New Doesn't Necessarily Mean Better: A DeFi Cautionary Tale

Julien Genestoux of Unlock Protocol raises the issue: Let's make sure this new financial system ins't adding liabilities and throwing out the good things of the old one.

Hello defiers and happy Friday! Julien Genestoux of Unlock Protocol is taking over The Defiant today. He writes about the value, but also the potential pitfalls of building a new financial system. The risk is two-fold: Excluding the advantages of the old system, and introducing additional liabilities in the new.

Julien says he’s on a “mission to fix the web” with Unlock, a protocol for content creators to monetize their platforms in a decentralized way. I’m one of the writers using Unlock to offer subscribers the ability to pay with Dai. Click here to pay with DAI through Unlock (70 Dai/yr), or click on the “Subscribe Now” button to pay with fiat ($10/mo or $100/yr).


DeFi is a Feature… of Web3!

By Julien Genestoux

Before 2008, I was a banker. I worked for BNP Paribas, one of the largest banks in the world. When the so called “sub-prime” crisis exploded in our faces, one thing became clear: we’d built a financial system which was not rooted in reality anymore. We’d built a financial system which did not serve the economy… but the interests of a small number of investors and bankers, at the expense of the general public and the economy.

As we build a new financial system, we need to be careful to avoid making the same mistakes. At this point, it’s not clear to me if we are.

Satoshi himself had identified the failings of the legacy system, by famously writing “Chancellor on brink of second bailout for banks” (The Times January 3rd, 2009) in the Bitcoin genesis block. One of the core goals of Bitcoin is to (re)build a financial system which serves the people… one where inflation is not used as a tool to absolve careless investors or collectivize their losses, but to reward the miners who make the system more secure.

Financial infrastructure

Finance is actually an incredibly powerful tool for entrepreneurs, founders and economic actors in general. When a local business has a return on capital invested of 10% and they can borrow from lenders at 5%, they should, as it allows them to grow faster! Lending can be a very powerful leverage which allocates scarce funds to the most efficient businesses.

Similarly, when someone trades internationally, they are exposed to exchange risk as the goods and services they buy now in a currency might be sold only months or years later in a different currency. In that scenario, investors who have exposure to both currencies can “guarantee” an exchange rate by lending, with a margin, either currency to actors on either side. This has the important consequence of reducing risks for businesses who can now operate with a clear understanding of the costs associated with exchange rates.

The promise of decentralization

The “decentralized web” movement (often called web3) has been gaining a lot of momentum in the last few years. People understand better the risks of relying on third party middlemen to host content, organize local transportation or even run applications. These middlemen will eventually act as gatekeepers, not necessarily because they want to, but because they can… and sometimes because they are legally expected to. 

However, it is important to recognize that these gatekeepers also provide valuable services to users, including, in many cases, financial services. Uber took over taxis in part because it did not require us to carry cash. Google’s adwords is an incredibly powerful system to acquire customers… etc. 

If we are going to obsolete these middlemen, builders of decentralized finance will have to play a major role in making sure users are still receiving those services. Equally important is to make sure replacing middlemen with smart contracts doesn’t turn into a liability!

Can we trust DeFi?

In the last few months, the DeFi ecosystem grew tremendously, but it’s also been accused of “recycling” Ether which was already inside of the ecosystem… The most sarcastic would even say that no “new money” has entered the Ethereum chain and that the DAI supply is only coming from Ethereum whales, while all its flavors cDAI, rDAI, xDAI… are in fact just the same dollars accounted for several times… hiding the real value of the DeFi space.

Similarly, are the savings rate a reflection of demand in the assets, or are they a reflection of the risk associated with the crypto assets themselves? (smart contract bugs or vulnerabilities, legal exposure, …) What would happen if a critical vulnerability was discovered in some of the most used smart contracts in the DeFi space, be it a wallet, a CDP contract or even an exchange? What would the impact be on the decentralized web economy? 

