The Battle for DeFi Liquidity – Dan Elitzer

hello okay thank you for for having me here my name is Daniel it's ER I work at I do collab ventures you you heard my colleague Gavin McDermott a little bit earlier today talking about liquid staking and some of the potential unintended consequences of going down that road as as he emphasized we definitely are going down that path and what I'm gonna be talking about today is some of the cool things that we can do if we go down that path but acknowledging and recognizing fully that there are a lot of risks associated so as pretty much every speaker up on the stage has talked about today deep eyes absolutely exploded over the last year so one call-out though is this like total value locked I think is a is a misnomer it's deposited right this is not locked in any meaningful way you can withdraw it at any time that's one of the beauties of these protocols so hopefully we can adjust the nomenclature slight slightly looking back we can really see the growth of this ecosystem right this was Alethea put together some great great images this was backed up ever 2018 pretty small jumping ahead to may 20 19 getting pretty big right you're seeing compounds come up in lot of interactions with maker as a result you know swap starting to emerge auger getting a bit of activity but then by august the ecosystem had absolutely exploded and unfortunately they haven't updated this there's no easy way to pull it down from their website so I don't have a more recent one but just look at the size of synthetics at the top right that's tiny and they're now exploding so I think we can all agree that this is this ecosystem is just getting started but already we're seeing these money Legos combined in really really interesting ways so what to successful defy protocols have in common they're not peer-to-peer right if you if you look at some the early attempts the original version of Dharma what 0x was focused on originally they were all focused on taking this order book model that's been used in traditional finance and saying you know we've got somebody who's making an offer and someone who's gonna take that offer and that was kind of clunky and unfortunately for trying to bootstrap a market that doesn't work very well so every single one of the protocols that we've seen become successful at some form of Peter contract interaction now I want to emphasize this does not mean that like you're literally trading with a robotic train with a contract there is effectively a human on the other side of that for now and that's happening because we're using various forms of automatic rate setting and automated market makers that are enabling this interaction we're in the moment you're going against pools of liquidity so if we look and this was snapped it's it's funny trying to make slides because when you show charts like this they like fluctuate if you do it in an hour beforehand but this was this was taken last night so every single one of these maker compound synthetic everything down until you get to light new network and WBT see every single one of these has as a core components some form of an automated market maker or some automated interest rate setting and a peer to contract interaction and that's what I believe is one of the key drivers that's unlocked this ecosystem so if you're thinking about launching some kind of new defy protocol today and you're not thinking about app the core having a peer to contract interaction I think it's gonna be really hard to get up on this chart and start getting liquidity now the important thing here is liquidity is a mode this is how you're going to defeat everybody else you need the most liquidity why there's this flywheel effect around liquidity right as you increase your liquidity and you're using this automatic rate setting you're slow goes down for trades the rapes go down for people who want to borrow so that increases your trading activity it increases your borrowing activity that in turn increases your fees which increases the yield for the people who've deposited liquidity and so the more liquidity floods in so you need to get this flywheel turning and it's possible to try to growth hack your way at any one of the points on this cycle right you can start you can pay people for liquidity to start dumping a lot of stuff in there and initially to put your slippage and rates below you can subsidize your your rates that people are getting right an example of this is the way synthetics subsidize people to create the Seth eath pulls on unis right or if you look at pool together right they've got this sponsor dye pool that boosts the prizes and boosts the rates that people are getting for participating in their prize linked savings protocol on the trading and borrowing side you can always do the kind of traditional thing you can give some sort of rebates you can do various things there fees right we can play with fees you can give higher fees if you think traders will tolerate it that will incentivize local providers but the place where I really think there's the most interest the most attention is aa run yield and we've seen discussions right see Gavin laughing there because this is like there's been like three talks in the stage jest today all about yield and how that is the tail wagging like the billion dollar the billion dollar tail wagging the trillion dollar dog is what's gonna happen eventually so how do you hack yield right I think I think Ryan is totally right here that we're gonna see like what we're seeing right now our liquidity hackers the folks who are successful today we're getting up there finding ways to climb up those ranks and get used to their protocol they're finding ways to hack liquidity so just a year ago right before Denver last year I published this piece explain this concept of superfluid collateral and the core idea here was well why do you just have to use assets in one place why can't your collateral also be earning for you while it is say securing a loan and so one of the examples I gave was looking at compound and saying well why can't we tokenize deposits into compound so that you can earn interest and at the same time use that as collateral somewhere else I had a slightly different construct than what ultimately ended up happening in May of that year when compound ended up introducing C tokens I think bzx had AI tokens before that as well so you know this concept has really taken off and it's starting to form the core of a lot of the new protocols that we're seeing experiment with these concepts I also made a prediction we're gonna start seeing you know swap liquidity pool shares start getting used as collateral loans and that would get to millions of dollars in months rather than years and that unfortunately is been wrong but I think that I was wrongly timing not on whether that's going to happen and I think the reason for that that that this ended up being wrong was the power of defaulting to opt out rather than opt in so if you think about the power of defaults right we've seen studies that show that you can increase participation employer sponsored retirement plans by having people opt out rather than opt in by about 32% the one that I really like is organ donors right if we if you go look at countries that have opted out from organ donor programs versus opt in there's a 600 percent greater participation rate when you say you know you're opted in by default so I think what we need to start seeing is folks build these protocols from day one that's saying we want to have yield generation in there so I think where that's in the take us is we're gonna go from talking about superflous collateral to super fluid protocols an early example that we've seen of this