DeFi continues to grow at an unprecedented pace, and its very difficult to keep up with the crucial breakthroughs occurring. As a result, I wanted to weed out the most important breakthroughs that we have witnessed in Q3 that are bound to take the entire DeFi sector into the stratosphere.
Introduced: EXPECTED November 2020 [LINK]
Loopring is known to have developed zk-Rollups on top of the Ethereum blockchain to provide a route for scalability. In fact, with the zk-Rollup technology, Loopring can help process over 2000 transactions per second on top of the Ethereum blockchain itself.
Loopring is taking its technology one step further as they begin the process to allow developers to build Automated Market Makers (AMMs) on zk-Rollups. AMMs are an integral part of the DeFi ecosystem. One of the most famous AMMs out there is Uniswap, and it allows users to quickly swap between ERC-20 tokens directly from their wallets.
The only problem with AMMs today is the fact that Etheruem GAS fees are crazy high. Trades can cost upward of $15, so it instantly rules out small swaps under $100 as you’d be paying 15% on the trading fees alone.
Automated Market Makers that implement Loopring's 3.6 zk-Rollup tech will have an edge over competitors. Scaling down from ~$15 to a few cents per trade is something every AMM in the space wants.
Side note: Loopring was also added to Coinbase Pro on September 14th, 2020.
- High gas fees on token swaps at AMMs such as Uniswap. This is due to the increased load on the Ethereum blockchain itself
- High fees at regular order book DEXs due to the same reason.
- High fees to register to Loopring DEXs as it requires an on-chain transaction.
- Ability for developers to significantly reduce costs from few dollars to a few cents per swap on AMMs.
- Reduced trading fees on regular order book DEXs
- No need to register on the Loopring DEX, saving users the need to pay for the on-chain transaction.
2. Kyber Network Introduces On-Chain Market Making for Professionals
Introduced: June 2020 [LINK]
The Fed Price Reserve (FPR) is an on-chain Market Making tool professionals to market make and generate profits on-chain. Apparently 70%-80% of all trades happening on Kyber get the liquidity from FPRs.
First of all, it is essential to understand that DeFi apps can ONLY take liquidity from on-chain protocols. This is because smart contracts can only talk to other smart contracts. So this rules out centralized exchanges (obviously) and even hybrid-type exchanges.
This means that to take advantage of the use cases that DeFi provides, such as flash loans and automatic portfolio rebalancing, market makers would have to provide their liquidity to fully on-chain protocols.
The problem is that most professional-grade market makers remain on centralized exchanges because this is all that they have ever known. Market making on-chain remains untapped in comparison to off-chain market making.
With the FPR, professional market makers can build bots to operate their unique algorithms and adjust their desired risk exposure. They also have the option to do this manually.
Typically, these professional market makers are deterred from traditional on-chain order books as they are usually gas/capital inefficient. This is because quotes need to be provided for every token, and a gas payment is required for every addition/removal of an order.
One of the significant advantages of the FPR is that it allows the ETH balance to be used for all of the tokens that the market maker is pricing. For example, on traditional on-chain order books, for 100 ETH of orders, the entire 100 ETH needs to be locked away - for just that one token. If the market maker is making markets on five different tokens, that would be 500 ETH required. With FPR, the 100 ETH committed can be used across the entire token range that the market maker provides liquidity for (so in this example, the market maker would put 100ETH instead of 500ETH to perform the same action).
Other advantages of the FPR include;
- Gas-Efficient Batch Price Update Mechanism - Market makers, can update their prices for all tokens with a single transaction instead of many individual transactions for each token, which is gas inefficient.
- Algorithms for Pricing, Rebalancing, and Exposure - total control of their pricing structure as it determined off-chain and then fed into the contract. This allows them to remove excess liquidity if needed easily.
- Low levels of professional market-making liquidity.
- Market making on-chain is extremely gas-inefficient, deterring professional market makers away.
- Professional market makers are entering the on-chain market-making realm.
- Increased liquidity and stable pricing mechanisms.
- Increased exposure and liquidity to a broader range of different tokens than deep liquidity on just a few.
3. Yearn Finance Introduces $YFI Governance Token with 0 Value & Fair Launch Model
Introduced: July 17th, 2020 [LINK]
The story of YFI has been nothing short of spectacular as the coin managed to increase by over 35,000% in just seven days and has continued to grow further as it hits as high sniffed $40,000 in September 2020.
YFI was indeed one of the biggest things to happen to DeFi, and it took the entire industry by surprise.
Before yearn finance, DeFi users would have to manually swap between protocols to offer the best interest yields on their holdings. DeFi animals would be analyzing the APR rates of lending protocols such as Aave and Compound and would continuously switch between the higher APR.
The only problem at the time was the fact that users had to do it manually. This required a lot of time to keep checking the individual interest rates from each lending platform. On top of this, the farmers would have to pay too high GAS fees with each switch.
The introduction of Yearn.Finance changed everything.
The breakthrough is what is known as an automated DeFi Yield Aggregator that automatically switches between the highest APR on these lending platforms and splits the costs amongst all the users that have deposited.