Finally, and I know this questions even the “core” foundation of the decentralization movement: how can we recover or help the most fragile users if (or when?) a blackswan event hits the DeFi ecosystem. Four years after the DAO hack, it is clear that the “hardfork” governance is not an option anymore: No one is in charge…  but are the risks all gone? What mechanisms has the DeFi space put in place to help build trust and be the fuel it can be on the decentralized web fire?

The value and the risks

Regardless of these questions, so much value is getting built. What many consider the most emblematic DeFi project, Maker, provides stability to the crypto currency ecosystem where volatility has reigned. It is already clear that as much as people love the idea of “hodling” tokens which will appreciate, they generally do not enjoy the idea of paying with them, nor to be paid with them when the value jumps or drops. With its clever over-collateralization approach, Dai guarantees a certain level of stability which, in turn, reduces friction for people purchasing products and services with it. DAI is a UX improvement in service of web3.

Compound, Aave and others can be used by traders to do margin trading, where they can increase their exposure to price changes in order to leverage long or short positions. These smart contracts run 24/7, and their rates and fees are transparent. 

Using Unlock, creators like Camila are selling access to their content. In that case, the Lock is itself a “revenue generating asset”. The lock itself can then be “collateralized” by its owner in order to borrow, exchanging future revenues (used to repay the loan) for short term needs. Camila does not have to rely on a “corporation”, she can sell her labor directly to her customers. Similarly she does not need the “approval” of a bank in order to borrow the money she might want to invest in her own work. 

GasToken (https://gastoken.io/) has a bad rep as being “wasteful” … but it also provides a very valuable system to hedge against gas price variations which I am sure gas networks which process meta-transactions will want to leverage. 

Building a better future

Healthy economies foster peace and prosperity for all. Finance is just a tool toward that goal. Decentralization is a novel methodology which, like many, I believe will prove more efficient, but, in the same way that “exotic” financial products and derivatives are only as valuable as the services they provide to the underlying economy, DeFi is only as valuable as the new decentralized applications and services it enables… and we can only consider the DeFi space to be a success if, indeed, it empowers decentralization, and avoids the pitfalls of the old system. 


The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access at $10/month or $100/year, while free signups get only part of the content.

Click here to pay with DAI.There’s a limited amount of OG Memberships at 70 Dai per annual subscription ($100/yr normal price).

About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively cove

"We Need to Democratize Access to DeFi": DeFiZap's Nodar Janashia

Most liquidity in decentralized finance is coming from VCs, Janashia says.

Hello Defiers! This week’s interview is with DeFiZap founder Nodar Janashia. DeFiZap wants to create a one-click experience for DeFi, reducing the number of steps involved in deploying your funds into decentralized finance protocols, with the goal of making investing easier for the masses. Nodar is bursting with ideas for his barely one-month old project — gas-less Zaps! private Zaps! anti Zaps! insured Zaps! He lays them all out, and says which he expects will come first. He talks about how he plans to make this four-person hackathon project into a sustainable business, his focus on education, and plans to start making sure DeFi liquidity doesn’t come only from VCs.

You’re signed up to the free version of The Defiant, so you’ll get only part of the interview. Subscribe now for complete access. Click here to pay with DAI at 70 Dai per annual subscription ($100/yr normal price).

Pre-Crypto Background

Camila Russo: Tell me about your pre-crypto life, I understand you come from a financial background? Also, where are you from and where are you based?

Nodar Janashia: I'm originally from Ukraine and half Georgian, and came to Brooklyn when I was 12. I've always been interested in finance since even before high school. During high school I got an internship at EY, which is one of the big four accounting firms, and they've been doing things in crypto too. I tried to get a CPA after that, but then I saw no need to get a CPA license per se. So I continued working at BDO while in college. After that I joined a budgeting and forecasting software company. I spent two years onboarding CPA firms and businesses that wanted to implement our software, which would build financial forecasts for them.

CR: So what led you to Ethereum and crypto in the first place?

