Doc's Daily Commentary
Mind Of Mav
4 DeFi Protocols Building A Better Future For Finance
There is a protocol arms race in DeFi right now. Yet due to DeFi’s composability, an advance boosts the whole ecosystem, not just one protocol.
The lightbulb has switched on in the heads of major financial systems, and crypto-literacy is spreading amongst the population and mass adoption continues. As such, a slew of fantastic DeFi protocols, on Ethereum and beyond, are sprouting up to capitalise on this new west, with the sprawling (and unclaimed) territory of a new financial system waiting to be conquered.
Finance just makes more sense on-chain. The main impediments to successful, flowing finance are counterparty risk, vast expensive bureaucracy, siloed economic activity and unnecessary friction between assets. The blockchain and DeFi have solved or will solve these problems in the near future – and that’s why there is so much excitement in the space.
Although instruments like lending and borrowing are already in full swing on-chain, there remains other uncharted financial products: price protection, risk management, complex swap products and credit derivatives which are still exploring their infancy on-chain. This next layer of finance promises exponential growth in the DeFi space, so let’s take a look at some of the DeFi protocols that are helping to shape the future of finance.
1. Olympus Pro
Olympus Pro has a unique bond market system to raise liquidity for its protocols. What began as mining, morphed into ICOs and then liquidity bootstrapping has now, in Olympus Pro’s case, been superseded by the creation of a bond market to help build more stable liquidity in a protocol.It does this by purchasing liquidity (in the form of collateral) outright using their token, rather than simply renting liquidity through paying rewards to mercenary capital – capital that might take flight at any time.Bonds scale down in rewards in accordance with their uptake, eventually producing negative yield. At which point, no one should want to buy them (and that’s okay).
The bond market on Olympus Pro is still an active pursuit of passive income as, by keeping tabs on the market, buyers can earn significant yield buying a low-uptake bond and reselling the vested tokens on the open market as they unlock.
Olympus Pro wants to bring this bond market system to the wider DeFi start-up space, as many protocols still use the liquidity mining method used by Compound – and to varying success as, should the protocol fail to continue its (possibly expensive) reward mechanism, then the protocol may seize up as liquidity drains to better opportunities and the growth of the protocol may stunt.
By helping protocols to acquire their crypto capital through their battle-tested smart contracts, they will create a new paradigm of liquidity acquisition for start-up DeFi protocols and ensure more of them survive as the great transition occurs.
2. Near Protocol
Near Protocol is a developer-focused protocol that aims to build a cleaner, friendlier and faster ecosystem for DeFi, or to use their preferred term: Open Finance. Near’s stated advantage is that transaction costs on its proof-of-stake blockchain are cheaper by an order of magnitude, environmentally sustainable, and their long-term growth potential using sharding tech promises a ledger that can scale infinitely in line with mass adoption.
To encourage development on the blockchain, Near pays developers 30% of fees generated by their projects. It also provides a wealth of development support and has a more developer-friendly ethos than other projects. To compound this, it recently launched an $800 million dollar grant program to fuel the creation of projects on their protocol.
Their Rainbow Bridge means that Ethereum or Polkadot assets can readily be deployed on Near, and the protocol is asset agnostic, and intends to be fully composable with the rest of the DeFi world.
This will encourage liquidity to migrate from more established DeFi protocols to take advantage of the DeFi projects on Near that are offering new solutions, and doing it in a faster, cheaper and more eco-friendly way. Near is poised to drive mass adoption into DeFi.
The more DeFi protocols sprout up, the more interconnected and composable the blockchain ecosystem becomes, the more the price-relationship between assets has the ability to cause knock-on effects throughout the network.
Moreover, the more assets move on-chain, and more digitization of real-world tokens occurs, the more that established institutions will need to appropriately hedge against risk.
This is where Bumper comes in. Their protocol, and their modular plug-in one-click price protection service, have the ability to interface in far-reaching ways with protocols right across the DeFi ecosystem, whilst also offering protection for individual and retail users through the Bumper dApp. Taking insurance against risks is an essential centerpiece of any financial system, and Bumper looks to provide something similar to the DeFi space.
It will allow users to lock in price floors for their assets for a small premium, so they can be certain on a particular USDC amount for it without having to leave their asset on an exchange. They then have the freedom to use those assets as they desire, whether that be to take a crypto-loan, or to deploy them in the yield-bearing farms they desire.
This security will vastly increase capital efficiency as assets will not have to be held ‘in reserve’ out of fear of an imminent market crash – making it less likely for said crash to happen.
Bumper will be a foundation brick for DeFi’s onward development as it seeks to flatten and diminish the damage caused by crypto’s famous volatility.
The fact that Bumper can be plugged into any protocol, and provide price-protection to whole pools within them, is a bit of a game-changer.
Users will be more attracted to financial products on offer that have already been bumpered.
Bumper has first-mover advantage in this price-protection space, and as traditional and crypto institutions need to hedge against risk to satisfy regulators, then Bumper will be perfectly poised to help them do so.
Abracadabra is a light-hearted and fun protocol with a fantastically serious and profitable use. By staking yield-bearing DeFi tokens, such a xSushi or yvUSDC, Abracadabra emits the affectionately named Magic Internet Money (MIM) – a sly nod to what crypto is callously claimed to be by the unconverted.
MIM is a stablecoin that can be exchanged for other stablecoins so that the trader can take a loan on their assets, while also earning a yield through Abracdraba’s ‘magic’ pools, which compose to streamline and maximise yield generation from the assets stake within them. To get their tokens back, users simply return the MIM minted.
Yield-bearing tokens can not be traded easily, as they represent a claim on an asset which has been locked away. In this way, Abracadabra is a third layer of collateral-value unlock for thirsty crypto traders.
Although they are earning good interest in a pool such as the Yearn Vaults, they can’t use the token they hold as productively as they like. Or buy anything ‘real’ with it. With Abracadabra, holders of these tokens can free up liquidity to make the trades they need or, to use Abracadabra’s example, buy a fiat panda with a jacuzzi in the back, without losing their exposure to the ongoing yield of their token. This type of ‘consumer’ credit is a key engine of the traditional finance system, and Abracadabra will bring it on-chain.
Future of Finance
DeFi protocols are being built that will maximise the possibilities of this new way of finance. As they do, they will over time replace and upgrade various elements of the financial system, and in doing so usher in a more equitable, efficient, and yield-bearing way of doing things. Whether that’s helping protocols achieve funding, offering price-protection, creating developer-friendly blockchains, or unlocking crypto consumer credit, these protocols look well equipped to succeed.
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