Exploring the frontier: The latest breakthroughs in DeFi primitives
IPOR, GammaSwap, and Reliquary are three ambitious, innovative projects with a vision to bring new products to the decentralized finance (DeFi) space. Each DeFi protocol has its own set of goals and distinct characteristics, but all three can be categorized as potential DeFi primitives.
DeFi is an industry that has grown significantly over the past three years, offering a new way to access financial services without relying on traditional intermediaries. Simply put, DeFi primitive are the essential building blocks of this burgeoning ecosystem.
The importance of solid fundamentals
Despite its potential, the DeFi space is complex. In addition, it has been proven time and time again that smart contract code is vulnerable to exploits. That’s why it’s crucial to have solid fundamentals for the ecosystem to thrive and grow.
The key to this is a robust and secure network, and Ethereum itself is a great example of this. Ethereum is a Proof of Stake (PoS) blockchain that powers the majority of decentralized applications (dApps), and it consists of thousands of nodes and developers.
That being said, specific projects are equally important for the DeFi ecosystem. They are essential building blocks that can be combined or leveraged in a variety of ways to facilitate higher-order DeFi functionalities.
These key DeFi applications or platforms are referred to as primitives and fulfill an important role as they connect users and markets in new and efficient ways.
Examples of DeFi primitives: Uniswap and Chainlink
Before diving into the potential new primitives we want to explore in this blog, let’s start off by highlighting some of the existing DeFi protocols that have had a long-lasting and significant impact on the DeFi space.
Examples include:
Uniswap
- Uniswap was the first successful decentralized exchange (DEX) that allows peer-to-peer trading through liquidity pools on-chain where anyone can become a market maker for an underlying trading pair.
- Unlike centralized exchanges, on a DEX users trade through smart contracts directly from their wallets — all that is required is an internet connection.
- Other DeFi protocols rely on Uniswap for liquidity, a critical component in DeFi.
Chainlink
- Chainlink is a decentralized oracle network that is able to bring off-chain data, such as prices and other information, on-chain in a reliable and tamper-proof manner.
- Chainlink infrastructure brings real-world data like CEX prices or weather data on-chain.
- Over a thousand DeFi protocols rely on Chainlink’s oracles, including blue chips such as Aave and MakerDAO.
What is the definition of a DeFi primitive?
In essence, a protocol can be deemed primitive when it supplies a critical product or service that has found a provable market fit and is a critical component within the DeFi space, such as:
- Uniswap’s market maker models x*y=k (CFMM) and concentrated liquidity (V3)
- Chainlink’s oracle network
- Curve’s vote locking
- Aave’s lending markets
- Sushi’s incentive model
A word of caution
In this fast-moving space, new projects are often advertised as “groundbreaking” or “primitive in the making”. As an investor, you should always remain vigilant and keep an eye out for red flags. Here are a couple of tips:
- Beware of investing in projects with tokenomics that involve (mandatory) long lockup times.
- Keep in mind the impermanent loss risks present when using liquidity farms.
- Be mindful that audits can only ensure safety to a certain degree, there are plenty of exploited projects that had passed multiple audits.
Reliquary, GammaSwap, and IPOR
Below, we explore Reliquary, GammaSwap, and IPOR and identify how they aim to change the DeFi ecosystem by becoming new money legos.
Reliquary: An evolution of the MasterChef
Reliquary is a new DeFi protocol built by the Byte Masons team (also behind Reaper Farm and Granary). Its goal is to fix the shortcomings of current vote escrowed models in the DeFi space.
The solution enables users to deposit liquidity provider (LP)/vote positions within a Relic, which can be exited at any time, unlike traditional locked position mechanisms.
The Relic introduces maturity to locking, where users are encouraged to align with the protocol over a given time period, earning additional governance power and incentives as their position matures.
The maturity model is broken down into various tiers with progressively unlocking rewards, bringing power back into the hands of the people and fostering a system for protocol alignment. Protocols using Reliquary can set the parameters themselves.
The position is represented as a financial NFT (fNFT) which offers users the freedom and flexibility to manage their own capital.
Reliquary shifts the focus from “forced” to encouraged, solves the issue of illiquidity, and provides every user with the opportunity to engage and participate in governance.
Example Use Case: Beethoven X
For an example of how Reliquary works, see the image above, which displays the consequences of a vote for governance participants of Beethoven X (a Balancer-friendly fork on Fantom).
The blue line indicates voting power over time in the protocol’s current format (voting power remains constant regardless of the quantity of $BEET tokens the user holds), while the red line indicates the voting power distributed using Reliquary.
In practice, protocols have control over the shape of the red curve. Keep in mind that with Reliquary, locked digital assets are instantly unlockable at any time, and therefore more liquid.
GammaSwap: Sophisticated Market Makers
GammaSwap is a decentralized platform for volatility trading that does not rely on oracles.
Liquidity providers (LPs) on GammaSwap are short gamma, i.e. short volatility, and are betting on prices going sideways (we disregard the farming rewards here for simplification). The payoff structure for LPs is similar to a short straddle in options.
This enables traders to long volatility or hedge their impermanent loss (IL) for any token
Instead of providing liquidity directly to a Constant Function Market Maker (CFMM) (i.e. Uniswap, SushiSwap, Balancer, etc) users can bring their tokens to GammaSwap and earn additional APY.
GammaSwap protocol adds the tokens to a liquidity pool on behalf of the provider and allows users to borrow the underlying digital assets (LP lending protocol).
Borrowers can go long gamma, i.e. long volatility, by borrowing the LP tokens; this gives them exposure to a convex payoff function.
The interest rate on GammaSwap is determined by the fees paid by the borrowers, which ultimately means the yield is always greater than the underlying AMM.
IPOR: benchmark interest rate through smart contracts
IPOR aims to improve the on-chain interest rates market by introducing a benchmark lending rate, similar to the London Inter-Bank Offered Rate (LIBOR) in traditional finance.
Their roadmap includes various products based on this new benchmark rate:
- IPOR Index: a fair market cost of money for stablecoins that allows users to bet on interest rates.
- IPOR AMM: an on-chain market for interest rate swaps.
- Asset management services through their interest rates products.
These products can be used to hedge interest rate risk, by betting on interest rates or swapping their interest payments through the AMM.
Other projects can use the IPOR Index as a reference for the fair market rate. IPOR is fully open-sourced and decentralized through a DAO.
By setting a transparent benchmark rate, IPOR has the potential to encourage the DeFi market to mature and stabilize.
Key takeaways
- Reliquary: B2B solution to improve vote escrowed token models using NFT locking. Solves the issue of illiquidity and gives every user the ability to participate in governance.
- GammaSwap: Enables users to create sophisticated trading and investment strategies by betting on volatility. Users can provide liquidity and earn additional yield.
- IPOR: Introduces a transparent benchmark interest rate for stablecoins in a decentralized and open-source manner. The goal is to help DeFi debt markets grow and stabilize. Offers interest rate derivatives and the ability to swap rates. Interest rate derivatives are often used by financial institutions for risk management and are a multi-billion dollar market.
In conclusion, these protocols have the potential to bring sophisticated solutions to DeFi, and attract more users and institutions to the crypto ecosystem. All three are in the infancy stages but have huge potential to disrupt the crypto market and become true DeFi primitives.
Yield App Labs’ mission is to transform and enhance the Web3 landscape through collaboration with individuals and projects that share our vision of a decentralized future. Communications from Yield App Labs are intended solely for informational purposes, and should not be construed as investment, trading advice, or solicitation.
