Transgressing the Boundaries Of DeFi: Interview With Co-Founder Of Solv Protocol

By Edward Moon | Analysis From Moon | 9 Dec 2021

While the blockchain space is incessantly moving in the direction of mainstream adoption backed up by sustainability of operation, the system is still far from being flawless. The whole plethora of financial instruments populating the field of traditional finance is still missing from DeFi, curbing the smooth transition to the decentralised banking future. Recognizing this problem, Solv Protocol was the one to break in and offset the gap: by introducing its own token standard EIP-3525, Solv aims to resolve one of the most pressing problems in the emerging field of digital finance -  the absence of an efficient and flexible tool to express complicated financial contracts; but even more than that, Solv streamlines the creation of synthetic assets for anyone willing to come up with their own financial instrument. The radical role in this is given to the brand-new ERC-721-compatible NFT standard, which is the main engine behind the financial transformation of the future.

By leveraging NFTs as an effective medium for expressing even the most entangled bits of information, Solv knocks out the space with the new quality of operation serving as a tipping point for NFT in terms of management, creation and trade of new tokens. Distinguished from the former token standards such as ERC-721 and ERC-1155, Solv Protocol created this new standard with ID-SLOT-UNITS – the mechanism allowing to engineer financial instruments of complexity hereto unseen. Coming up together with Financial Transaction Vouchers (FTVs), the first in the space lock-up allocation service, Solv Protocol accelerates the NFT development and brings it to the next edge in which the variety of creative financial scenarios have a potential to be brought to fruition.

Being stirred by the proposition of Solv Protocol, I decided to invite the Co-Founder of the team for the discussion. During the course of our talk, we touched upon the most delicate topics in DeFi, namely the functionality of the latest Ethereum upgrade, as well as how the arrival of the first FTVs is going to shape the course of development of the fast-growing niche of NFT.

1. DeFi 2.0 is the latest buzzword right now.  What do you think about the term, and what would be the relationship between Solv Protocol and DeFi 2.0, if any?

It seems that these days, “DeFi 2.0” is mostly associated with new models of liquidity mining, protocol-controlled value, etc. Personally, I don’t agree with these associations, maybe because in terms of innovation, the priority should be in technology, not business models. 

I think what “DeFi 2.0” is really about is bringing more sophisticated financial instruments and more flexible transaction models to the market, both of which are vital for the blockchain and smart contracts as an infrastructure in the era of Metaverse. 

This is precisely the philosophy shared by Solv Protocol. So I think it’s entirely fair to call Solv Protocol a “DeFi 2.0” project. 

2. Sustainable future with the help of blockchain – do you envisage that?

I think that the blockchain’s most significant contribution to the future is an all-new global infrastructure designed for ‘transactional finance,’ equivalent to the role the Internet plays in global information processing.

Currently, the work to build this kind of infrastructure falls upon the global network of financial institutions, such as SWIFT, Western Union, Paypal, etc. Unfortunately, such a network is neither sufficient nor necessary for that purpose, because it’s entirely possible to build transactional finance on a purely computational network ( i.e. blockchain), rather than relying on a network of risky and costly intermediaries.

Take the rise of Axie for example. As data suggests, over 80 percent of 650 million people living across Southeast Asia are without bank accounts, just because no Internet-based companies or platforms could incorporate a population of this size into their business. Yet Axie succeeded, all thanks to the blockchain. In fact, there’s a very good reason to believe that businesses and industries -- be it a “play-to-earn” game or insurance project providing coverage for smart-contract-related risks --  can benefit from such an infrastructure regardless of the business model they are in.

3. For you as Co-founder of Solv Protocol, has the pandemic been a time of harsh struggles or unexplored opportunities?

Did you know that the Solv team began to work together almost at the same time COVID-19 pandemic started? It’s such a curious coincidence. All thanks to DeFi’s global, online, cooperative nature, we have yet to be negatively affected in any way by the pandemic.  

Evidently, COVID-19 has turned out to be a huge opportunity for most of the finance-related markets. It has surely been a catalyst for DeFi’s booming, and Solv did benefit a great deal from that. At the end of the day, it’s all about timing. 

