DeFi 2.0: “You Don’t Know The Power Of The Triple Threat!”
My previous post Getting Acquainted With Yield Farming got me all excited about decentralized finance (DeFi) again.
In short, DeFi is a blockchain-based form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks to offer traditional financial instruments, and instead utilizes smart contracts on blockchains.
Did I say just say NO banks? Hell yeah, now we are talking. It was after installing the Terra Station wallet, and using the Anchor protocol, that I realized, DeFi is the new financial system, and it might very well replace traditional finance (TradFi). And the reason is simple: It’s just better.
In essence, it is not unreasonable to suggest that the banking system is a regulated Ponzi scheme driven by leverage and debt with onerous rules and powerful gatekeepers. When you are in the system, you are a slave to it — think credit card debt cycle, and worse still, the banks can freeze your payments and shut down your accounts.
To me it looks exactly like the people who were fucked in 1995, vis-à-vis the internet, they just didn’t know it. Bill Barhydt
To be sure, the DeFi ecosystem advances at breakneck speed — over the last few months, a surge in liquidity-focused decentralized finance projects has ushered in a new generation of DeFi innovation known as DeFi 2.0. So just when you think you’re up to speed with the latest DeFi protocols along comes a brighter and shinier project vying for your attention.
So what the heck is DeFi 2.0?
DeFi 2.0 is a movement of projects improving on the problems of DeFi 1.0.
In particular, while DeFi aims to bring finance to the masses, it has struggled with scalability, security, centralization, liquidity, and accessibility e.g. in my post Ethereum might have more to offer than just high gas fees I have already discussed Ethereum’s scalability problems.
DeFi 2.0 wants to combat these and make the experience more user-friendly.
An example of DeFi 2.0 is Alchemix, which lets you take out self-repaying loans where your collateral generates interest for the lender. This interest pays off the loan without the borrower making interest payments. That’s insane — beat that TradFi!
The Defiant rightly notes that a core component of DeFi’s next evolution includes alternatives to a mainstay of DeFi 1.0: liquidity mining. Projects like Alchemix, OlympusDAO, and Fei Protocol are all experimenting with new ways of capturing users with the new challenge of getting them to stay.
The issue at hand is liquidity mining, which is a mechanism or process in which participants supply cryptocurrencies into liquidity pools, and are rewarded with fees and tokens based on their share.
The problem is that protocols are watering down their token’s supply in exchange for capital deposits, which are often temporary. So people come in, lend their assets to the protocol while milking its rewards, then disappear with both the assets and rewards, leaving the protocol high and dry.
“DeFi 2.0 is mostly about DAOs changing the relationship between capital providers and the protocol itself. The move-in DeFi 2.0 is for protocols to own their own liquidity,” … “This contrasts to ‘DeFi 1.0’ where protocols earned TVL by providing the best user experience or rented liquidity via liquidity incentives”.
Here is a nifty explainer video by The Defiant that summarizes it rather well.
This was a rather lengthy albeit necessary introduction to DeFi 2.0. With this in mind, let’s banter about a new DeFi 2.0 project that has been the talk of the town, which is, in short, the The Vader Protocol.
The Vader Protocol — A Stablecoin Anchored Automated Market Maker with Protocol Owned Liquidity. Nuff said. Mic drop!
Vader’s ambition is to be a liquidity protocol that combines a hybrid algorithmic-collateralized stablecoin with liquidity pools enhanced via synthetic assets. The stablecoin, USDV, is issued by burning VADER tokens and liquidity pools use USDV as the settlement asset.
Vader liquidity incentives finance impermanent loss protection guarantees, thus making VADER pools more attractive to capital. It also enables the purchase of Protocol Owned Liquidity (POL) via Bond Sales. Synthetic assets are minted from liquidity pool shares which allow for single side staking with no impermanent loss.
For all you basketball enthusiasts think of the Vedar Protocol as a LeBron James on steroids. It is the amalgamation of Luna’s mint and burn mechanism, THORChain’s AMM design with the concept of POL pioneered by OlympusDAO.
All in all, I think that Vader’s 3-in-1 applicability might very well be a game-changer after considering the meme-able nature of VADER as a token name, as well as the success and communities of LUNA, RUNE, and OHM.
So let’s quickly summarize before we get lost in all of this fancy-pants crypto terminology.
What is The Vader Protocol 101?
In short, it is “The Father of Decentralized Liquidity”.
Vader is trying to become a truly decentralized, algorithmic stablecoin on Ethereum. Ethereum’s composability would certainly allow projects to be built on top of USDV, thereby increasing the utility of the ecosystem.
It is also trying to become the best AMM for liquidity providers and traders.
Quick explainer: An automated market maker (AMM) is a type of decentralized exchange (DEX) protocol that relies on a mathematical formula to price assets. Instead of using an order book like a traditional exchange, assets are priced according to a pricing algorithm.
You could think of an AMM as a robot that’s always willing to quote you a price between two assets.
Vader also solves the problem of mercenary liquidity providers through Protocol Owned Liquidity.
Is Vader’s Holy Trinity a game changer?
The Vader Protocol definitely shows immense promise and there is a fair amount of value captured from the Vader token as the market cap has increased steadily in a short period of time.
However, there are still some significant risks to be aware of when it comes to this project. For example, Vader’s team has yet to take their algorithmic stablecoin off the ground. There have been a large number of algorithmic stablecoins that lost peg close to launch and never looked back.
Let’s also consider the fact that the OlympusDAO and many of the forked rebase projects it inspired have suffered brutal losses this past week despite the broader DeFi markets rebounding from last week’s lows.
In particular, a well-known OHM-holder, Twitter user shotta_SK is believed to have sold more than $10 million worth of OHM in a single transaction.
Note to myself — wasn’t that the whole point of OHM i.e. capturing users and getting them to stay?
A quick search on Twitter certainly reveals a somewhat bearish community sentiment, which indicates to me that not all is well under the hood of the OHM’s (3, 3) model.
Quick explainer: The key point to remember about OHM is it’s intended to be a store of value — not a mere stablecoin. Olympus uses staking as a primary resource for accruing value to OHM to achieve store of value status. This strategy is referred to as (3, 3).
In any case, check out Westie’s deed dive Vader — The Father of Decentralized Liquidity if you want to get into the weeds of the inner workings of the Vader Protocol, as well as some of the risks and concerns associated with the protocol.
In conclusion, DeFi 2.0 has been one of the largest buzzwords in crypto for the past few months. This movement was led by the concept of POL, which is pioneered by the Olympus DAO team. Accordingly, projects such as Alchemix or the Vader Protocol are super interesting to say the least.
#DYOR and let me know what you think about it in the comments section.
Will I be aping into the Vader Protocol?
The Vader Protocol has definitely captured my attention/imagination. It might well be worth a cheeky punt.
Btw I am certainly not going to be using it as it is run on Ethereum. As I have previously mentioned — I have made it my maxim to avoid Ethereum’s gas fees at ALL COST (pun intended).
As it is customary, I will leave you with a tweet by Route 2 FI:
Happy DeF(y)ing ya’ll
Frei Bier / Twitter: @FreiBIER13
DISCLAIMER: My writings are merely a reflection of my learning journey and my attempt to compartmentalize the cryptoverse. I am learning out loud so feel free to correct me or disagree with me. This is not investment advice but my hope is that you find value in some of my links and ideas.