Anvil Protocol: Modernizing Finance With Onchain Collateral | M - Anvil

ETH Denver, how are you? My name is M and I work at the Acron Foundation as the head of the Anvil project Foundation as the head of the Anvil project . But before we get there, I want to take you back to 2006, season 6, episode 11 of The Sopranos. The guy on the left is Veto. He wants to return to his family.

And the one on the right is Terry. Look for a loan to pay child support . Now, for this, I want you to forget that Veto is a dead man you to forget that Veto is a dead man . And Terry knows this and has no intention of repaying the loan. Sorry for the spoiler, but if you don't know it yet, you've had 20 years to watch it.

Anyway, they agree on the terms of the loan, 20 thousand at two and a half points, right? And then Terry says, and a half points, right? And then Terry says, "You know I'm reliable." Now, I would like to analyze this very aspect. What does it mean for Terry to be trustworthy?

This means that he is able to repay Veto and will do so within the agreed timeframe. So, what are we really talking about here? We're talking about Terry's creditworthiness. Creditworthiness is how trustworthy a party is to keep financial promises. So let's see how creditworthiness is currently assessed.

And the way I see it, there are only two ways. The first is reputation. This is how credit scores work. The basic reasoning is essentially this. Other financial institutions have trusted you in the past and you seem to pay on time, so we'll vouch for it.

That's also how mobsters do things. Well, that and, you know, the threat of a baseball bat. But that requires trust. And what do we say in Web 3? Don't trust, verify.

So the most responsible way would be to evaluate reliability through guarantees. Putting something of value at stake that can be seized if the conditions are not met. Guarantees come in many forms Guarantees come in many forms . One, illiquid assets, house, car, watch, and two, liquid assets such as cash in the bank or stocks. But let's start with illiquid collateral.

They are not particularly efficient in their current traditional form. And speaking of which , let's talk about car loans. When you buy a new car and get a loan, what is the guarantee? It's the car itself, right? The bank holds the title and if you don't pay, they will come and take your car.

But think how crazy that is, right? The bank has to hire someone or pay a middleman to come and get your car. It's twisted. And on top of that, they don't even know what condition your car is in. It could be destroyed, right?

What if the used car market crashed? The bank would end up recovering a pittance compared to what it paid to the dealer. It's a bad system. And because of this risk of insolvency, foreclosure, and devalued collateral, the cost of inefficiency is passed on to everyone in the form of higher interest rates and administrative fees. And even liquid collateral is, upon closer inspection, equally inefficient.

And this brings me to the crux of what I want to convey today. Sending money is not the same as proving you can pay. It might seem sensible on the surface, and even obvious, but as you look at it in practice, you'll begin to see its inefficiencies. Think of all the times you've had to pay money when all you had to do was prove your creditworthiness or reliability. Think about down payments, deposits, escrow, etc.

The problem is that in traditional finance, there's no good way to ensure your cash collateral is safe when it needs to be collected, other than having the company hold it in advance or relying on a third party in the case of an escrow. You deprive yourself of your money just to prove that you will be able to pay in the future. This too is a flawed system and the implications are enormous. A quarter of a quadrillion dollars. This is the size of the credit industry if we add up all those components.

And they are all subject to the exact same inefficiencies we just identified. But there is a solution. Digital assets. Digital assets are the perfect collateral because they are liquid and can be verifiably backed on a blockchain. And on-chain collateral isn't just an innovative way to attract cryptocurrency enthusiasts.

This is an inevitability given the enormous inefficiencies of the current market. And on top of all this, on the consumer side, we have new generations who don't want to play this game. They are not interested in this. And one example is what I call the Gen Z problem. Gen Z has two characteristics that the market will have to adapt to very quickly.

The first is that they are not building their credit at the same rate as previous generations. They are less likely to buy property and are cautious about taking on debt. They saw what happened to their parents during the 2008 financial crisis. So they choose debit cards instead of credit cards. And when they need credit for a major purchase over time, they turn to BNPL services like Klarna, Afterpay, and Affirm—all of which offer interest-free loans even if they have little or no credit.

So they're not building trust. They are not building illiquid collateral. So what do they have? They have cryptocurrencies. According to a study last month, more than half of Gen Z owns cryptocurrency.

Whether they realize it or not, this is their favorite guarantee. And the result of all this is a market imperative for a way to exploit digital assets. That's why we created Anvil. Anvil is the DeFi on-chain collateral management protocol that allows users to issue fully collateralized credit. Now, this last part might be a little confusing.

I know financial experts know what fully secured credit means, but when it comes to credit and lending, it can be a bit confusing. So, let's rewrite what we already know. Anvil is a DeFi collateral management protocol that allows users to demonstrate their trustworthiness, right? So how does it work? It all starts with the vault.

