Defi Top 20 with Arthur0x, Su Zhu and Hasu - Part 2

Transcript

So welcome back to episode two second half of our top 20 on the biggest DeFi projects. I'm here once again with Sue and Arthur. And if you haven't listened to the first part where we introduce Arthur and talk about all projects DEX category and spot lending and synthetics lending then go back and and listen to that first. Otherwise, welcome back. Today we will cover kind of like uh we call them token bridges. So basically bridging kind of assets between different blockchains or between bank accounts and blockchains. Basically tokenizing stuff.

And then we have the category that's sort of money games which we get to. And then basically the the three things three three projects in the top 20 that didn't really fit into any category of their own. So we have Yearn and Nexus Mutual and Loopring. So welcome back you two. And let's let's start with the bridges. So the first bridge I think that we're going to talk about is Ren or the and their flagship uh asset is Ren BTC. So Ren BTC Ren was actually initially called

launch ICO I think in early 2018 as a Republic Protocol. Initially it wanted to do like a dark pool for decentralized trading. But I think after a while they pivoted to like instead of doing like a like a like a trustless asset bridge for other asset like starting for Bitcoin and also like they have other assets as well. But I think the Bitcoin the Ren BTC is the most successful one right now. And I think that the the approach taken by them is is a very it is a very useful and pragmatic approach because I think that there's a huge demand to use Bitcoin in the DeFi ecosystem

just in the Ethereum ecosystem in general and the other solution when they were launching is wrapped BTC which is like a centralized solution which I think you guys talked about in the previous podcast and so wrapped BTC is supposedly the the more decentralized version of Bitcoin on Ethereum blockchain. And and is is done using like uh what they call a cryptographic method called secure multi-party computation SMPC to to to solve this to make it trustless so you can like verify that there's a real Bitcoin backing this wrapped BTC using the cryptographic method. So I

think this has been fairly successful since the launch the wrapped BTC has probably like the the second uh highest uh BTC like synthetic wrapped BTC on Ethereum blockchain the first one is wrapped BTC. Uh it's it's getting equal into the curve pool and gotten decent amount of liquidity and it's kind of interesting that how wrapped BTC seems like the favorite coin for the a lot of the DeFi hackers to get away with it. They usually convert their gains to Ethereum then to wrapped BTC and then convert from wrapped BTC to the real Bitcoin and I'm not sure what happened to the to that afterwards but seems like quite a number of the hacker like exploiters of DeFi have used

that route to get their money out from the system. Yeah and beyond that I think that the the value capture is okay I think that it's decent but I think that the number seems like it's uh because they take like a a certain percentage of fee for every uh conversion that if you call wrap your Bitcoin into a wrapped BTC, you pay like one basis point and vice versa when you unwrap. So, uh the key challenge is what will happen to the fee if a lot of the wrapped BTC is just not going to go through back and forth. I mean, once they enter the Ethereum ecosystem, they're just going to stay there and not going to be converted out anymore. So, then the fee capture value capture on this part will be a little

bit weak uh in that sense and there was also some uh uh controversy about the the current stage of decentralization on trustless like that. I mean, I'm not the expert in this, but there are some who say that that currently they are not really using the a real SMPC yet. Uh it's like probably not like peer review or uh open source. I'm not Again, I'm not expert on this, but I heard some about this. Uh but yeah, I mean, but so far that's it's been doing pretty well among all the cross-chain or bridges project, I think it's definitely doing uh it's probably the the most successful so far if you count uh wrapped BTC out.

Yeah. Yeah, I I agree with the characterization as as a WBTC competitor. I also because I sort of disagree with the characterization of it being trustless. Um so, I'm also not an expert on this, but I think that the right way to think about multi-party computation is basically just an implementation of multi-signature, right? So, it's sort of like a consortium where you have different machines in the Ren office or wherever they store it, but controlling all holding all the the actual BTC in custody and then issuing Ren Ren BTC against that on on Ethereum, but uh yeah, I mean, they they can kind of change change this at any time. I think

they have full control over it. Yeah, so I don't uh I don't actually see this as trustless. I see it right now as fully custodial. Uh which might be totally fine, right? So, you can it Tether is fully custodial, right? But, it's its value proposition is regulatory arbitrage. And um that's kind of the bracket where I put renBTC into right now. Um and it's kind of proven by yeah, all the hackers using it to cash out their their BTC. And so far, the Ren team has never stopped any of those withdrawals, although they could. And that alone shows that it's custodial.