4. From your point of view, what are the key trends that will be responsible for fuelling DeFi growth in the years to come?

I observe two trends in the DeFi space: institutional investing in crypto assets, and the adoption of more blockchain-based, transactional finance infrastructures. 

The first trend has proven to explain the booming of crypto markets over the last two years, and I believe it will continue to make a difference for DeFi in the foreseeable future. Whether one likes it or not, all crypto assets are already dollar-priced, so the amount of ‘money’ entering the crypto market will likely maintain its significance, until there is enough.

The second trend is the worldwide adoption of transactional finance infrastructures built upon both blockchains and smart contracts. I deem this trend the more important of the two. As I mentioned previously, the presence of GameFi projects have confirmed this new trend, and the emerging Metaverse and Web3 projects will solidify this adoption of transactional finance infrastructures. 

In the era of Metaverse, Web3 and GameFi, refining digital assets, financial instruments and transaction models is an open door to a DeFi 2.0 filled with amazing opportunities, not just cliched liquidity mining methods or clever memes.

5. How would you describe the issue of the buyer-seller contractual relationship at this stage of DeFi’s development? 

It’s a great question. I think, in DeFi there’s definitely still room for user-to-user contractual relationships to mature. Broadly speaking, cross-account transfer, exchange, and staking are still the dominant use cases of DeFi. Well-developed solutions for reinsurance, instalment payment, renting digital assets, etc. have yet to emerge in the DeFi market. As a result, transaction structures provided by DeFi are far less flexible than their counterparts in traditional, centralised financial markets, therefore far less attractive to those who have the requirements for complex transactional structures.

The building of these complex financial instruments, as well as flexible transaction models, needs innovations in algorithms, token standards and contract implementations. Solv Protocol symbolises just the kind of effort toward that end. 

6. What is at the heart of the EIP-3525 token standard introduced by Solv Protocol?

The purpose of EIP-3525 is to define a set of interfaces and data structures to match the semi-fungible character of these financial instruments. Or, to put it simply, to bring the ‘semi-fungible’ aspect of financial instruments into DeFi. This ability reduces the cost and complexity of manipulating financial instruments as well as transactions involving them.

Why do we need semi-fungibility? Because a large portion of financial instruments such as bonds, investment certificates, futures, vesting plans and fixed-term deposits all have two common properties: identification and quantity. Interestingly, altogether they mirror the two seemingly conflicting concepts in DeFi: non-fungibility and fungibility, or, correspondingly, ERC-721 and ERC-20. None of them alone is suitable for programming the above-mentioned digital assets.

For example, if you were to resell an insurance policy to a reinsurance company in DeFi for risk purposes, the best way to do this would be to tokenize this contract, then determine converting mechanism involving incoming cash flow and tokens, and at last, sell the tokens proportionally to the reinsurers. If you implement this process using ERC-20, you’d need to deploy a new ERC-20 token contract for each single insurance policy, since no two policies can be exactly the same. On the other hand, if you use ERC-721, the identification issue could be solved by using a new token-ID for each insurance policy, but reselling it can’t be done as easily, as ERC-721 tokens are not 'fractionalizable'. As a result, you may need to deploy a new ERC-20 contract just for that purpose, which obviously isn’t efficient from a cost and complexity perspective. 

So the upshot is this: neither the fungibles nor the non-fungibles alone can adequately supplant complex financial instruments (or digital assets, generally speaking.) We need some form of a combination of the two -- maybe call it “semi-fungible”-- a combination with the ability to satisfy the requirements for identification and quantitative processing. This is the true logic behind developing ERC-3525, a whole new token standard.

Combining the abilities of fungible tokens and non-fungible tokens, ERC-3525 will help drive up the overall market cap and transaction volume within DeFi, because the market is very quick to absorb a token standard as long as it fully satisfies what digital assets require of it. This is proven by the success of ERC-20 and ERC-721.

7. Could you break down the underlying principle behind ID-SLOT-UNITS – and what made it capable of incorporating the complexity of operations conceived by Solv?

