Editor's Note: Original title was "DETH on Ethereum"
Foreword: DETH in this article is not a single English word, but an abbreviation of Derivative ETH, which represents the most basic form of equity ETH derivatives. Haseeb and Tarun have previously suggested that the security of the PoS chain may be weakened as the returns from DeFi lending are higher than the returns from equity pledges. But the premise here is that it can only choose one of them. With the arrival of ETH derivatives, it can be used as both a pledged asset and a loan. It does not need to be one or the other, which also improves the utilization of capital. At the same time, this has also brought a negative impact. Due to the network effect of liquidity, this has caused some validator entities that have accumulated a large amount of mortgage assets to gather greater liquidity and further move towards centralization. The combination of DeFi and future innovations will bring us more and more possibilities. The writer is Dan Elitzer, translated by "CL" of Blue Fox Notes.
Suppose you own an asset. It's called ETH, and it's a digital commodity, and you plan to hold it for a long time because you want it to become more useful, and you want it to be known to more people and find it useful.
- What is the most ideal interest rate model based on the DeFi loan service of the fund pool?
- Be careful, DeFi has the potential to erode the security of the PoS blockchain
- User Experience Survey: What is the next wave of DeFi users?
- Play Compound from 0 to 1, 5 minutes and get passive income from DeFi
- Messari founder's latest report: Is there still hope for DeFi in 2020?
- DeFi project party Compound completed $25 million in Series A financing, led by a16z
At the same time, if you put your own ETH into use, that's fine. Nowadays, you can use open financial (or DeFi) protocols to lend them for interest, such as Compound, dYdX, or bZx.
But soon, you can not only lend your ETH, but also pledge equity (technically, you will convert unidirectionally to ETH2 and pledge), thereby increasing your holdings and verifying transactions as Ethereum security contributes. This means that earning money while protecting your network is even better.
However, what if the return on equity pledged ETH is lower than the return on loan ETH? How much real warm and vague things to protect your network are of value to you? For most people, I think we will all agree that it will all depend on money.
Haseeb Qureshi, who wrote the abstract of Tarun Chitra's thesis, proposed that the DeFi loan income will be higher than the pledge income, which will eat away PoS security over time because it may lead to low pledge rates.
However, the assessment made a key assumption: holders of ETH must either choose to lend their assets or pledge their equity.
I have only one question: why not both?
Superfluid mortgage theory
Earlier this year, I predicted that the main trend for DeFi was the emergence of "hyperfluid collateral." (Blue Fox Note: Superfluid is a material state, which is characterized by a lack of stickiness.) The overall argument for superfluid mortgages is that the ability to use the same asset in multiple agreements simultaneously has both inherent appeal and offsets the need for credit-free credit agreements Inefficient use of required excess mortgage capital.
As suggested, Compound does announce and release currently widely used cTokens (cDai, cETH, etc.), which represent claims on the assets provided to the agreement. On the other hand, the shares in the Uniswap pool have not yet become a popular form of borrowing and collateral. I still believe that their good days will come, but it is clear that I am too optimistic about its timetable.
As the native asset of DeFi, ETH is probably the most obvious and important target of hyperfluidization. Anyone who wants to pledge their ETH and use it for other purposes (such as lending, market making, etc.) should be able to do both, without having to choose only one or the other.
Super fluid mortgage: empowering ETH with super power
How does it work? Similar to Compound's issuance of cToken on behalf of the claims provided to the assets of the agreement, services such as exchanges and equity pledge pools, which pledge their ETH on behalf of users, they can also issue tokens on behalf of their pledged assets and accrued earnings claims. Although it is possible to create derivatives of various types of pledged assets, we call the most basic form DETH or Derived ETH.
Just like CHAI ensures that Dai holders can always earn DSR income (Blue Fox Note: DSR refers to Dai Savings Rate, Dai Savings Rate), without having to lock or unlock Dai for each transaction, DETH also ensures that ETH holders It can always earn equity pledge income without having to consider various things such as storing, withdrawing or trying to have 32ETH bound to its validator.
However, unlike DSR's risk-free interest rate, which is truly equivalent to Dai (without additional risk, you only need to hold Dai), earning verification income with DETH does require mitigation of risks (if the verifier node goes offline or makes mistakes) and custody Risk (you believe that the equity pledge service provider will not steal your ETH, nor will it lose its private key or be hacked).
In this way, not all DETH will be the same, they have more than one DETH. Each pledge service has its own version. Stake Capital has proposed a form of DETH in the form of LETH, which they call LToken (Blue Fox Note: Liquid Token, short for Liquid Token).
It can be imagined that there will be BinanceDETH, CoinbaseDETH, and other kinds of DETH in the future, each of which can be released with the click of a button. Coinbase and Binance have begun to pledge certain assets on behalf of their users, such as XTZ (Tezos), and issue tokenized derivatives of USD deposited by their users (ie, stablecoins USDC and BUSD). It seems inevitable that these companies will eventually want to issue tokens representing pledged assets.