They They do want to go I think in the future into a direction that's a bit more like tBTC. So, you have kind of fidelity bonds, right? So, for for the different nodes that that custody the the key shards of those Bitcoins. So, you would then have a protocol that watches watches the behavior of the custodians. And they have to put up a bond. And when they misbehave, for example, they deny a withdrawal or they withdraw coins that don't have authorization, then their bond would be confiscated. So, that's that's I think a possible direction for for Ren to go, but it it it has this trade-off, right? If you want your custodians to

put up additional bonds, then that the system will become more expensive to use. So, I actually think it's it's necessary for them to start with this custodial way because if if the system was expensive to use right from the start, then I think it would be way harder to build the necessary network effect and liquidity for this token so that users might eventually be willing to pay like this kind of upcharge for additional security. Does any of you know much about Terra? Yes. Uh So, yeah. I I'll talk about Terra. I actually have a pretty decent understanding of it.

So, I think Terra was actually also like was ICO launched in 2018. Actually, they raised a fair amount of money. And I think more of the reason is because like the the co-founder, one of them is like a fairly successful entrepreneur in the Korean e-commerce market. He launched one of the biggest e-commerce startup in Korea called Ticket Monster, Ticket Monster. Uh and yeah, so I think that that gave gave gave him a lot of credentials to launch this and and to launch like a a decentralized stable coin protocol built on a Cosmos SDK. So, you can think of them as part of the Cosmos ecosystem.

And the concept is uh pretty similar to the first initial design of Havven, actually. Like a precursor to Synthetix. Basically, that what happens is like the the user of the stable coin will pay a fee to the Terra token holder to pro- providing these stability services. Uh yeah, so yeah, I think that that concept as a whole is very sound. But, I think on the like a detail on it, like how do you maintain the price stability and a peg? Yeah, it will we won't go too deep into this, but uh there's some some small challenge into it.

Uh but basically, I think that the general concept sound that that you're paying the the the Terra the Luna token holder for sort of like providing some backstop to the stable coin, but also providing the stability to that. So, but in in a way, you can think of it in a real world circumstances on a payment, uh when you're using Visa and MasterCard for payment, like the merchant get a paying like 2% for to Visa and MasterCard for helping them to process this transaction. So, the logic I think on that is very sound. Um I mean, in a blockchain, I I guess I get why you can't do it kind of in a regulated environment with Visa and MasterCard, but in a blockchain environment, can't you just wrap the the payment token and then transact with that? So, the the underlying

kind of Terra coin or whatever it's called doesn't move. Yeah, I think that is definitely a way to get around with it. But again, that I think that Uh, the the crux is like the network effect of the the the the original stable coin so strong that your wrapped version will not be able to overcome it. So, there's definitely a lot of effort that will need to go to build the network effect and the distribution channel for that original version of the the the Terra stable coin so that even if a person wrap it, you will not get accepted anywhere. And the main use case of Terra stable coin has always been in the Korea uh commerce scene. I think mainly some e-commerce. So, they actually if you will measure it by some metric, they have the largest amount of fee paid to

use the protocol because uh they have a Chai app that in Korea you can download the app and use it to pay for a lot of e-commerce services. Uh I mean, they have some way to get around it so that the user actually not using the stable coin. Uh but in a way they they are using the stable coin. I'm not sure the exact detail. I I don't really use it before. But uh they actually lead to some new fee generation for the Terra uh validator and staker. So, Uh the generator effect of fee and the daily user is pretty impressive. I think that they have more than 1 and 1/2 million of total registered user and uh daily user is like I think 15,000 each uh I think also near more. I I can't recall the exact number, but uh it's probably the most successful if you

measure it by real world adoption in terms of payment. So, uh the Korean user are through the Chai app are using a Terra protocol for the payment services and interacting with the stable coin in a some indirect method. Um but I think that uh uh and they are trying to get into DeFi right now. I think that what they realize that they spend a lot of effort to build the e-co- the commerce adoption in Korea. And they actually they want to expand to Southeast Asia as well. Uh but it's the real world move way slower than the crypto world. So, I think that they recognizing that right now and they are actually trying to move into the the DeFi space by doing some I think they launched a new thing called the Mirror Protocol. I think they partnered with some of the other Cosmos ecosystem

project. And I think that with the launch of the Cosmos IBC, they might be able to interrupt with each other. Uh so, I I think it's doing fairly well. It's just that their approach is not so crypto native uh compared to most of the probably all the other DeFi protocol in that we talk we are talking about right now. So, yeah, it's I think that it has a good amount of success in the mainstream space. Something I didn't understand yet. So, the the Terra stablecoin, is it backed by dollars in a bank or uh is it What is it backed by?