NJ: I kept hearing my friends talk about it, but then I saw this video on Vice, explaining how proof of work works. I was blown away. It basically revolutionized the double entry accounting system in my I view, so this is a system that's been implemented in the 15th century and we're kind of still using that same fundamental system to check ourselves. The proof of work mechanism replaces that. That's why I was like, okay, I have to contribute to this space. As they say, I fell down the rabbit hole. And when I saw the DeFi movement start coming up last summer, I started following, all the projects very closely and started making DeFi Tutorials.

I just wanted to bring value to the ecosystem and I started looking at what was the most viable project for me to join and continued making DeFi Tutorials. I started getting feedback. One weekend I hacked up this other tool called DeFi Strategies. You can go to DeFiStrategies.com –I started buying all these domains– it was a trading simulator that helped you experience these tools, Compound, TokenSets and others, without actually putting in your money. And then people there were like, Oh, I thought I would be able to place these trades, because I had them there, in a bundle, like DeFiZap is now. From there, that's where the idea of DeFiZaps formulated. This was obviously a big undertaking. So I needed help with smart contracts. And I saw Kyber's hackathon at this time.

CR: And at this time were you still working at the software company?

NJ: No, I actually stepped off from the day to day of that software budgeting and forecasting company about like three years ago. I started an accounting marketplace. I made a lot of connections working at that software company with CPAs and small businesses. I saw a big disconnect in how they were finding each other in the ecosystem, especially startups were wasting a lot of time and money. So I onboarded 300 CPAs into this online tool that we created and basically we used Stripe for payments. And this is something I actually also want to implement within our ecosystem, but all in due time. But yeah, so startups will come on our website and answer a couple of questions and we connect them with the on-demand CPAs.

CR: Got it. So, so you were working at this company at the time you, you were also launching DeFi Tutorials and DeFi Strategies?

“Holy hell, we won”

NJ: I started spending my full time in crypto in late 2017. That's when I made a leap and stepped away from the day to day operations because everything there is basically automated and we have other partners who are working on it.

CR: So that's where you started mining ETH, then doing DeFiTutorials and DeFiStrategies, and then thought of DeFiZap from this idea of bundling strategies and people wanting to actually implement this but not being able to. Is that when you went to the Kyber Network hackathon?

NJ: Yeah, exactly. That was a great summary there. So it was like two weeks before the deadline for the hackathon and I reached out on Discord, and Dipesh almost immediately reached out to me. He also has a CPA background and two years ago he made a leap and stepped away from being a CPA. Last year he was learning from a ConsenSys bootcamp and this year he was teaching it. He's also a very nice hustler. So immediately we started working on DeFiZap and holy hell, we actually ended up winning that the hackathon.And I think it was because of this user experience that the space is missing.

A lot of people, even those in this space for a long time, they're not aware of everything. Some people are having a hard time coming out of liquidity pools once we got them in. They're on the swapping feature in Uniswap and they're not even aware you have to go into the pooling section and click on remove liquidity. Many of the strategies available could be packaged so it's interesting what we are coming up with and people are excited about it.

Image source: Medium

5.3K+ ETH

CR: When was the official launch of DeFiZap?

NJ: The very first Zap was launched on the live mainnet, was actually LenderZap and that's what we launched for the hackathon. We didn't want to launch a bunch of Zaps because security was our priority, so we didn't want to rush things. It was a soft launch to test things out. We started actively encouraging deposits with the new UnipoolZap, which was on December 9th, so literally one month ago.

CR: Crazy it was just one month ago. What kind of traction have you seen since then? Number of users, volume?

NJ: So far we have, over 3,600 ETH deployed into DeFi, 244 unique users, 705 Zaps, saving users 3,631 transactions. Because as you know Zap eliminates all those manual steps that you have to do each time. That adds up to a total of over 60 hours saved for our end users. [The interview was two weeks ago, number have now increased to 5,300+ ETH; 1,000+ Zaps; 10+ hours saved] It's fast for the first month especially since were are not coming with any kind of funding behind us.

