ETHWarsaw 2023: definikola, DeFi Saver - The Latest Developments in DeFi: A Comprehensive Overview

we'll have the next talk on the trends in defi by n Nicola from defi saver so let's welcome him thank you um yeah hello everyone thanks for coming once again I am always glad to see a lot of defi enthusiasts around um I'm defi Nicola I'm coming from the defi saver team and I am um doing ecosystem research uh and product basically a defi saer we are kind of a onetop uh managing platform for defi Landing positions um today we're going to talk uh about latest latest developments in defi um actually I would like to hear uh from you if you have maybe any ideas or assumptions what uh could be on the agenda today just to double check my agenda yeah of course tokens so so say to the mark uh liquid steak tokens okay that's a good one yep oh I talked uh with you previously so yeah that's cheating no yeah but maybe new stable coins go CRV USD and such okay cool any other suggestions you can sorry um account abstraction maybe okay that that would be a good thing like for crypto in general but yeah def defi included yeah that's a good guess tokenizing oh sorry sorry tokenizing where assets okay cool and one more you can just say loud I will oh okay cool so impact on the swaps on uni wi4 and and uni X okay cross cross chain okay anyone else sorry liquidity across liquidity across chain okay like uh bridging cross chain messaging okay well that's a lot of topics I think we are a little bit short on time but yeah the agenda today would be the centralized Perpetual Futures I um I'm um surprised I haven't heard the I mean Perpetual Futures are are not a relatively new thing but are gaining more Trac traction uh in defi lately um the second thing we're going to talk about is um Oracle free landing in Defi and the third topic we're going to talk is I think you mentioned it the leverage e staking so the Perpetual Futures we're going to start with um basically onchain derivatives uh starting with forward contracts I'll briefly explain what are the future contracts and then we are going to head to decentralized Perpetual Futures uh work free lending is um relatively new movement in defi where there are teams trying to shift the Oracle risk from the core protocols to the users themselves uh we'll talk about that a bit later uh and The Leverage is taking is one of the currently most popular defi strategy um how can you basically boost your staking apy with a non negligible but very low liquidation risk okay um so first off Perpetual futures um so let me just give a brief um breakdown of what derivatives are so derivatives are type of financial instrument that derive value from the underlying asset um in this case we're going to talk about the crypto assets but it could basically be anything uh a forward contract is basically an agreement between two parties to sell certain amount of certain asset at a certain day um and at the certain price let's say I want I make agreement with you to sell you 1,000 of um 1,000 kilos of apples like in a year from now um what uh Futures are future contracts those are just standardized version of forward contracts let's say we split one forward contract into into a a bunch of U smaller contracts um gave them exactly the same amount let's say one kilo of Apple apples um that we that I'm going to sell um to you at a certain date so you can why why are we standardizing but it because we want to put them on an exchange so you can basically buy um 100 of those future contracts and um uh trade them the main difference between Perpetual Futures and normal future contracts is the expiry so the future contracts have expiry date whereas Perpetual Futures are well Perpetual they have they do not have expiry date and I will again just here uh try to um break you down in a simple example so let's say uh that you do not have eth and then I do not have die okay um but let's pretend that as if I have borrowed eth from you and as if you have borrowed the same dollar amount of D from me and we give it some time let's say one month it doesn't matter the eth price changes and what happens if e a price uh has risen you would essentially exper experience a profit because you are essentially having a eth long position because you lent out eth to me and you borrowed D on the other hand I would experience a loss because I uh borrowed eth I shorted eth and lent out die okay so we are uh here just exchanging the profit and loss we are not um we are kind of borrowing the exposure to the underlying asset not the underlying asset itself okay um which is for example the case on U margin trading on centralized exchanges so um why are we talking about perpetuals today because on centralized exchanges uh the average daily volume in 2022 was three times um bigger than the spot volume on Texas so Texas have like a spot market and the Futures Market um the Perpetual Futures were actually first in introduced in the cryptocurrency space I mean the the Inception of them was in the cryptocurrency space they were introduced by bitmax back in 2016 um and why uh do you think that perpetuals have a average daily volume