Definikola - Latest Developments in DeFi

Glad to be here. Uh my name is uh Nicola and I'm coming from block analytica team uh the risk team behind maker and dice stablecoin now also USDS stablecoin um and I'm here today to talk about latest basically developing trends uh in the D5 space. Now this is actually um a talk I've been giving um for three years now. So it can get pretty interesting to compare the agendas from the the previous years. Um by the way since it's going to be a 20-minut talk uh we're not going to really dive into details of every topic we are going to touch today.

So uh for that matter um across the whole presentation you may find QR codes that you can scan if you want to re you know like dive deeper into the into the topics we're going to talk about today. Um this year's agenda looks like this. So we're first going to cover basically some new iterations of uh DI protocols. Uh then we're gonna head to specific uh innovative trends in DeFi lending space. Then also we're going to touch the topic of um yield products and how those have uh evolved over time in DeFi.

Uh and after that uh we're also going to get an overview of like a let's say a public good uh stable coin dashboard built actually by the block analytica called sphere. Um and then um we're going to touch uh in my opinion very important topic uh and that is privacy in Ethereum. This is actually going to be my contribution into bringing back um more topics about related to privacy to the events uh like these to the Ethereum events uh like this one. And then we're going to wrap up with some DeFi tools that you may consider or should uh be uh checking out nowadays while wondering through the D5 space. Okay.

Uh so first things first uh we're going to discuss uh new protocol durations. So basically here's a list of just a couple of them. Some of them um are not here. For example, Moro uh v2 recently uh was announced um introducing the fixed rates but yeah um most of them are here. So the first one is fluid.

It's a it's a new innovative uh lending protocol that kind of was the first one to combine providing collateral that you can of course borrow against but at the same time use that same capital to uh provide liquidity to a DEX uh so that you can basically earn trading fees uh alongside the the supply rate you are getting on the lending protocol. the that combination of liquidity provisioning to DEX and to to a lending protocol is done at least in fluid by something called smart collateral and smart depth. Now what that is briefly so smart collateral is basically um uh done by having pools that have a pair of asset available available as collateral. Um here I gave an example of rep BTC and cobbased BTC. Uh so essentially you as a user as a let's say a CDP holder uh position holder um can say okay I don't really uh care if my collateral is held in rep BTC or Coinbase BTC and what the protocol does it basically leverages that fact uh by saying okay then we can use that uh liquidity uh as a liquidity right and earn trading fees on it.

Um, so this is exactly what Floyd does. And uh, as when it comes to smart depth, it's a bit more complex, but still also a bit more cool because your depth actually can be utilized as a trading liquidity. Um, and yeah, this is actually something that is technically not possible in any kind of traditional finance setup. uh smart dep uh looks like this like a pool on on fluid smart dep looks like this. So let's say you put ETH as collateral and then you can draw uh or generate USDC or USDT uh as dep and you again as a user are basically saying I don't really care if I need to pay the debt back in USDC on or USDT uh as long as I earn trading fees in return uh on this.

So how the protocol flow of actions works on the smart depth is basically uh let's say a trader comes and he wants to swap USDT for USDC uh he is basically paying back your USDT depth and the protocol is minting uh USDC depth back to the to the trader and you uh are essentially earning uh like a trading fee for that for that swap. Uh then liquidity v2 it is another iteration of like completely mutable stable coin protocol liquidity v1 the lusd stable coin. Uh this one also comes with a new stable coin called bold. Uh and uh like the newest value proposition and innovation is that um I know it sounds maybe a bit utopian but you as a borrower can basically set your own borrow rate. Now the catch here is that um the lower you the borrower rate you set the higher the redemption risk in the protocol you will have and you can brief brief to briefly explain it the redemption liquidity you can um basically see it as uh as a liquidation but um arguably without any loss because the only thing you lose is the exposure to the collateral asset.

Then of course Oiler V2 which comes also with the recently introduced Oiler swap. Oiler is a new very modular lending protocol. Uh and Oiler swap is a DEX similar to to fluid decks in a sense that you can basically utilize reutilize your collateral as a as a trading liquidity. then a v4, unisoft v4. As I said, more of a v2, a lot of them with with a lot of uh innovation and uh you know experiments.

But yeah, as I said, feel free to scan those cure codes if you want to uh read more about those and um dive uh dive deeper as I've basically um wrote about all of them um so far. Um then yes I also wanted to uh um touch on the topic of what I think is coming next to um defense especially uh the def lending space. So what I think we're going to see very soon is or maybe we even started seeing something some of those um is first uh risk trenching or yield trenching. Basically what this means is separating your LPS into the junior and senior branches what we are massively uh seeing in stratify of course um we're going to actually talk about this more on the next slide then risk premiums this is something yeah again uh one of the risk management um improvements I think that should be you know taken into account when you are kind of calculating what the what rate your users should be paying for the services they're getting from your protocol. So basically uh the mechanism would uh be to pay a higher rate for borrowing against like a the a riskier collateral.