It's actually backed by the Luna token. So, it's a little bit of synthetics. Yes, yeah. It's backed by the Luna token. If uh Again, I'm not an expert, but I think that's how it was. And the fee uh that go to the Luna token is what make the Luna token valuable. I see. I see. Okay. Got you. Anything on Terra suit? Yeah, I don't really consider it DeFi per se. I mean, it's definitely uh like crypto and then finance, but I'm not I'm not sure if it's full DeFi just because of the way that it's uh It's not It's not really interrupt with with anything that's currently in DeFi.

And then also, I think I mean there's the way that the the original token sale for Terra was done, I think it's um makes it quite a different project. I mean, it's kind of got this interesting thing, right? Where it's a Korean project, but then it has this like very long list of investors that are like like like like standard crypto funds. Uh it's just it's just kind of I don't I never quite understood that. But I But I think maybe that's a product of the time that it was conceived in.

Um but with that said, yeah, it it it's impressive the adoption that they have. I'm not I'm not sure the business model for the for the idea of the coin is is is that proven, but but we'll have to see. ThorChain, I think it's it's it's a bridge like like renBTC but also has some elements of an exchange like Uniswap. It both tokenizes different coins and I don't really know how it works and then you can trade these coins on sort of an off-chain exchange. Or is it not actually off-chain because they do have their own blockchain, right?

Yeah. So again, okay, I'm not an expert on this. I try my best to explain how it works. I think that how it works is like a I think from a user perspective, you have a key group of validators that they're actually putting up more more Rune, the native token of ThorChain, as the collateral to backstop the interoperability of it. So that you can actually go from native token to the native token directly without using the wrapped version. So let's say you want to change from Bitcoin to Litecoin, you can actually use ThorChain to do so. It's a little bit like a like a ShapeShift, a decentralized version of ShapeShift, like launched by Erik Voorhees, a Bitcoiners OG Bitcoiners. Um And I think how they achieve this is using the economic guarantee like there's always

more Rune backing the the the collateral being because they're using the AMM as well. But they have their own version of like a CLP model of AMM uh providing liquidity for this. But there was always more Rune backing the AMM asset so that you are not that worried that you'll be like corrupted or what or maybe attacked because like they have more to lose if something happened. Uh but yeah, you can change from like a Bitcoin to Litecoin or to like a Bitcoin Cash directly using ThorChain. I think that is the vision that is save all the wrapping hassle and the value capture is supposedly very strong like you all the fee will go to the Rune token staker and validator. Yeah, I think that's my understanding of it. And

I think that it has a very uh strong community as well. Quite similar to Synthetix in a way. Uh like that propelled it to a very monstrous gain this year. Although it's still in the test net, but yeah, but it has been fairly successful if you measure it by a price action and the performance of the token so far. Yeah, I think Rune's an interesting project. Um definitely seemed a bit a bit hype-centric when it first came out, but I think that the bridging liquidity design that they have is is definitely unique and they have a first-mover advantage there as well. It just remains to be seen what it'll actually look like in mainnet, so so I think it's hard to really speculate about it

as a project until actually you can actually play with it and it works. Okay. Um so moving on to the final asset, which is Reserve. I think one thing the most impressive thing about it is actually they spent a lot effort at the earlier stage of their protocol to analyze all the different pros and cons of the different stablecoin model. And in the end, they figure out that the all of them have some key issue, so that they come up with their own model. They adopt a gradually decentralized station model where initially, I think the Reserve the stablecoin, the RSV, is actually backed by actual dollar in the cash, but they plan to gradually decentralize it to make it backed by the Reserve right token itself. Um and I think one thing that set themselves apart from other

stablecoin or bridge protocol is that actually they they actually want to push for for the adoption in the developing country first. And actually, I think they spent a lot effort in Venezuela to get the user there to adopt stablecoin with a pretty normal mission, I would say, because we all know that how what kind of situation that Venezuela is in right now, and they do need a stable currency. And I think they've been spending quite a a fair amount effort to penetrate the Venezuela, yeah, in terms of getting their stablecoin become like a de facto currency instead of their own Venezuelan bolivar.

Um I'm not sure how successful successful that has been, but they definitely have a very impressive list of backers uh yeah uh earlier on. So, yeah, that's what I know. Yeah, I'm just going through the documentation right now and there's the screen and it says that the the the protocol is supposed to have three phases. So, first the centralized phase where every token is backed by a small number of collateral tokens. Each of which is tokenized US dollar. And then a decentralized phase where reserve is backed by changing basket of assets in a decentralized way, but it's still like it's it's it's more than 100% backed in every phase.