Users deposit digital assets into a central vault where they can then be used as collateral throughout the protocol. Once the collateral is used, it is reserved, meaning it cannot be withdrawn and cannot be used twice. Only the party to whom the credit is granted can actually request it. And this is how users can verifiably demonstrate their creditworthiness. It is important to note that the guarantee remains with the issuer unless or until it is necessary to call it back.

So, you're not giving up your assets upfront. The Anvil Vault currently accepts 14 different types of digital assets as collateral, although any ERC20 is compatible as long as it passes our governance. We launched just a month ago and have already seen $17 million in collateral enter the vault. So, let's talk about the two main ways this collateral can be leveraged within the protocol. The first is through digital letters of credit or " through digital letters of credit or " locks".

Locks are a digital promise from the creator to a beneficiary for a credited amount. It's a digital payment promise that's guaranteed no matter what. And they come in two forms. The first is static. Static locks are a promise for a certain amount of digital tokens.

Let's say 25,000 USDC. They are covered by 25,000 USDC of collateral in the vault. And the second type is dynamic blocks. Dynamic blocks are a promise in one token backed by collateral in another. So you still pledge that 25,000 USDC, but it could be backed by, say, your encapsulated ether.

This allows the beneficiary party a secured claim in an appreciating token, while remaining flexible enough to allow the creator to leverage the digital assets they already own. Dynamic blocks are over-collateralized and subject to liquidation if relative values begin to diverge too much. That's exactly how Compound and Aave handle it. And here at the Acronym Foundation, we've published an open-source liquidator in our repository that anyone can use and build upon. Liquidations are without authorization.

Anyone can do it and make money in the process. And right now at ETH Denver, one of our hackathon bounties is to have them create a new kind of open-source liquidator that leverages other DEXs. So yes, run liquidators, make money, and help us put the D back into DeFi. It is important to note that whether your collateral is a static or dynamic block, it should not matter who accepts the block. A guarantee is a guarantee and how it is collateralized should ultimately be irrelevant.

So, let's talk about some use cases for blocks. There are seemingly endless use cases for blocks, but I'll touch on a few and then we'll dive into one. The first is to guarantee consumer loans. We have already seen this happen in Europe. There is a company in Europe that accepts Anvil digital letters of credit and issues fiat loans against them.

In fact, their entire value proposition is the same-day credit in euros to your bank account against your digital holdings. You don't have to sell your position to gain access to fiat liquidity. And we just saw in the car loan example, right, that when you remove risk from a system, interest rates go down. This is a competitive advantage in the market, facilitating international trade. This is no surprise.

That's why analog letters of credit exist, right? Two parties across a border with disconnected financial systems trying to prove their creditworthiness to each other. So what happens? You have regional banks in the middle, intermediary fees. It takes a long time.

If you use blocks, it would be direct, instant and free. It's a better system. Payment and transfer regulations. Guys, I'm done waiting for a wire transfer to clear. Enough, it's over.

I've had enough. And if you need to send a wire transfer, send a digital letter of credit to guarantee the amount in the meantime. I don't want to waste a week of trading waiting for a wire transfer to clear. It's ridiculous. We can do better.

Auctions ridiculous. We can do better. Auctions , games and sports betting. I'm really glad that auctions are included, because so far we've only talked about cases where payment is unavoidable. But think about what an auction is.

You have to prove you can pay to bid, but you might not win, which means you might not have to wire any money in the end. And even in cases where guaranteed transfer isn't actually guaranteed, locks still work. And for gaming and sports betting, we continually see casinos offering credit lines to high rollers based on trust. We know how well it works, right? Anyone should be able to issue a digital letter of credit and obtain a line of credit at any casino or bookmaker.

I mean, think about what happens when you win. Think about this process, as it exists now. Sell ​​your digital assets. Get fiat currency. You withdraw it from the bank.

You have to go to the casino. You approach the cash register. You exchange it for chips representing those dollars. You put them on the table. All this to cover up a delta whose size you don't even know, right?

Locks can make huge strides in this area. And the last one is financial bridging. Locks are a great way to facilitate bridging between chains. This is pretty obvious. So, let's talk about a more specific example.

Maybe you can relate to this. Imagine your organization wants to book a booth at a crypto conference. The Acronym Foundation does this all the time. In fact, we've had one in the past. These are in high demand, right?

They are often booked up to a year in advance. It's a competition to get them. They are often quite expensive depending on the size and location. But how does it actually happen? Well, in our experience, that's how it works.

We contact the organizer. We agree on the amount to be paid. We put it in a contract. We sign it. Then the organizer sends us an invoice.

The invoice has payment terms associated with it. Let's say 30 days. And then we are contractually obligated to pay within 30 days to secure the stand. But do we really have to pay or can we simply prove that we are solvent? Imagine the booth costs $100,000.