So it makes sense right? I think this is actually what a v4 is going to bring when it goes live and I would expect um other protocols to follow as well. Um then fixed borrow rates uh this is something we are yet to see at least not in a successful man manner let's say um those can be maturity based like the pendle uh protocol is doing for the opposite side like for the fixed supply rates or yield rates um more for as I said more for v2 is trying uh to tackle this with their new protocol iteration Um and then uh composite oracles. Now by this uh this is also kind of a risk management improvement sort of uh what uh this what I wanted to say by composite oracles is that uh now defi I think has evolved enough at least the lending space that you can kind of play around a bit and experiment with pricing the assets within your protocols to make like the overall protocol uh significantly safer. Um some examples of composite or oracles can be introducing upper bounds to stable coins and LSTs.

You know considering that stable coins are are the um are the asset that is mostly being borrowed on defend lending protocols. You don't want um the price of those stable coins to go above $1 for any uh reason you can think of. So it might be uh clever to just introduce some upper bounds. Then you may use redemption exchange rates for uh let's say tokens or collaterals like uh liquid staking or sorry um stake teeth um of course with a fall back to a market price. Um so that's why why what I mean by composite oracles and then you can basically do the fall back in case of u some threshold is met and that threshold can be like the deviation between the exchange rate uh and the market price different um oracle providers of course for example you can use let's say chain link is a primary or redstone as a secondary on the other way around um because you don't want to have a dependency on a a specific spec specific provider, then the median between various providers.

Of course, I think this is something that Sparkland is currently doing. Uh and even some custom feeds u for specific purposes. Okay. So, for example, I think we did this on a moro on a LBTC the lumber BTC morpho market on base. What we basically did is use um proof of reserve uh oracle from redstone and then um combine it with a market fallback based on uh deviation threshold.

Uh of course these kind of custom oracles need to be audited uh audited but uh yeah this is also something if you want to increase the like the security of asset pricing within your protocol something to consider. Yeah, next topic. Um, yield products and the evolution of those in DeFi. Um, so it's a it's in my opinion been a very interesting um evolution because now we are seeing um I would say finally uh the segregation of risk and the reward as a product. Um we're gonna talk about the examples of those uh and of course the fixed u fixed yield products right this is u uh this is where pendle protocol comes in because they were like a bunch of different um let's say protocols that did not uh manage to find a market fit.

um arguably it was like the too early uh of DeFi stage to introduce that kind of idea. Uh but yeah, Pendle um did the timing right and uh basically now the Pendle PT tokens the ones that are kind of offering the fixed yield uh are massively used across DeFi as collateral on a morpho etc. uh when it comes to segregation of riskreward um one of the examples is like the revamped a uh tokconomics in a sense that now uh the new tokconomics is basically called umbrella and in umbrella uh you don't need to uh stake the a token to earn like additional yield uh and to act like a a back stop liquidity in case a gets a bad depth. Now what you can do is you can stake the A tokens right the A USDC. So the A tokens in A are basically the the receipt tokens uh you get when you supply to A.

So you can um additionally stake them uh and then you basically boost your supplier yield uh but you kind of are falling uh down into into the the junior trench, right? Um the the consequences of this is that vanilla deposits like the current deposits are we get the same yield for less less risk because uh the stakers are going to take the risk for you and kind of earn the the the additional uh yield. Uh that yield is by the way coming from the avid itself like from from the the treasury the protocol is earning from borrowers uh from all the deployments. Then another example is the summerfi uh it's called summerfi lazy protocol and it's basically uh similar to what year was doing. It's aggreg aggregating yield sources across protocols and networks and it also is offering basically a higher and a tire and a lower sorry uh risk tire.

Uh so I think it's uh it could be useful for people that are not that familiar uh with like all the DeFi yield sources and uh management of those. So you simply just one click deposit and you just uh can choose whether you want to supply into the higher and the lower risk of course the higher risk brings higher yield. Uh and yeah, penal PT tokens as I said massively used already as collateral and now because of the thanks to the uh D5 modularity, you can on on top build like like the auto um uh rolling to the next maturity and basically have like a perpetual fixed yield um which is which is pretty cool. Uh okay so sphere this is the dashboard I mentioned at the start. This is something we're building at block analytica.