Then the independent phase where they want to launch their own unit of account. So, it's no longer pegged to the dollar. Okay, so that's a pretty ambitious goal to build a network effect for that. Yeah, and and and their backers are like the probably the top investor list in crypto for the city in terms of look at the investor list like they have a Peter Thiel, they have a uh Sam Altman, uh they have like a lot of the top like Silicon Valley uh investor in their in their list, yeah. I guess that they changed their goals or their architecture pretty radically because this what I just read is nothing like what I first read about them in like 2018 when I looked into them.

It's it's interesting to see them still stick around here. Yeah, but I I think that they are probably the one of the also one of the few DeFi protocol that don't really consider them DeFi. I mean, I have never seen them trying to interop with other DeFi protocol or like trying to work together with any of the DeFi protocol that we have mentioned so far. Yeah. So, now next is a category that's uh has a bunch of different things. So, let's uh let's hop I guess into Yearn. Yearn is sort of a grassroots grassroots ecosystem with the main goal to allow users to deposit coins and then invest those coins in a way that these are can just set and forget. I'd be

curious to to hear what you think about them. I think that yearn is the definitely like I think among all the different DeFi protocol that emerged this summer, it's definitely you can say that it captured the most amount of attention and also have the most meteoric price action uh on the way up and also when it come down it also so so pretty uh uh volatile. Uh and I think that the key I think that is just that uh it when it when you put in the DeFi perspective it's a little bit like a I don't I don't want I'm saying this not to like offend the Bitcoiners, but I do think it share a little bit kind of like a genesis with like a how Bitcoin was being born like it was a fair launch. I mean yes Andre Cronje is the he's not

unknown, but the whole fair launch method has a uh capture a lot of people's imagination on how a DeFi protocol can launch without the like a VC involvement can be a pretty grassroots and community run kind of a DeFi protocol and still be fairly successful. And I think that if we we're just focusing on this aspect and they've been fairly successful in that. And I think the coin distribution right now is also fairly distributed. Uh we actually know a few big uh YFI farmer uh that farm more than 1,000 YFI and they actually sold most of it before it hit 10,000. Uh so uh so the the the distribution is actually I think quite distributed right now and I think half of the supply is actually

in the central exchange right now. So I think a lot of people have actually sold and bought it uh on and off again. So in that sense is you can say it's a little bit like a Bitcoin of DeFi all of that is not a money. The founder says it's a worthless governance token, but everyone know that it's not really worthless because people are willing to pay 32,000 for one YFI. Um So uh I think that is interesting. The first version of the product is really to be a U aggregator to because there's so much new like a U coming out like we have Ave, we have Compound, we have also a Curve as well.

So, like for average user is very daunting to just interact with all of them alone so that you use Yearn you can just what like solve all of your issue that they just help you aggregate and find the best U for you and the founder built this to use it himself and obviously he doesn't want to govern the project and he launched a token to decentralize the governance process. And I think that um that project that product has been quite successful for the first one to two months and after that I think there's a new other other they they did not move fast enough to catch up with the new U farm. So, I think that I think the new stuff other new U farming vehicle actually take some of the TVL away and I think that even right now I think that they are still

trying to figure out a scalable way to run this uh U aggregation strategy because when the U is lower than a certain level people are just not going to do it anymore because the issue is you need to pay a performance fee and management fee for using the Yearn vault. And I think that right now is the key challenges is if you're talking about this U aggregation strategy alone the key question to ask is is it even possible to get a market neutral strategy that is also scalable at the same time but yet achieve like a probably like a double digit APR consistently. I think this is actually quite challenging and difficult and I think that version of the product is I think that right now is it's doing

okay. I has like a 400 million of TVL but it has not really been growing for some period of time. But they are trying to go for like a more ecosystem play method. They are like collaborating with a lot of the other DeFi protocol that some one of them we mentioned in a previous podcast which is SushiSwap. And uh a lot of other smaller one like Pickle and, uh others as well. I can't really recall all the names. So, and uh I think it is shaping out a little bit like a kingmaker of uh of DFI in the sense for especially for the more fair launch a a non uh grassroots community driven coin. They can actually when they collaborate with the coin and then I think they can bring

a lot of value to the table on how are they going to run the DAO and the whole protocol and some synergies they can explore. I think that kind of become like a not so pure play anymore. That actually there's more to yield right now. I mean, and it can become whatever the community want it to become in a way. So, I I think it's a pretty special protocol, but it also make it quite hard to value right now. Um and it's even among the DFI coin it's also among the more volatile one and it's it's kind of like a trader's favorite. Like the traders really like to trade around because it's very liquid and it also moves. I mean, that's the state of YFI. It's definitely one of the top DFI protocol, but uh I think that it's quite hard to define what it is right now. Yeah.