this higher than the spot market and the answer lies here it's uh that it offers the same trading user experience but with way more leverage so when we opened our position when you um when I borrowed E from you when when you borrowed the DI from me um the necessary step before opening that kind of position was to deposit some kind of collateral okay some kind of margin so we can keep our position perpetually uh as long as our margin as long as our loss does not exceed our margin okay in that case we'll be liquidated um okay so what about Perpetual Futures on Def in defi on decentralized exchanges so derivatives average weekly volume in defi has uh increased significantly in 2022 compared to 2021 with a continued growth in this year despite the Beer Market uh what's new is that new protocols trying new designs of decentralized petal Futures are coming and the new ver versions of the um current protocols for example uh GMX launched the version two of their protocol synthetics uh is launching uh the version free Etc uh the main difference between Perpetual Futures on dexes and the Perpetual Futures on centralized exchanges is that on centralized exchanges if you trade Perpetual Futures your your counterparty is usually uh another Trader or the market maker while on the decentralized um Perpetual Futures you are basically trading against a pool where who which has the liquidity so we are basically trading against the liquidity providers the the main um task when designing decentralized Perpetual future protocol is to create um as delta neutral uh pool um as possible so you want to keep um the r the volatility risk of your liquidity provider is low um in another way that if you don't do that they will do that by by themselves by hedging on some other protocol on maybe even TX um okay so let's just go over the stats so decentralized derivatives volumes were only 56% of the sport Market volumes compared to 300% on taxes uh dex's derivatives account for a mere 1.5% of central centralized exchange volume while the share is closer to 8% to a sport Market mainly thanks to to the one of the biggest uh decentral and the more popular decentralized change Unis swap um so what can we prove to increase those volumes in the Perpetual Futures in defi in the decentralized space because being non-custodial seems like not enough um if you ask me it it is but uh we need to work on the things like ux uh on boarding people on um uh educating them we also need to work on uh trading costs um most of decentralized Perpetual future protocols or I usually call them leverage trading Protocols are on uh l2s ethereum l2s because of the transaction cost but maybe even layer free maybe even um app specific rollups dydx is for example doing something similar uh we need to introduce more features we need to um design them to be able to provide more leverage because uh last time I checked GMX had like uh 50x Max leverage whereas bance has like 125 um we need to lower the price impact I mean I say we I mean as an industry and as a Builders um uh we need to offer different assets H and of course security is is uh can always be improved so to to sum it up we need to move this uh if you look at this graph we need to move this optimal ux Spectrum to the right hand side to the can't be evil side okay um so the second topic uh is the Oracle free lending um it's a relatively new movement as I said um where protocols uh I mean Builders got attention of um Oracle attacks that happened in the previous couple of years in Defi and they wanted basically to create The Primitives the protocols that do not uh that avoid that kind of a risk uh they do it by Shifting The Oracle risk and the Oracle dependency from the protocols to the users now the whole point here is that we need to find a way to trigger liquidations because we are talking about Landing protocols to trigger liquidations without an oracle without the external price feeds okay today I'm going to mention three uh projects the first one is porn Finance sorry um basically what they're doing uh they said okay will have expirable loans and the loans will only be uh liquidable or you could liquidate them only after the expiry date so whatever happens before the expiry you cannot liquidate loan even if it's it's uh represent a bad bad depth um another project called bler lending it's basically a project from the blur nft Marketplace um they said that okay we want to make an oracle free lending protocol but we want to the loans to still be Perpetual like we used to in defi like in compound D maker liquidy Etc um on blur you can come as a supplier and Supply e that nft Traders can borrow uh against some of their nfts so a borrower comes deposits an nft and borrows e and can do do with what whatever they want with that NFD with that eth sorry they can for example buy another NFD um how did they manage liquidations they said okay we'll um make the lenders the one who can the only ones uh who can trigger liquidations so if I'm A lender I lend out some eth and I for some reason want to withdraw that e that's the point where the liquidation will be triggered so the borrower is given some