Tiki Talk Minutes: Fluidity x DOPEX x Arbitrum and the evolving boundaries of DeFi
The year 2020 marked the explosion of DeFi protocols in public imagination, driven largely by the rise of liquidity mining — Compound protocol had started offering COMP tokens as additional rewards to liquidity providers. For a long time, the first iteration of DeFi ruled the roost unhindered. However, as we edge deeper into 2022, a new crop of ‘DeFi 2.0’ protocols — plugging some of the glaring lacunae in DeFi 1.0 — is gathering steam.
What exactly are these new age protocols addressing? Some innovations resulted in innovations that were light years ahead of what was provided by traditional financial institutions. One example of that would be the concept of ‘self-repaying loans’, of which Alchemix is a pioneer. Take an example. You deposit your collateral, you borrow against it, and the protocol stakes the principal that you deposited — the yield from staking will automatically pay your loan off over time. Your loans decay to zero over time, and your position will never be liquidated.
Another important gap that is being plugged with DeFi 2.0 is the accessibility, democratization and user-friendliness parameters — a necessary development at a time when DeFi platforms are getting more complex by the day. More avenues are opening up, delivering more and more interesting ways of earning yield. One particular field is that of DeFi Options, where users get access to yield through different options strategies that are dependent on the volatility of the underlying asset prices and catering to a spectrum of risk preferences. These high-grade strategies were available earlier only for institutional investors.
In conversation with Dopex’s Halko and Arbitrum’s Nina Rong, Fluidity’s own Shahmeer Chaudhry described the project as a new derivative, where assets pay yield as and when they are used. It would seem slightly paradoxical, as, generally, yield is associated with locking assets up — this is a potential new paradigm when it comes to people’s perception of crypto, Shahmeer said.
If you are in possession of $100 USDC stablecoins, you can exchange them for $100 fUSDC (fluid asset USDC) — a wrapped form of the stablecoin — on the Fluidity platform. You can redeem your fUSDC for USDC at any point of time.
Where it differs from other DeFi yield systems is that you earn rewards on your fluid assets by using/utilizing them — that is, if you send them, receive them, swap them, or trade with them, you stand a chance to earn randomly paid yields and “large dividends” which can range from cents to millions. This is the polar opposite of traditional methods, where you have to lend, stake or lock up your assets in an idle form for an extended period of time to earn yields. Fluidity, on the other hand, envisages you, as a user, earning rewards through everyday activities like payments for food, rent, or interactions with your favorite decentralized exchange (DEX) or NFT marketplace, or blockchain gaming platform.
If A transfers a fluid asset like fDAI to B, both the sender and receiver stand the chance to earn rewards, split 80:20. At least 70 per cent of all transactions will be yield-bearing.
In addition, with Utility Mining, Fluidity also provides a new way of distributing tokens that protocols can take advantage of. Utility Mining rewards users for displaying ‘intended behaviors’, gifting them with governance tokens on top of the general TRF rewards. Take an example. If a DEX like Uniswap signs up for Utility Mining, a user who performs a specified transaction with a fUSDC pair on Uniswap could win up to three yields — Fluidity governance tokens, UNI tokens, and the usual TRF rewards. Learn more about Utility Mining here. With Utility Mining, you can reward, not mercenary capital, but actual, engaged users of the protocol.
Dopex’s Halko said that flexibility and intuitive user experience were at the core of their protocol’s success. Dopex is a decentralized options exchange where anyone can buy and sell options in an easy-to-use interface. Options is a contract between two parties, a buyer and a seller. The contracts run on top of an underlying asset, and make bets on its price action. That is, you are not dealing with the underlying asset in itself (be it ETH or BTC or stocks) — but earning yields from the volatility of the base asset. Unlike stocks, options always operate within a timeframe, and all options have an expiry period. After the expiry date, be it in days or months, the options contract becomes worthless. There are two main types of options available in the market: Call and Put. A call option basically gives the purchaser of an options contract the right (but not an obligation) to buy the underlying asset at a specific price. A put option, on the other hand, gives the purchaser the right (again, not an obligation) to sell an asset at a pre-determined price.
“What we managed to do was to merge staking and farming with options selling, and we have a very popular product in single-staking options vault,” said Halko. “It is pretty much a single-staking farm. Users can stake tokens, which are deployed into various strategies, with risk preferences they are comfortable with,” he said.
Dopex had recently deployed on Arbitrum, a Layer 2, after moving from Ethereum. So, what is Arbitrum? Layer 2s like Arbitrum are scaling solutions that help Ethereum communities solve high cost as well as congestion on the main chain. It works by putting all computation on Layer 2, which is off the main chain, but submitting all call data and compressed call data to Ethereum validators. All the Ethereum validators will be able to use this and construct what is happening in the L2 at any time.
Arbitrum employs a technique known as an optimistic rollup, which means that all validator claims are considered to be honest until another validator steps up and challenges it.
What makes Arbitrum special is that it is, so far, the most EVM-compatible out there, says Nina. “We use a technique called multi-round fraud proof. What this means is that if somebody is lying and gets caught, or if two validators disagree, we will have them fight and figure it out. What exactly do they disagree on? We will only transfer that one bit of info to Layer 1 to decide who is right and wrong.”
Conclusion
As we enter a new phase of DeFi, a lot of questions remain unanswered. How can we better the current techniques of yield? How can we ensure a steady flow of liquidity to the emerging derivative protocols?
Arbitrum had a meteoric rise when it first launched, as on the back of outrageously high APYs from farming dapps like ArbiNYAN. The TVL had touched almost $1.5 billion. Did the initial rush of users sustain, and could Arbitrum implement the Utility Mining concept for more sticky liquidity?
For option markets like Dopex, Fluidity can be — as Shahmeer described — a way to pay fees and hedge positions.
As new frontiers open, new solutions and definitions will need to be discovered. The protocols that manage to do that will remain future-proof.