Yeah, definitely. YFI I think uh more so than any other coin of the DFI summer uh definitely a uh a kind of a zero to one moment really where uh I kind of heard a funny phrase today uh which was that this coin is so fair that I had to ape in as early as possible. Uh which is is kind of ironic to me in the idea that, you know, it's it's like it's like you know, it it because it's so fair it's such a it's such a good buy at an early stage. And and I think that like YFI really created this fair launch meme.

Um the the idea that you can have a DFI protocol which uh 100% of the coins are going to the users um by a some pre defined metric and then see what happens. And I think there's a canonical not canonical, there's a cardinality effect that it is achieved by being the first to do that properly. Which is that like like Arthur said, it's like the Bitcoin on Dfy. It's the it's the Bitcoin on on uh It's It's like It's like you have the 30K cap, which I'm glad they did because um that was contested for a while. But it gave it a very commodity-like trading

style where you know that there is never any emissions. So, in theory, if all the holders now just believe it's worth a million dollars, it's going to go to a million dollars, right? Um that'll just happen mathematically. But in practice, a lot of them will sell as it goes up. So, it it has that commodity fixed supply thing that makes it very good to trade. Um and it has the kind of mythical uh genesis story, which gives it an allure that is harder to replicate even if you have a project that does the same thing, but kind of um is launched after YFI. So, I think I think it it's it's got that. But like Arthur said, you know, it it

yield aggregation is a tough game in in in the longer term because you you you don't really know what fees will be paid and how those will be received. And And also like longer term, if you don't have inflation, then it will become harder to incentivize people to join the network. Um because they would have to buy coins to then have a governance vote as opposed to earn them. So, you could have some issues with ossification um from that. I guess you could use your cash flows that the It has a lot of cash flows, right? You could use those to buy up supply from the market.

Yeah, you could you could do that. You could do that. There's a number of ways you can do it. I mean, I I think Wi-Fi holds a holds a central role in DeFi, so people use it as a DeFi ETF as well. So, that's why you see the trading volumes are enormous on Binance, on on Coinbase. Um and um but it's also very much a bet on Andre as well uh because Andre being the sort of uh wild child mythical figure that he is, kind of uh is the embodiment of Wi-Fi himself. Uh so so it's definitely a bet on him and and continued uh continued innovation and composability.

I So, I think you know, when when people first analyze Wi-Fi, they looked at it from the pure yield aggregation play perspective and they didn't really understand why it had any value because you could just do the same thing. Um and they kind of didn't understand the the cultural context of of that project as it was launching. So, I think um I think that prestige is actually it is very Bitcoin-like in the DeFi ecosystem and I think it will likely to retain some of that prestige value uh over time. Uh just just a matter of like what what innovations will they bring to also give cash flow values uh to the users and to the holders.

I think going through different stages with YFI in terms of like liking or not liking it. I liked it a lot in the very beginning because same as Compound, it brought a lot of new innovation to the DeFi first that when it's one of those projects, if you tell people from outside of DeFi about it, then that's kind of what makes it click for them, the things that you can do, right? This whole kind of super fluid collateral thesis. Um where we touched on this in the last podcast as well, but where YFI was consistent of so many layers of uh basically tokenized balances that you could earn yields in several different different protocols at the same time all

in a kind of set and forget nature. So, it's really highly capital efficient. Um and at the same time, it's completely like trustless and auditable. And I think that really highlights the power of of the things that you can do in DeFi and that you can you that you can do with composability. But then after kind of this like first magic kind of wore off, then I saw that the people working on Yearn didn't actually care about the user. It felt like they they cared more about like tinkering like with different stuff, constantly rewriting how the project worked.

And and that's when you saw that like you kind of noticed that in there were like huge yield farming opportunities in DeFi and they just didn't offer them for their users, even though kind of the market demand was there. And and it was huge and they and projects like Harvest went over like a billion dollars of of deposits when when Yearn was like at 200, even though Yearn was had the capability to do this in a trustless way. And and Harvest was actually for like almost until the end was completely custodial. And so, it was con- controlled by a single admin key, like a billion dollars, right? And there was this funny exchange between I think you

Su and the founder of Harvest about stealing a billion dollars and they said like who needs who needs a billion dollars as the reason why they would have no incentive to steal it. Um but yeah, I feel I feel I that was actually where I got really mad with them and actually sold my coins. Um when they just refused to adopt new vaults and new strategies. Um I think they now are at a point where they have started to add new strategies and kind of move a bit faster.