is Ave right there a compound like lending borrowing and lending protocol but rather than just have this variable rate loans that are kind of money market function what they've done is they've also said well you can use the same pool of liquidity and we can also offer fixed-rate loans you're not gonna get as good a rate but if you want the guarantee of a fixed rate we can also do that from the same pool of capital oh and by the way we're also offering flash loans right there have been other folks that had done flash loans and various forms previously flash loan being where you can actually take an uncollateralized loan as long as within the same transaction you are paying back all the assets that you borrowed and they're saying like that's that's free right you're you're not that there's no risk there but you can seriously minimize the risk and it's certainly fine to do uncollateralized lending or it's better to do uncle hours lending in a single transaction with the guarantee of payback or their transaction reverts versus trying to do on or under collateralized lending where you can really move stuff around across multiple blocks so getting to the next step there's a protocol called bounce earn hey guys can see it there and so balancer is a noncustodial portfolio manager liquidity provider and price sensor but in easier terms it's yuna swap but with any number of assets with any waiting right that's that's the core thing they do they say you don't need to have a 50/50 weighting of eath and some other asset if you've got three assets five assets 15 assets in your portfolio and you want to contribute them all into this liquidity pool with varying weights you can do that you can make those pools custom and I think that is that's really cool and one of the things I loved reading their papers that that made me think we're gonna start seeing this bleed out into the traditional clients world too is they pointed out you don't need to do this just in crypto you can apply this to traditional markets right imagine an S&P 500 pool if Vanguard took their S&P 500 index fund and rather than having people who are paid to go out and trade and keep our program balanced let's just make that whole fund available and other people can pay us to rebalance our portfolio for us so I think that is super cool my question is can we combine balancer and compound right if I'm let's say I'm willing to hold eath and die and BnB and wrap right and I've got I'm saying okay this is a portfolio I want to go long I can if all those assets were saying on compounding like okay I'll just dump them all in there but why wouldn't I also say I'm willing to accept if we want to borrow any one of these assets and they're willing to collateralize it in another asset that I'm willing to hold and over collateralize it why wouldn't I let them do that right that's more yield now you're getting the flywheel effect going where you're super charging that yield because you're not only getting the trading fees yield you're starting to get the lending yield so this leads me to what is the ultimate super fluid protocol right first you're able to deposit any assets in any proportion here to be able to have them automatically rebalance as the relative prices of those assets shift you're gonna earn trading fees via some sort of automated market-maker you're gonna automatically earn interest on loans of your assets as long as they're over collateralized by other asset types that you've deposited and you're gonna get extra bonus fees from flash loans of your assets there's also another thing you're gonna get which we're gonna get to in a second so the question here is then is all of this gonna congeal into like one single super fluid protocol where we're all going to be dumping our assets and trying to maximize our yield and I think the answer to that question is no right and then here are some reasons right we've got these smaller liquidity pools are going to exist they're gonna have more slippage and more volatility but the upside is you get more opportunities and so there will be traders are gonna come in we're gonna arbitrage your in to keep activities going those little pools because they want that good some people don't care enough they're not trying to optimize too much and so you're gonna have these these different pools but I believe there is a trump card to this right there there is there is one scenario where you never want to go with the less liquid pool privacy right look at tornado cash if you forked a tornado cash and said we're gonna start tornado cash from scratch but oh by the way the anonymity set the number of deposits with which my deposits are getting mixed there's ten deposits so far nobody who cares about privacy is ever going to go and use that protocol you always want the largest anonymity set for privacy you're never gonna go with a smaller anonymity set so that means the sixth piece here is you're gonna have privacy because that is going to be a really powerful moat and that means that all of us by participating in these protocols by trading with them by borrowing from them by lending to them by parking our assets they're what we want to passively go along this portfolio we're both going to regain our own financial privacy and we're going to empower other users of the protocol to regain their financial privacy that's the talk I think we've got a few minutes if there are any questions now this all sounds good you guys gonna build this yeah question uh sorry where I can't see the mics is there there's there's a mic up here people have questions no have you met anyone building this protocol uh not yet my question to both the balancer and compound teams because those the ones I think are best positioned over all right now is who's gonna become who first is compound gonna come balancer or as balance are gonna become compounds but I do think you know compounds big balancers getting out of the gates and there's a lot of other very smart teams working on things so I'm excited to see how this plays out yes I guess if you talk about privacy I'm curious if you see other potential money Lego combinations for increasing it so the obvious one that I see is if you take the die savings rate and put that on top of tornado cash people can now keep their savings in the on nimidam and then the middie set are there other obvious combinations that you think would be beneficial or that yeah I think yeah that's a great thing I think all of it right so absolutely you can do the DSR and I think that's the the least risky way to do it it's just you know you're already taking risk with die and so DSR doesn't really add any more metal rescues you're leaving money on the table if you don't have your die deposited not locked to earn the die savings rates so absolutely that should be the default way I think tornado cash right now just supports Eve I know like Aztec just launched like there's ek die there are various ways to do this so I think yes absolutely you'll earn the dsr you'll probably want to do this with you know C tokens and I tokens and Y tokens and all these different things but I think you're also gonna mix it to let these privacy and enhanced assets also be traded via you know swap pools balance your pools whatever it is right as long as you're willing to hold multiple assets and you want those proportions right so you don't buy a unit bias of like I bought this number of units of this asset and I want to have that number of units later then yeah I think that that's how it'll work just a quick correction don't have the cash support she died and I'll just forge it awesome yes very cool all right cool well I'll be around if anybody wants to talk more about some of these ideas [Music] you [Music]