What if you instead issued a lock valid for a full year until the conference to the organizer for 100,000 USDT? Book your place immediately. You don't have to part with your assets, so you're happy. But the organizer is also happy. You don't have to worry about whether you'll pay within those 30 days or what to do on the 31st or 32nd.

Do we trust them? Should we keep the booth? Can we resell the stand at this point? They also don't have to worry about cancellation penalties because the locks are partially redeemable. And this is where it gets awesome.

What happens if the collateral you used is an interest-bearing asset? What if it were staking ether or an interest-earning stablecoin? Let's say it earns 10% APY. So you use 100,000 in an interest-bearing asset. You block him for a year.

You book the booth and when the year is over, you send the 100,000 to the organizer. On-chain, off-chain, it doesn't matter. Once received, they can cancel the lock and return your warranty. You just kept all the profit. That's 10,000 you just made using the guarantee efficiently.

I want to talk to you about something that has been bothering me for over a decade and that I think will clarify this point. When I got my first AMX, this is what I saw when I opened the app. Please pay by I opened the app. Please pay by . What the hell is a "please pay by" date?

It's not an expiration date. I can tell you this because I've read the terms and conditions. The expiration date was 15 days later. So why would AMX do this? Why would AMX do this?

Why do they really want to help me pay on time? Do they care about me? Does this sound typical of the credit card industry? No. Exactly.

Because they know that if everyone pays their bill 15 days in advance...There's a huge advantage in holding your money for another 15 days. The problem is that traditions are designed to capture the benefit even in short durations, which is not the case for individuals or organizations outside of financial services. But that’s why DeFi is the great leveler. We now have tools available to earn anytime, for any duration anytime, for any duration , 24/7, 365 days a year.

So I ask you again: why should you part with your money a minute before you have to? While all of this is related to locks and what they can fix. We have another mechanism. Locks are one to one in credit issuance. We also have a many-to-one option in terms of collateral pool.

Through collateral pools, many users can contribute to the same fund for the benefit of a single beneficiary. This model is very common in insurance or staking pools. And while I think we're all familiar with these concepts, let's look at a current example concepts, let's look at a current example . Flexa. Do you know Flexa?

Exact. Flexa is the largest purely digital payment network in the world. They allow merchants to accept cryptocurrencies at the point of sale. And to ensure these payments, they reward users for participating in the staking pools that support their network. Over the past few months, they have run a successful beta through Anvil with users contributing approximately $2 million in pledges.

Looking ahead, I'm excited that they will be migrating their entire collateral system, known as Flexa Capacity, to Anvil collateral pools. This likely represents $160 million to $ 180 million in additional collateral that we expect to enter the protocol in the coming months. So, let's look at the protocol from top to bottom. It's a vault. They are locks.

They are letters of credit. But it doesn't end there. There are seemingly endless ways to leverage warranties and mechanisms to do so. And this is another prize we are offering to ETH Denver right now. We are trying to find the next mechanism that Anvil will use to solve real business problems and market inefficiencies.

And our engineering team has a comprehensive roadmap of tools and expansion to ensure we continue to be pioneers in this space. So how can you get started? Well, first of all you can interact directly with the contracts interact directly with the contracts . All our contracts have been published and verified on Etherscan. Additionally, the code is located on the Acronym Foundation's GitHub.

There are readme documents on the website and our contracts have been reviewed three times. Twice from Open Zeppelin, once from Trail of Bits. We have passed two Immunifi audit competitions and have an active bug bounty program. The second way to leverage Anvil is through our dApp. Our dApp exposes vault and lock functionality, while also allowing you to participate in governance and track and claim your own protocol rewards.

And the last way, which is the newest and the one I'm excited about, is our SDK. Our SDK allows easy access to functionality through customizable components, while also aiming to optimize the user experience also aiming to optimize the user experience . We've talked about all those use cases before. We need a flexible user experience to manage them all. This is what a good SDK should do, and we currently have a working alpha library that we will continue to work on, expanding its functionality and configuration.

So, please contact me if you're thinking of integrating with our SDK, so we can prioritize development based on your specific use case. All of these options can help you leverage on-chain collateral to enable features like allowing your users to trade and transact instantly, operate on credit, access seamless bridges, and much more. You can check out anvil.xyz. We have links to everything there.

Discord, Medium, uh GitHub, Twitter, all our docs, protocol issues, and our governance. Uh, I'll be here all week. I'm m_att_anvil on Twitter and Telegram. You can also find me on Discord. Let's meet and discuss how your organization or project can leverage Anvil to take things to the next level .

I'll also offer you a coffee. Trust me, you know I'm true to my word. Thanks, Denver.