where DeFi has failed thus far) – need to have a top-tier market making program, incentivize based on volume rather than quotes, also need sufficient organic liquidity
AMM is coming back as well – date TBD
Will start with ETH and BTC options, but since the modular stack is so flexible, custom use cases for altcoins can be added as well
Standard margin manager – looks at margin individually for each position
Allows cross-margin activity (Short BTC options using ETH as collateral, short ETH perps using BTC as collateral)
Also allows for capital efficient spreads – don’t need to lock up any margin
Portfolio margin manager – allows for huge amounts of capital efficiency, looks at margin in aggregate over an entire portfolio, sets margin requirement based off worst-case scenario
Only allows you to have only one form of collateral (ETH position must be backed by ETH) – this cancels out risk – as risk decreases, so does margin requirement, which increases capital efficiency
Space #4: Synthetix x Ethena
At this point, there’s not enough liquidity in DeFi to make a perfectly decentralized stablecoin – there’s way more liquidity in the CEX derivatives market than DeFi derivatives (about 25x more)
So, the goal became to find the middle ground – use liquidity of CEXs to back an DeFi native stablecoin and try to keep it off CEXs
Ultimately, at this point, scalability > decentralization
Ethena’s stablecoin has a delta-neutral design (staked ETH + short ETH perp on CEX/DEX) – similar idea to UXD, Lemma, etc. – this model works, but there just wasn’t enough liquidity in DeFi to make them successful
If DeFi wants to compete with CeFi, it needs to make some compromises and adjust as more liquidity enters DeFi and makes fully decentralized stablecoins more viable
How does this work when ETH perps have negative funding rates (meaning shorts pay to hold trades open)?
Funding rates are positive a majority of the time, even in 2022, which means that longs pay shorts (income for Ethena which can be saved in case of negative rates)
Also, staked ETH yields have historically covered what would’ve been the amount paid for funding rates, and there will also be issuance generated to cover the rates if they exceed staked ETH yield – 3 lines of defense to combat negative funding rates
Even if all 3 fail, the interest rate of the stablecoin would be negative, which would cause people to withdraw from the protocol, which would decrease Ethena’s overall short position, which decreases the damage done by negative rates
Kain – we’re about to enter a golden age for decentralized stablecoins
So far, we’ve been limited to 3 main stablecoin designs – fiat stablecoins (centralized), overcollateralized (decentralized up to a point), algorithmic (many failed attempts)
New 4th option emerging – delta neutral stablecoins – decentralized (up to a point), very scalable, ideally censorship resistant
Thoughts on the current and future role of stablecoins in DeFi:
Right now, staked ETH yield is the only consistent DeFi native yield that competes with TradFi rates – might explain why many of the newer stablecoins are backed by staked ETH
The delta-neutral approach of collateralization brings another source of real yield – funding rates (when they’re positive) – easy to see how this could attract more demand
With that increased demand, more people will do more things with stablecoins on-chain because there’s incentive to earn its yield (stablecoins will be used in a more active role)
How Ethena plans to use Synthetix v3 to carry out their vision:
Ethena will be trading on Synthetix’s platform, which provides liquidity and benefits Synthetix
V3 permissionless pools allows Ethena to create an “internet bond” – stable financial asset with embedded yield – can plug that into Synthetix and possibly even wrap sUSD around it (like how FRAX is minted against USDC)
Synthetix Perps’ role in Ethena’s stablecoin:
Synthetix basically modeled their perps product around funding stability (rather than sole focus being on UX, maximizing LP returns, etc.) – users are incentivized to stabilize the funding rate which creates a better environment for Ethena and their stablecoin
Also, on-chain pricing and references to Binance’s orderbook depth make it CEX-like in terms of execution but keep it all on-chain
Thoughts on scaling sUSD:
Cautiously optimistic on USDe being a primary collateral form – can be used as collateral in smaller pools and Infinex
Don’t want to go the DAI route and basically be backed by centralized stablecoins
Much more flexibility in V3 to take on more forms of collateral
Ultimate goal is for USDe to be a major reserve asset in DeFi
Timeline:
Ethena launch – finishing up internal testing over next 6 weeks, will have more news after that
Synthetix integration – no hard public date yet – best to join discussion in discord
Space #5: Resonate x Velodrome
Velodrome summary @9:00 and @14:50 – guessing most of you know it already so I won’t summarize here – meant to be an improved version of Andre Cronje’s Solidly DEX (first ve(3,3) AMM), everything on Velodrome is on-chain, built in modular style which makes upgrades/changes to protocol much easier/smoother
Revest x Velodrome:
Velodrome was one of Revest’s launch partners back in the day (Resonate is a Revest product – allows users to get full year’s APY on YBA’s up front)
Resonate works with protocols that incentivize liquidity on Velodrome to also have incentives on Resonate – helps boost liquidity for Velodrome
Example – frxETH pool pays ~8%, using Resonate, you can get that all up front except you get paid in frxETH instead of VELO – the VELO tokens go to Frax, and LPers get up-front yield
Velodrome fees exploding:
Max fees on any pool on Velodrome v1 is 0.05% (same as Solidly) – v2 has fee switch, can be more than 0.05% – hence increased fees
Aerodrome vs Velodrome:
Aerodrome codebase built upon Velodrome v2 codebase – almost the same – will have a “public goods flywheel” which will vote for “public goods pairs” which are ideally blue chip assets like cbETH, stETH, etc. – a portion of fees from these pairs will fund public goods grants to incentivize more protocols, more activity, etc.