Um but yeah, that's kind of the downside of this super fair launch approach where you just have no people really incentivized to to work on it and and the governance sort of so decentralized that um it's really becomes really hard to innovate. Yeah. I need to add one thing though. I think that the core group contributor did did form about yearn um and they are actually getting paid for working on yearn as well right now.

But I think that even for a decentralized fair launch protocol you kind of still need a person to act as a leader. I'm not sure who is the leader right now. It's probably Banteg or I'm not sure if they still call Andre. I don't think he is. Uh I think without a leader figure is when it comes to some difference in opinion are you going to go for voting every time? I think it's not not the best way of resolving some key issue especially if only the insider know it better than anyone else. So I think that's also probably one of the challenges of like a decentralized community run protocol.

Yeah, exactly. Exactly. So that's the managerial role that was kind of missing from yearn cuz I carried kind of my what I thought was constructive criticism to the team and the answer that you got was if you wanted then write it yourself. That's what we tell everyone and I mean that's not really how you run a business. Um it Yeah. Right? So they didn't really care what the user wanted. They they had their own idea of what was interesting and fun to work on and that's what they did. So but I think they are really turning it around right now. So like the the criticism that I brought forward I I don't think it's really valid anymore.

Just giving my perspective on uh what really soured this this protocol for me for a couple of months. So, moving on to Nexus Mutual, it's one of two or maybe one of three big insurance protocols. The other two being Cover, and then there's one Asian one that I don't know all that much about. So, let's talk about how how Nexus Mutual works and and what it does. Sure. So, I think Nexus Mutual is very straightforward. It's like a uh it's a mutual which means that it's a member-based uh a pool and it's being insurance pool that every members

contribute uh capital and have a claim on the capital pool but also providing uh cap the coverage for people who want to insure against them and as a in exchange, they share the premium proportionally to how much capital pool they contribute. So, it's a fairly ancient concept is and just applying it to DeFi and I think it works in a sense that if you want to purchase any insurance for the DeFi protocol or the smart contract insurance Nexus Mutual is insuring, yeah, you can go and do it and it works. So, I think in that sense you can say it pioneered the uh approach of providing insurance for smart contract which is definitely a big issue in DeFi and in Ethereum as well.

And I think it it has been quite successful in getting that objective achieved which is to provide insurance coverage for users who want to interact with DeFi smart contracts. I think that yeah, you can definitely say it's fairly successful and the founder, the team also is fairly legit, have a very credible profile. They worked as actuaries and were in the insurance space before. Um yeah, definitely very solid insurance protocol. But I do think that um uh recently it's losing I probably not the right way to describe it but I I that the way that the whole pricing model is designed in a bonding curve uh

is actually uh there's a lot of uh second-order effect on the price and on the people who contribute the capital to become a Nexus Mutual member because uh at 100% MCR like I think what I forgot what MCR stand for. I think Minimum capital ratio, I think. Uh you can't redeem your Nexus Mutual token for the capital which is ETH anymore. So, you will have your capital stuck and the only way you can sell it is you wrap it into a wrapped Nexus Mutual and sell it on exchange.

And that is actually uh a lot of people don't think it would happen, but it did happen and it's still there. It's currently it's still 100%, which means that you can't redeem your Nexus Mutual through the bonding curve and as a result, wrapped Nexus Mutual trade at a rather substantial discount to the actual Nexus Mutual. I think it's around 30% or more. I think 30-plus percent right now, which um which kind of uh ish affect the confidence of some of the members because uh in a way that uh they didn't realize that they can actually get trapped inside the capital pool. Uh they want to they need to sell it at a 30 to 40% discount on the open market.

And I think that actually this issue is it it's not an issue if you're coming in from a user perspective of using the protocol because yes, you still get your insurance uh coverage and you still get a payout if uh your claims is the right claims. Um but from a member perspective, I think that uh I think that kind of uh make a lot of people would think twice before uh providing uh the capital in the future, especially for bigger holder because it's actually quite illiquid and it doesn't give them the flexibility to really enter and exit uh not even in a short time, but I mean over like a more reasonable medium time frame. Yeah.