Ordinary boring original ETH requires you to run a validator node to earn the benefits given by the network, and if you want to lift the pledge and use it for other purposes you need to wait 18+ hours, and now you can have a superb, easy and flexible DETH, It can continuously group each block together, even if it is lent out on Compound or provides liquidity on Uniswap.
OK, this is very touching. But, what's wrong with it?
what? Don't you believe there is a free lunch? Fine, you are a smart person. Are you telling me that this lunch is not free?
More equity pledges, very centralized
Equity pledge is not a natural network effect or a meaningful return on scale. That is to say, by default, there are no economic incentives that can enable people with a large amount of ETH to obtain higher profits from pledges, or can encourage more people to come together to use the same pledge service.
Still, it's difficult to avoid concentration of wealth, and people tend to use other services they see by default. As a result, most protocol designers actively implement mechanisms aimed at decentralized token ownership (and therefore decentralized equity pledges), or at least encourage greater diversification of the verification infrastructure.
Unlike equity pledge, liquidity has a strong network effect and can create a powerful moat. See how much trading volume Tether still has, even after it reveals that only 74% of the USD's collateralized assets are backed by USD-some people think this is because traders think Tether is better, more stable or less risky than USDC, TUSD, etc. ?
Liquidity produces liquidity, and as Tether has shown, it not only survives but thrives. The stickiness of liquidity is also an important reason why the IEO platform is strategically important for exchanges: early tokens are distributed to traders on the initiating exchange, thereby launching a liquidity flywheel for new tokens.
By introducing liquidity network effects to equity pledges, equity pledged derivatives like DETH can change the game. Even though the returns of BinanceDETH and CoinbaseDETH are the same as those of small independent pledged services, increased liquidity or the inclusion of more DeFi lending and trading protocols will lead to its wider use.
No one wants to disrupt the liquidity of ETH borrowing on Compound or the liquidity of trading pairs on Uniswap through a large number of DETH derivatives, and of course MKR holders don't want to use their shiny new MCD with their only original mortgage assets Features to manage their stabilization fees, excess mortgage rates, and debt ceilings.
The most likely scenario is that liquidity will grow into DETH instances, which are issued by the 2-3 largest exchanges or custodians. Once the flywheel begins to spin, all DeFi users will be motivated to deposit their ETH in these services in order to maximize their flow and become useful.
Soon, the pledge requirements of 32 ETH validators will become meaningless, because most ETH will be held by a small number of entities, and the number of entities may even be less than the entities that control today's financial and communication networks.
But about …
The most common observation made in this view is that DETH is traded at a discount to ETH because of its risk reduction. I don't think so.
First, it is reasonable to assume that DETH will have a trading premium, due to the aforementioned advantages over ordinary ETH. However, assuming that the pledge service does not charge for wrap (packaging) or unwrap (unpacking), the price difference between any pledged ETH derivative and ETH should be arbitrage almost instantly by anyone with a pledged service account.
Suppose a scenario where anyone with a Binance account and brain (or a robot can do it, not even a brain) can buy cheap BinanceDETH, unwarp (unpack), and sell ETH, then buy more BinanceDETH, Then wash, scour, and repeat this process until the price becomes 1: 1 (please note: there may be a delay in withdrawal, depending on how much unsecured ETH the service reserves. Blue Fox Note: Similar to bank liquidity and Unlending funds are closely related). On the other hand, if BinanceDETH has a trading premium, the same person / robot can also wrap (package) ETH into BinanceDETH, then sell BinanceDETH, and then buy more ETH until the price becomes 1: 1.
I believe that regulation (especially KYC requirements) is the biggest potential obstacle to DETH. If the verifier is forced to KYC the owner of each address that receives the pledged derivative, it has the potential to undermine its adoption (and many other potential use cases). However, as long as the fiat-backed stablecoin becomes a reality, I don't understand why pledged derivatives are not possible.
Any asset that can generate revenue through homogeneous automation activities can be wrapped. This applies to ETH and equity pledges (which results in DETH), but is not suitable for reporting in the REP and Augur markets (thus, DREP may not , The possibility is small). However, both ETH and REP can easily earn money from borrowing, and they exist in a wrapped form like cETH and cREP.
The use of wrapped yield-generating assets in DeFi is attractive because they support that the underlying assets can be used for multiple purposes at the same time without increasing the complexity of the protocol. In an ecosystem built largely on excess mortgage lending, superfluid mortgages can maximize returns and reduce capital inefficiencies.
Although protocols can be designed to apply the superfluid principle locally, warpped revenue-generating assets allow these protocols to add new assets as easily as other ERC20 tokens without the need to radically modify their architecture.
Due to the network effect of liquidity, the wrapped income-generating assets provide incentives for centralization. Because liquidity has such a powerful network effect, the largest issuers of these assets will become magnets of capital, and thus become the main concentration points in their respective networks and ecosystems. For example, Ethereum's DETH is Coinbase and Binance, and DeFi Borrowing is a Compound with cToken.
Even by the standards of the crypto world, 2020 will be a particularly crazy year.
Risk warning: All articles of Blue Fox Note can not be used as investment advice or recommendations. Investment is risky. Investment should consider personal risk tolerance. It is recommended to conduct in-depth inspection of the project and make good investment decisions.