I think the concept of “semi-fungible” helps make the logic behind the ID-SLOT-UNITS combination easier to grasp: 

The “ID” attribute is somewhat equivalent to token ID in ERC-721 that reflects the non-fungible aspect of digital assets. ERC-3525 is designed to be compatible with ERC-721 because there was no better way ERC-3525 would have maximised its compatibility with the DeFi ecosystem. 

On the other hand, “UNITS” attribute is comparable to the “balance” attribute in ERC-20. It can facilitate quantitative processing for ERC-3525 tokens (e.g. transferring of any amount of units to others, like transferring the balance of an ERC-20 token.)

The SLOT attribute is the key mechanic for connecting ID and UNITS. It’s an abstraction of tokens’ business-related attributes. Any two tokens with the same set of identifying attributes should have an identical SLOT value. For instance, if two users create their Uniswap V3 LPs on USDC/ETH pair with exactly the same price ranges, the two ERC-721 LP tokens would be treated as “fungible” to each other and, because the underlying liquidity is arranged within the same dimension, they can be added up. This would mean that we can use ERC-3525 to implement Uniswap V3’s LP tokens and calculate the SLOT value based on the price pair of the range. Because the SLOT values of these two are identical to each other, the two ERC-3525 tokens could be merged together with UNITS added up together. In a way, it’s a bit like what generally happens to ERC-20 tokens. Furthermore, one may also transfer units between two tokens that have the same slot value - equivalent to transferring the value of an ERC-20 token between two addresses.

One may ask, why introduce the concept of SLOT instead of using the tuple of the value of attributes directly? Because it’s about fully utilising the power of the DeFi Legos: we cannot require other contracts or wallets to be knowledgeable about the business-related details of ERC-3525 token contracts. But with a single SLOT value, anyone can tell whether any two tokens are fungible to each other, just like they’re able to distinguish ERC-20 tokens based on their contract addresses. 

8. Could give some more insights on vNFTs, the focal point of Solv Protocols?

At Solv protocol, ERC-3525 tokens are called “Voucher,” implying an important functionality of such tokens - namely, to act as “tickets” to other digital assets. In order to maximise safety for users’ assets, this “ticket” function has been implemented by several DeFi projects such as Uniswap and Compound, with the use of the “underlying asset container” pattern. In the case of Compound, when assets are deposited, you would get a “cToken” as the receipt. The owner of the underlying assets deposited would then become this cToken contract. This pattern is a pretty common practice in the DeFi space now, and Solv voucher implements underlying asset containers using this pattern as well.  

As such, ERC-3525 tokens can easily implement fixed-term deposits, vesting plans, convertible bonds, etc., with existing ERC-20 tokens as underlying assets. ERC-3525 is also able to take ERC-721 tokens as underlying assets for fractionalization purposes. It is far superior to the ERC-20 one, as it paves the way for the fractionalization of NFTs while preserving attributes and metadata for these NFTs. 

Huge efforts have been made to standardise and abstract this underlying asset container approach. In doing so, we’ve created standard interfaces that expose the attributes of underlying assets as well as exchange mechanics between units and the quantity of such assets. 

Simply put, in order to truly exploit the potential of ERC-3525, we combined the token structure of ID-SLOT-UNITS with its functionality as an underlying container. We also made reference implementation of ERC-3525 more attractive to developers, provided the importance of coordinating ID-SLOT-UNITS structure and the storage of underlying assets is. All this is well addressed in the RI code.

9. What lies ahead of Solv Protocol – and what are the practical steps necessary to realise your vision?

Though we are incredibly proud of the EIP-3525 standard and creating our own platform for minting and trading Vouchers, there will be more to come. 

Next, there will be more new financial instruments developed to enrich the current portfolio of Solv Vouchers. In doing so, we’ll leverage the true potential of ERC-3525.

What we are also going to do is expand our existing platform with the functionality of liquidity pools, which will drive Solv to be more decentralised and powerful, in terms of the core financial infrastructure it’ll provide in the age of MetaVerse.   

As for infrastructure compatibility, we plan to port Solv to more mainstream blockchains other than Ethereum and BSC, like Solana, etc. We are also planning for more layer 2 platforms like Arbitrum, etc.

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Edward Moon
Edward Moon

Crypto trader and analyst.

Analysis From Moon
Analysis From Moon

Analysis From Moon

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