Could you describe for someone who would maybe be interested in getting insurance on some DeFi protocol that they are using? How does the claims process work? Who decides uh if you're getting paid out or not? I think right now uh I think for Nexus Mutual is uh it's a bit of a debate uh and a little bit of a I don't think there's a formal on-chain way. Uh I think Okay, again, I'm not 100% sure. Probably there are some voting. Uh but it's it's pretty arbitrary. I think there's no like a formal kind of like a methodology, but it's a bit more of like a I think voting by the member and also combine some of the expert opinion from the the the team as well. Uh because they I mean they have all have insurance background as well.

So, it's not a guaranteed payout, uh but so far they have paid out some claims successfully before. Do you think there's a way to do this in a completely trustless way? So, I mean, we are operating with smart contracts after all, right? So, isn't there some condition that you can define that is like definitely a hack or and then kind of people can 100% rely that the insurance will pay out? I I think that yes, it can be fairly trustless, but it will not be like 100% trustless because you need to rely on an oracle and in this situation oracle is even harder to define because how how are you going to define an oracle for a hack, right? Because it has to go through a human to decide that oh, we think that this is a hack.

Uh so that we agree to pay out the claim. So, the even on the definition alone that you can debate for a fair amount of time on that. Uh so, I think that you'll be you can go fairly trustless, but you will not be like a fully trustless, purely robot like a kind of way, yeah. Yeah, that makes sense. So, Loopring is a is a first uh DEX in Ethereum to adopt a ZK roll-up. And when uh yeah, it was and it's it's a it's a I can you can say it's a quite a big success in that sense that they are the first to adopt a ZK roll-up layer two solution and when they do the the process of starting the ZK roll up, I

think that was a get quite a lot of a buying from a lot of people in the community and because it's the first uh practical implementation and it works right now because you can use the ZK roll up of Loopring for both the DEX trading and also for transfer. Uh I think the transfer part is not really the major the initial objective, but it just that because so cheap to transfer on layer two, they kind of say that you why not we also advertise this benefit as well because you can transfer from uh two different account in the ZK roll up with a very very low cost and very quick as well. So, I think that's kind of the some uh expansion of the scope. And I think they were order book based model because if you're using using ZK roll up is quite

cheap at gas cost and the performance is quite good. So, you don't really need to use any AMM, but I think the the challenge is order book model is not that good for bootstrapping liquidity for DEX. Uh I think they right now they actually going to offer AMM DEX for Loopring as well instead of pure order book model. So, I think in that sense the ZK roll up the techno technical implementation is definitely very successful, but I think in terms of running a DEX, their volume is not really in the top 10 right now and even the user I think is okay, but I would say you can call it like a like a very successful and I think but one thing unique about Loopring is also one of the very few team where the team is actually based in the Asia a

big part of the team engineering team. Yeah, which is I think it shows that there are some DeFi team in Asia as well. So, and they technically they are pretty solid, but they just pretty under the radar and pretty low profile in a sense. What do you see as the challenge for basically those launching a new layer two solution like like Loopring? I mean, if I look at this, I I'm asking myself, so what is actually the incentive to deposit any tokens there? Like right?

So, don't you have to kind of chicken egg problem? Yeah, exactly. I think this is a big issue right now and it will get worse next year if a lot of the layer two launch and we don't really get a consensus of which one that we are going to use. I think this is going to be a pretty chaotic situation. I think that uh from what we learned in the DeFi summer, incentive works. I think that actually some of the layer two solutions should actually experience like a usage mining in a way that you give people some incentive to try out to use the layer two solution and to also to incentivize the other protocol to build on top of you as well. So, you get a network effect. Uh and I think it become a bit like a game theory like which one are you going to adopt like

right now is basically that middle and the smaller DeFi protocol are all waiting for the bigger protocol to make a first move before they make a move because if they move and the bigger one move to another one, it's kind of pointless. You lose all the composability. So, it's it's a bit like a chicken game right now. Uh and I think that the layer two team can probably do something to nudge them. Again, I I think that's just my idea and it's definitely not an easy problem to solve, but I do believe that incentive goes a pretty long way to help to tackle this issue.

Yeah, right. Usage mining sounds like like a very viable solution to this problem, right? Given that Loopring already has a token. Uh and I assume it gets it earns some kind of fee from Oh, yes. Oh, yeah. One thing about Ring is the user do get some fee from the trading volume. I think that's if you if you become a Loopring staker, I think you get pretty substantial percentage of the fee that going through the Loopring exchange. But it's all just because the Loopring exchange doesn't do that much volume.

There's not much fee to be distributed right now. So, then we move on to our final category. Um we were kind of debating uh before this podcast that this uh should even be included. Uh it's DFI coin. Um but CoinGecko uh includes it, so we will talk about it. And it's very popular right now. So, it's the kind of Ponzi game {slash} money games um uh empty set dollar, ESD, and uh AMPL fourth.