The point of making Aerodrome rather than just deploying Velodrome V2 on Base is to keep all benefits of the protocol contained to its home chain – encourages native growth rather than extraction of value from other chains back to home chain
Superchain:
Fully modular approach to blockchains – each app on its own chain (rollapps), can operate independently, way more efficient since the speed of one app isn’t affected by activity on another app – reduced costs, also will see account abstraction implementations
Already lots of activity to deploy rollapps – account abstraction will play a major role over the next 3 years
Portion of fees go back to Optimism collective to fund ecosystem growth
Future of Velodrome:
Next step – Concentrated liquidity AMM – will be an option rather than have every token use CLMM model
Velodrome relay system – automated voting management – deposit veNFTs and have your votes automatically managed, earn rewards
New governance feature will allow voters to whitelist new tokens onto Velodrome themselves
Velodrome Fed – voters will be able to adjust emissions of the protocol on a broader basis – longer-term (2ish years)
Space #6: Gravita x Liquis
Gravita is officially the first Launch Partner for Liquis – many more in the pipeline
Gravita also recently deployed on Arbitrum – borrow against rETH, wstETH, wETH
Liquis (LIQ governance token) – the Convex for Bunni – Bunni manages liquidity positions on UniV3 – The fact that this is all built on top of UniV3 has huge benefits – biggest and most liquid DEX in DeFi
Also, with so many pegged assets launching (LSTs, stablecoins), there’s a huge need for apps like UniV3, Bunni, and Liquis
Bunni already enhances Balancer’s features to bootstrap liquidity for young protocols, and Liquis takes this to the next level by simplifying everything
Convex/Aura are successful because of their power-users – other protocols that have interest in bribing/bringing liquidity to their pools – Liquis is attempting to build the same base of users by giving 10% of all LIQ tokens launch partners such as Gravita
GMX has received tons of celebration for paying high real yield, but veLIT has been consistently paying 100%+ APR, 60-70% of which is in ETH – gigantic real yield – the downside is you have to lock your tokens for 4 years, but Liquis is changing that
Liquis 3 main features:
Lock Balancer Pool LIT tokens with Liquis, earn higher real yield (last epoch: 110% APR in ETH and BAL rewards)
Boost rewards for LPs via veLIT
Improve UX for oLIT
Token incentives for LIQ and liqLIT:
liqLIT is meant to be a real yield machine – similar to cvxCRV or auraBAL, gives people a way to earn real yield on LIT
Platform fees split between LIQ and liqLIT
When you claim oLIT, you’re also claiming LIQ – 0.39 LIQ per oLIT, ratio will gradually trend towards 0 (same mechanism as Convex)
How is Liquis improving/impacting liquidity for Gravita:
Gravita already has a couple pools on Bunni (GRAI/USDC, GRAI/swETH)
This partnership will make it easier to have more pools on Bunni which will improve liquidity conditions for the GRAI stablecoin
oLIT improvements:
Users no longer have to interact with oLIT – farmers can choose to claim oLIT, LIT, or liqLIT – claim transaction gets scheduled with others, and when there are enough people to claim, all transactions are filled at once – sort of like bundling transactions
Safety:
Liquis – being audited by 2 well-respected auditors, offering high bug bounties for white hat hackers
Gravita – audited by 2 huge auditors as well, also the fact that they’re a fork of Liquity (older, huge DeFi project) means a lot of eyes have already been on their code and so far so good
Launch:
Aiming to launch in 4-6 weeks
Prelaunch – deposit LIT, that LIT is converted into veLIT – Liquis then has voting power on Bunni emissions
Metagovernance – for every proposal to manage emissions on Bunni, there will be one on Liquis where LIQ lockers (vlLIQ) can also decide where voting power is going
There will also be a feature to allow vlLIQ holders to delegate voting power to bribers – delegating will cost gas, but voting won’t (voting is done on snapshot)