great period to either pay his U debt back or to find another lender who will just be a substitution to the previous one the third project I would like to talk about today is a bit more complex than the previous two uh but you you get the sense where this is going um asna protocol the it's it's basically Unis swap V free of of lending um what what I mean by that they made the process of managing liquidity so the the tasks of suppliers way more complex um by for introducing a new kind of feature or in this case um taking out the Oracle risk so what they did I is really complex protocol I don't have time to get into the details I by the way wrote about it on Twitter I have a thread about ASA so go check it out if you're interested but here I just uh give a brief overview so asna has basically a dynamic liquidation price which depends on two parameters the first one is called lowest utilized price so basically lenders come and choose at which uh collateral factor or or um loan to value ratio they want to lent out their assets so it's let's say some want to lent out um die at the 90% Lo to Value which means that someone deposits collateral and can borrow my my die up to 90% okay 90% of the collateral um so the loop is the lowest utilized price uh meaning that if one lender comes and say okay I want to um lend my D um I want to lend 1,000 D for one e and there is a second L lender saying okay I'm willing to lend 2,000 di for my e the first liquidity that will be utilize is the one with the uh higher loan to value the lender with the 2,000 di per e okay so the lowest utilized price is actually the price uh of the US lowest utilized liquidity if we take a look at this graph it's a it's a mock graph basically but the current low lows UTI price for um this token is uh 80 um and this is dynamic and algorithmic basically so the whole protocol is immutable um and it can change from both sides meaning that if a new supplier comes and supplies more than uh 80k of this token the loop would jump to 85 on the other hand if there is a new borrower that borrows more than um 40 K the loop would um um slide to the to the 75 now the positions in asna are can be liquidated if this um lowest utilized price Falls below the highest threshold price now the highest threshold price uh is basically uh explained by this picture so if you have a position of 1 e and 1K die your trash cold price is BAS you just divide those two values so as I said a bit more complex um uh but yeah it's a it's um arguably movement that u i mean the the defi in my opinion defi protocols they are the protocols The Primitives and they need to uh stay as simple as possible uh this kind of um approach really makes the protocol complex but it's a really cool feature not to have the Oracle risk so it's uh uh it's up for the debate um whether you blending should have oracles and keep it as simple as possible or try something like this again stands for utilized yes lowest utilized price um okay so the third topic today is uh e staking so why I wanted to talk about e staking is that over 20% of all eth is now staked at the moment um 40% of all Stak e is staked via pools so liquid staking um for example Lio has the highest dvl in defa at the moment standing at 14 billion um the liquid staking protocols offer a way to contribute to the ethereum security without running your own V validator um the the whole process is basically pretty simple you can just go and stake your e and receive some State e in return like an um ERC 20 token uh in return that it's is an interest and yield bearing bearing token and you can the most important thing is that you can use that token as collateral now uh since the shangi upgrade this is selling your St st e to e is not the only option of unwinding your U your position because now you can uh simply go to Lio or some other staking provider and say okay I want to withdraw my e to to redeem my eth but you will need to wait for some period of time to wait for the key so it's not an atomic operation so yeah we still need to sometimes to sell it if we want to one wide position in one transaction leverage stake e uh leverage sorry e staking is um pretty popular strategy today because it boosts your apy for example if you just hold one of the liquid staking tokens the yeld would be about uh five or four or 5% and if you uh open this kind of position which I would explain just in a moment you can earn let's say for example 10% so the strategy let's let's explain it the first step let's say for each eth you have the first step would be to flash loan another two eth uh the Second Step would to State all free E now that you have with let's say Lio and receive free Stak eth so the ratio is always one to one Supply that free st e into a or some other money def money market as collateral and then borrow uh to e against it to repay the fles loan so you essentially end up with a FreeX leverage position yielding let's say 10% apy um how is this possible um the main point here is that and the main two values we should compare are e borrow rate on those underlying protocols let's say a or compound or or Morpho uh so if as long as e