CR: So up until now, the only funding you have got was the $5,000 from the Kyber hackathon?

NJ: Yeah. DeFi Tutorials have been free too. I’ve been working for free for awhile. I think the community is finally realizing the value in these things. We have a Gitcoin grant out and we've seen some good contributions from the community. So we're very thankful.

DeFiZap Business Model

CR: In the longer term, what kind of business model are you foreseeing for this?

NJ: So right now all these entry Zaps are free. We help people get in and we're already having people saying “you should be charging for this, I would happily pay a fee.” But we need to democratize access to DeFi and entry Zaps have to be free. So we will start experimenting with some premium features, some premiums Zapps. So I'll tell you, one of them is kind of like the Anti Zap, which helps you do the reverse. So you close out all your positions back into ETH or Dai. So you'll be able to come in with ETH and come out with ETH, or come in with Dai and come out with Dai, and track your ROI very clearly.

We have other cool things like arbitration Zaps and insurance Zaps. So if you need the insurance coverage while doing this, that's something you'll pay for. Pool bridging too: Because volume may start dropping in one pool and exploding in another one and people might want to quickly switch between them, so it would be one-click switch between pools. And then in terms of this whole leveraged liquidity pools, we're very excited to keep experimenting with that.

The coolest part about these leveraged pools is that it eliminates impermanent loss on the way up while increasing the loss of the way down –it's really for the bulls– while still retaining 66% of your Uniswap fees. So what we're going to do is we're going to also have a short leveraged pool, so if you're bearish, you could eliminate the loss on the way down, but of course increasing it on the way up. So yeah, there's a lot of cool things to experiment with. Also, things like using the Unipool tokens themselves as collateral. Right now we're collateralizing ETH, but we could also be eventually using the Unipool tokens themselves.

Next Zaps Coming Up

CR: It seems like the combinations can be endless, between all these platforms and tokens.

NJ: It's important to not throw everything at people. We're keeping education at the core of our approach. We still have to do a lot of brushing up and we're going to keep getting feedback and we're going to make updates. But education has to be at the core of everybody's approach here because you're dealing with financial products that people don't even know what they do in the traditional world exactly, But now you're coming up with brand new use cases here.

CR: Okay so you're planning on having some of these Zaps, maybe the more complex ones have some kind of fees attached to them. Is that right?

NJ: Yeah, exactly. It could be a fee based on percentage, it could also be you get a flat fee for using a Zap X number of times. A couple of cool things coming up for sure.

CR: Are you planning on, on reaching a certain number of users before you start launching these new strategies? Or are you ready to quickly start rolling them out

NJ: These things will come very soon actually. We're planning to launch Anti Zaps very soon. It's been the most requested feature. There's also a lot of sort of integrations, a lot of wallets providers. Pools.fyi for example, they've launched a direct integration. If you go on their website, you could actually add liquidity directly from their website and it would be done by DeFiZap.

Our main focus is definitely to keep doing what we're doing, which we have very nicely organized. And the process that we have is very data driven approach. So what comes out next will be based on analytics.

CR: In terms of financing rounds, are you also talking to VCs or are you not planning on raising funds this way?

NJ: Yeah, we're definitely exploring some options. For now we're a very lean team. It’s just four of us. I'm based in New York, a Dipesh is in Singapore, there’s one person Mumbai and another one in Alberta. We've all never met in person. But at the same time we do want to accelerate our efforts. So we're wrapping some things up, like creating a deck and joining community efforts. For example we joined MetaCartel, they also gave us a grant, and like I said, the Kyber hackathon and Gitcoin. So super grateful to the community sharing the wealth.

[ … ]

Paid subscribers have access to the full interview, including sections on the no-code movement, mitigating “money legos” risk, and Nodar’s plans to bing DeFi to those who need it. Subscribe now so you don’t miss any of The Defiant content :) Subscribers reading this post: Head to posts marked with the little lock to see the full content.


The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access at $10/month or $100/year, while free signups get only part of the content.