Cronje decided to launch around July 17th the $YFI token to pass governance over to the community. The great thing about the launch of $YFI is the fact that it keeps in-line with the spirit of decentralized cryptocurrencies with an entirely fair and transparent launch. Instead of giving himself a founders fee or a “pre-mine,” Cronje decided to distribute $YFI fairly with the price starting from $0 leaving nothing to himself.
The distribution was done through the ‘farming’ on the protocol by providing liquidity to different pools. As a return, you would earn little bits of $YFI. This new token distribution model has now become somewhat of an industry-standard, with many other projects starting to follow the same footsteps.
A few weeks after the token launched, it was quickly listed on the Binance exchange, and it immediately started to jump higher. Coinbase was a little late to the party, having listed the token in September.
- Users would manually have to search for the best lending APR rates.
- Users would pay high fees for manually switching between lending protocols.
- DeFi tokens would launch with “founders fees” and “pre-mines” and were not in the slightest fair for any latecomers.
- Users have the option now to switch between the best lending rates automatically.
- GAS fees are distributed amongst all depositors - significantly reducing individual costs.
- DeFi took note on the fair distribution model with some already following its footsteps (see YFV or YFII)
4. Aave Showcases Credit Delegation
Introduced: August 6th, 2020 [LINK]
Aave is one of the hottest DeFi lending platforms, and it has been a pioneer in many facets such as Uniswap Money Markets and Flash Loans. In August 2020, the platform announced its first implementation of their latest feature, which are known as “Credit Delegations.”
Credit Delegation changes the game for DeFi as it allows trusted parties to take out a line of credit from deposits on Aave. All the interest rates, loan terms, and covenants are coded into an OpenLaw Agreement, that hashed on-chain - creating an immutable contract between the parties.
This new feature brings liquidity sourcing onto the blockchain for the first time.
It works by depositors supplying capital into the Aave protocol to receive the traditional aTokens to represent their deposits. They can then take these deposits and place them inside the Credit Delegation Vault, allowing trusted parties to take a line of credit out against their deposit.
It gives trusted borrowers the ability to take out loans with zero collateral as they are based on trust.
Stani Kulechov, the founder of Aave, has now elevated the DeFi game bringing lines of credit that depend on trust and not in code/math.
The first-ever Credit Delegation was granted to the decentralized exchange DeversiFi. Looking at the contract for the Credit Delegation Vault, it seems that there is a total of $1 million available for DeversiFi to play (borrow) with - split between aLEND and aUSDC.
- Crypto Loans were available, but it required a deposit of collateral to receive.
- All loans were based on code
- Credit Delegation allows for loans to be taken out solely based on trust (usually between 2 parties known to each other)
- No collateral is required to be fronted for the loan
- Depositors can come up with agreements to decide who they will trust with taking out the line of credit.
Introduced: July 31st, 2020 [LINK]
With the launch of Bancor V2, the team introduced a new type of liquidity pool called Dynamic Automaket Market Maker (DAMM). This new feature is designed to allow for automated market-making on any staked assets designed to maintain the value of the liquidity provider contributions over time.
One of the core problems that Bancor V2 is trying to tackle is to allow for single-token exposure and reduce any impermanent loss.
The first thing to mention is the single-reserve pool token feature they have added. Typically, when you want to provide liquidity to an AMM such as the most popular Uniswap, you have to deposit two tokens, the reserve token (usually ETH) alongside the liquidity token. These two tokens are split with a 50/50 weighting. This creates a scenario in which users have only 50% exposure against their favorite tokens - with the other 50% being locked inside the reserve token (ETH).
With single-reserve pool tokens, users have the option to remain 100% exposed to their favorite token (the liquidity token) while still earning from the fees generated from providing the liquidity. This is because the Bancor V2 pool issues a separate pool for each token reserve. Instead of one pool tracking stakes across multiple reserves, each pool token now represents the stake in just one reserve.
In addition to this, Bancor V2 also helps tackle the concept known as “Impermanent Loss.” This is a problem that Lqiudiity Provierds face when traders take advantage of arbitrage between decentralized and centralized pricing data. The arbitragers win, and the liquidity providers experience the impermanent loss in which they have a reduced number of tokens than they originally had staked.
The loss is impermanent so long as the relative prices of the tokens with then AMM return to where the Liquidity Provider began staking.
Bancor V2 integrated the Chainlink Oracle to combat this impermanent loss. When a token price changes, the oracle sends an update to the Bancor AMM to adjust the price before arbitragers can take advantage of the differential and adjust the weightings of the token ratios.
- Liquidity Providers had the option for 50% (uniswap) or 87.5% (balancer) exposure in their favorite tokens, with the rest being trapped in the reserve token (usually ETH).
- Impermanent loss was a headache for Liquidity Providers, and LPs are the core of the DeFi ecosystem
- Liquidity Providers now have the option to remain 100% exposed to their favorite tokens and still earn from the fees generated by providing the liquidity and fully benefiting from any price increase that happens on their favorite token.
- Impermanent Loss is mitigated through the Chainlink price oracle.