borrow rate is lower than the staking API this strategy is profitable right it can boost your API um now the Cool Tools that we could use could utilize is if we could have like one click uh position opening or closing so if we could do this basically in one transaction or if we have like automated leverage management because um the liquidation risk as I said um is not negligible because after the shangai upgrade that Tien the peg basically of liquid staking tokens but if you want to unwind this kind of position you still need to um automically sell your liquid staking token back to like vanilla eth uh so you need to um keep um attention at what leverage are you currently because if stake teeth deegs meaning if it um is trading on a market at a certain discount you actually can be liquidated um automated liquidation protection oneclick position shiting in between underlying protocols this is in my opinion very useful because you can basically have this kind of position let's say in a and after some period of time you find out that the strategy would be more profitable if you switch to compound because if borrow rate on compound is for some reason lower than a um or simply you want to switch between different liquid staking tokens let's say Stak eth is yielding less than I don't know rocket pool eth um this is a little bit of a teaser so um we are actually at defi saer have worked on something that can could provide these kind of tools we are releasing it on Monday and it's called e saver uh not not very creative from our side but yeah um it basically allows you to create um those kind of opposition in one transaction what happens at it hood is basically this we call it a receipt so you flesh loan some you wrap it you stake it Supply it to some underlying protocol borrow against it and then pay that flesh loan back the final state state of their position would look something like this so you we basically are leaving the full control to the user so you choose the underlying protocol you choose the liquid staking token you choose the leverage you want to open this kind of position to boost your yield we do not um uh pull any of the assets it's a per user positions um yeah we also have some useful information like the liquidation price the off pack percentage the liquidation your net apy Etc what which protocol you're using and Etc um it's actually uh currently live at ea.com but we it's we are still like testing it in it's in testing phase so um yeah uh but it's it's going to be uh official on on Monday so it's a bit of a teaser um yeah that's all for me today thanks any questions quick ones please I have a question regarding the transaction could you come back to the previous slide like I'm wondering like because we see here the transaction under the hood and What's happen if the one of the steps fail okay for example yes uh I mean we have on the you why if for some reason one of these steps is not going to happen we have like a warning message telling you that the transaction would fail um the current support process is like in it says like contact us on Discord and we try to debug why is it failing but it's uh not uh usual situation so yeah of course it can happen yeah I'm sorry uh how can this leverage staking fail because seems magical meaning if it goes wrong how can it go wrong it seems like you conjure ethereum out of nowhere and get additional percentages which is magical yeah I mean uh there is there is already the the downside so the risks of this strategy are as I see it um is basically the liquidation risk so you could get liquidated because if you use the liquid it's taking talking as collateral and its market price can um uh be different from the from the ratio that is like like the Redemption price on the uh liquid staking protocol so rry so if so the price is correlated to e right and if it loses that correlation it can uh value its value can be less your collateral value can be suddenly less than your depth and then the the [Music] also of course this yeah that's that's the second that's the second reason yeah so your eth borrow rate can basically um the eth borrow rate can become higher than the E staking yield so that's also risk yeah there's do we have time for another question one quick one more okay hello uh I was a Dey guy back 2020 21 I was on top of every on everything and the question is uh how would you compare the period 2020 uh to What's happen happening right now is it like happening more now is it like faster or or opposite uh definitely uh a lot more happenings today because we have a lot more teams develop in different stuff and you you basically in my opinion do not have an area that is not being explored enough when it comes to defi I mean we can talk about the I don't know the different design approach when uh trying to build a new stable coin different design approaches on um automated mic makers on uh lendering Primitives in defi um insurance so um I like I have a list of um ideas floating around every day I think the the number of Builders has also increased which is a great things so definitely more happenings today than the previous couple of years