Click here to pay with DAI.There’s a limited amount of OG Memberships at 70 Dai per annual subscription ($100/yr normal price).

About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively cove

Recap: DeFi Week of Jan. 13 🦄

Hello Defiers! if you’re in the U.S., hope you’re having a great long weekend.

Summing up last week: Aave founder Stani Kulechov explains his platform’s most innovative features after its recent launch. All investments in my DeFi10 portfolio have now been placed; I share the lessons learned in the process. Value locked in DeFi platforms climbed to a new record. Open finance enabled the no-loss lottery, now it’s enabling the no-spend charity, with rTrees. Bancor BNTETH holders start earning trading fees after airdrop. An NBA player is selling security tokens; the next celebrity tokenized bond should be in DeFi… and more :)


Interview

"People Aren't Earning Anything in Their Bank Accounts; Let's Bring Them to DeFi:" Aave's Stani Kulechov

Stani Kulechov, the founder and CEO of decentralized lending platform Aave, speaks about the series of innovations in last week’s mainnet launch. He explains the use cases and inner workings of “flash loans,” and the potential impact of fixed rate loans. He believes the DeFi narrative will change from value locked, to how this value is being used. He also talked about what’s next for Aave, with governance at the forefront in terms of product, while also a Series A round with VCs coming up down the line.

Op-ed

DeFi10 Part2: Becoming a Programmable Money Fund Manager

I’m running an experiment where I’m putting in an equal amount of money into 10 different decentralized finance protocols and tracking their performance throughout the year. Last week I invested in what will be the fund’s benchmark, MakerDAO’s DSR, and four other projects. This week, I invested in the other six. The experiment has helped clear a few myths, and spurred others to try DeFi too.

Tuesday

Dives

The Next Celebrity Bond Should be Truly Decentralized: Brooklyn Nets guard Spencer Dinwiddie is selling a tokenized bond linked to his NBA contract. While Dinwiddie’s tokenized bond is a big step towards that goal, it’s not really very decentralized. Could this have been done in DeFi.

Sums

Bancor’s BNT Holders Start Earning Trading Fees: Those who held Bancor’s BNT on New Year's Eve have already received ETHBNT tokens in their wallets and started receiving a proportional share of trading fees from ETH-based transactions on the protocol.

Zero Collateral Makes Protocol Upgrades: Zero Collateral team, working on unsecured loans in an Ethereum testnet, took the community’s feedback (including from The Defiant here), and made changes to its platform, which is on testnet.

Bytes

A Day in The Life of an Asset Manager in The Summer of 2030: Mona El Isa

Introduction To Cryptocurrency: Haseeb Qureshi

Wednesday

Dives

Total Value in DeFi Climbs to New Record: Value in decentralized finance platforms approached $800 million, a record, amid a broader crypto rally, and as savers rushed to earn higher deposit rates.

As Climate Change Worries Rise, ETH Has Green Way Out: BlackRock’s Larry Fink sent a letter to his fellow CEOs sitting at the heads of the companies his firm invests about $7 trillion of client assets in. He said they should confront climate change, as not doing so will hurt shareholders in the long term. So what does that mean for crypto?:

Sums

Visa Bets on No-Card Transfers (DeFi Bets on No-Bank): Visa plans to buy Plaid, which connects end users’ bank accounts with fintech apps such as Venmo or Acorns, for $5.3 billion

New Charity System: Donate Without Spending Money: The team behind rDai, which lets users redirect interest earned on their Dai, have now built rTrees.

Token Sale Regulations in the U.S. Continue to Tighten: The SEC alerted users “to use caution” before investing in so-called “initial exchange offerings.”

Bytes

Liquidators, The Secret Whales Helping DeFi Function: Tom Schmidt


💜Community Love💜

Thanking all the amazing defiers for the support and love this week (and always)!


The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access at $10/month or $100/year, while free signups get only part of the content.

Click here to pay with DAI.There’s a limited amount of OG Memberships at 70 Dai per annual subscription ($100/yr normal price).

About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively cove

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