Actually like two hours ago we uh released also the risk adjusted yields uh for major stable coins uh across mainets uh on like major um lending protocols like a compound morpho um spark etc fluid uh but yeah essentially it was launched as a dashboard where you can basically compare uh as you can see um stable coin border rates and the supply rates and then you basically can choose uh where you want to go like it's imagined as a like first stop when you want to decide uh where do you want to take a loan in DeFi uh and yeah it's also has like the benchmark rates we're using uh for assessing the sky savings rate formerly known as die savings rate um and yes from uh basically from today you can also find we kind of implemented our uh risk model um which uh also you can find on the on the dashboard itself uh in the documentation which is kind of powering this risk adjusted yield dashboard uh that you can see here. Um so what we aim to tackle by this is basically uh to say okay uh I want to get a glimpse of uh you know um the ratio of risk return in DeFi. uh and then yeah as I said this is u currently just covering uh mainet ethereum mainet okay this is u a project also I want to talk about um that is related to u privacy topic uh the project is called privacy pools it's relatively new non-custodial and non restrictive privacy protocol you can see there's a tornado cache for the ones that are familiar with the tornado cache protocol. But the the one important distinction or let's say addition is that u you can see it as a tornado cache but with an optional zk proofs that you can use to exclude yourself uh to prove that you know you're not a hacker or criminal or things like that. Uh so like the catch is that uh I mean the main um differentiation uh is that uh there is no hardcoded compliance rules uh that you can basically find in totach.

uh but instead anyone can prepare a list. You can do it for yourself basically or let's say a centralized exchange u wants to do some sort of QYC uh and what they can do is they can basically define uh their own exclusion list based on low law enforcement data sanctions list and then require you to prove that you're not part of that list and it's done basically with uh CK proofs so you're not um uh revealing any uh kind of information except accept that um to to them. Uh, of course, criminals um can still and similar actors can still uh use it for money laundering, but the like the protocol design uh discourages them um since they can they can't prove they're like not part of the specific uh list that they're basically clean. Yeah, this is uh I think last slide that we're going to wrap up with and I think I'm going to keep it for a minute or two here because this is something I usually like to um emphasize like the some tools that I'm basically uh using nowadays. Um let's say if you don't want to get me uh please consider using some of the private RPCs like me blocker uh fleshbots RPC uh similate first.

Yeah, this is something also I'm uh recommending when wherever I go. Uh use the products that use tenderly simulations and similar tools uh under the hood like rebby wallet, defy saver for defi. Um when it comes to lending and borrowing, you can use the sphere dashboard to find the best stable coin rates or risk adjusted yield down. Uh and if you are looking to minimize the liquidation and front-end downtime risk um focus on protocols with you know with proper risk management um potentially also defy saver automation which is pretty cool and of course use the multisig um safe and similar for for key rotations. When it comes to swapping and bridging, um I also uh mostly use the the llama swap which is kind of the meta dex argator and jumper exchange which is kind of the same thing just for uh for the bridging purposes.

Uh oh, I I timed it pretty good. Um yeah, I think uh I think that'll be it. Yeah, thanks. Yes, I did it turn on. Sorry.

That was amazing. Defi Nicola.

Thanks.

I'm g echo again. So, you have been so good that nobody actually Oh, there came a question in from blockchain miner. Can Sphere dashboard alert users to events like risk liquidity rates or declining collateral on key stable coins?

Yeah. Um, nice question. Actually we have been thinking of so no currently no um but yeah we are thinking of uh adding this because this is not like the first request we kind of got um about the about the topic about the like alerts. I think it was not just the liquidation rates um I think it was like rates in general and then uh yeah was it was something else uh but yeah also the liquidation. So yeah, this is actually something we are considering getting and that may be added in the future but yeah currently no.

Well a short and sweet question and answer.

Anyone from the audience have a direct questions because I know I have one as well. So

when it's come about staking everything a lot I know about is the impermanent loss in staking. How would are you working with that with the stable coin staking? Um yeah I mean impermanent loss generally um is can be u minimized if you are like providing liquidity to the stable swap pools. So I don't think that that's uh like the big issue if you are again providing liquidity to like the non-correlated pairs. Uh it is it is um definitely something that we are yet to tackle like overall generally speaking in DeFi.

There is some um actually um cool new project it's called yield basis if I'm not mistaken. It's from the co-founder. Um I'm yet to dive into it deeper but uh yeah I think it kind of uses leverages your LP position and tries to tackle improvement loss by uh basically uh collecting more more trading fees but yeah don't uh take my word for it but because as I said it's I think it's just a brief overview so yeah

yeah I mean permanent loss is always a nasty thing. So we have proof of staking just come in. How do you evaluate risk? Oh um yeah well I don't think this is like the question for uh uh for one or two minutes that we have left. Uh but yeah in general when it comes to lending protocols because this is mostly like our clients um so we kind of first segregated in um market risk, liquidity risk, counterpart risk um settlement risk, oracle risk um and then u the tricky part is to try to quantify it uh and combine it.

Uh but yeah actually a lot of a lot of um risk assessment is uh done by uh qualitative uh evaluation of like specific uh assets that you are like kind of on boarding to your protocol. Uh but yeah I mean we can uh we can discuss further um in person. Yeah.

Yeah. Risk analysis is always a big thing and it's like you're going down a rabbit hole all the time.

Yeah. So, any more questions from the audience sitting here with us today? No. Well, then I want to say thank you for helping us navigate the DeFi jungle, Nicolola.

Thank you for being here.