So, Arthur, could you describe uh how those work and why they are so popular right now? Yeah, I I again, I'm probably not the best person to explain this. Uh uh so, but I try my best. Uh empty set dollar is a algorithmic stable coin uh that use a novel economic incentive uh to incentivize the price to be stable. Uh right now, the target to is to be stable around $1 over a medium to long term. And they use uh they bake in a lot of economic incentive to bootstrap the initial network effect. Uh so, that people are going to uh participate in bootstrapping the network in the beginning. So, the incentive

of being early is extremely high if uh the the ESD market cap did end up expanding, which it did. So, I think when it got started, it obviously started from zero. Uh and right now, it's at around 500 million market cap. And when you think about it, it's actually quite insane because that's actually the maker market cap as well. Um okay, it's getting close. It's 430 right now, but uh it used to it was like 500 yesterday. So, um it went from zero to 500 million, I think, in 2 months. Um and by expanding the the supply of the ESD to the to the user that who participate in economic uh incentive game, which is uh you when the ESD trade below $1,

uh there is incentive to burn the ESD. So, you acquire something called a coupon. And what you can do with the coupon is if ESD trip above $1 in the future, you can use it to redeem for more ESD. So, let's say you burn one one ESD, you can claim like one and a half or 1.3 ESD in the future if ESD trip above par again when you go below par. So, there's incentive for the ESD participant to burn their ESD uh when it's below par to a certain extent so that they can get more ESD when it go above par again. Uh and there is a expiry date to the coupon uh so that if you if it doesn't go above $1 uh within a certain time period, I think

for ESD is around 1 week and then the coupon will expire worthless. So uh there is a lot of game theory uh component into ESD on how do they stabilize the price and bootstrap the initial value value and the network effect of it. Uh but another way to describe it is also highly speculative and it's a bit of a game theory uh uh game in a way that you have to know what other people is going to do so you can frontrun them a little bit to do something before they're going to do it and you also want to be the first one to exit when it trip substantially above $1 so that you you can sell before it trip below $1 again.

So, there's a lot of speculative element into it. Uh and I can tell a lot of people are very interested into it right now. Even people who I don't expect it to be participating in this kind of game. I have some professional traders, professional market maker like in the professional uh trading firm. Yeah, they have also doing it on their personal account which is to my surprise. Yeah. I think that's what I think probably have more to add on this as well. Yeah, I think you know the the idea of an algorithmic stablecoin is not bad, right? Because all money is a is kind of a money game where it's a shared belief.

Uh and we're definitely in the very early stages of figuring out which ones may or may not work. Uh I think Ampleforth was an early project. Uh I think mid-2019 it launched. It had some backers, so there's an investor allocation and then it did a I think it did an IEO on Bitfinex. Um I think it was started at like 150 market cap and then went up slightly and then went down a ton all the way down to all the way down to um like like 10 or 15 mil and then this year uh with the with the usage of the Uniswap uh geyser where people supply Ample and uh wrapped

ETH into uh into a pool, that kind of stabilized the price and and allowed it to start going through a expansion cycle and the kind of did a 50x, I think, from the bottom uh in market cap. So, obviously captured everyone's imagination because people before this kind of assumed that this kind of algorithmic stable coin wouldn't really work in practice. Uh and I think that Ampleforth was interesting because it gave people some ideas of what works and what might not work. I think YAM then I'd kind of consider in the same in the same vein where they like the

ideas of the rebase, uh but but ironically now I think they're actually considering taking out the rebase. So, I think I think rebase expansion contraction it it it's it's ultimately a double-sided sword. Uh if you think you can create the mechanisms that incentivize people to um to kind of do you know, do the actions that would you know, and and risk capital that ultimately brings stability to your the to the stable coin, then then it's good. And if they can't, then, you know, you you're probably not happy with the contraction cycles. So, I think E ESD and DSD should kind of be seen in that light where they're trying to solve

some of those problems that they foresaw and kind of saw bad out in the ample case. Um But again, like even at the 500 mil market cap, like it remains to be seen exactly how how it will play out with the Dow in terms of um in terms of coupons, right? In terms of how it how the game theory works where does it make sense to just buy the coin itself or does it make sense to to to play the coupon game where you're betting that it'll stay above the you know, the that the TWAP will stay above a dollar.

Um these are all things that this is so new that no one really knows how it'll how it'll accrue. But I I think the fundamental idea of an algorithmic stable coin um is not a bad one. The key is to get a reasonable distribution of of token holders that are not just trying to make a quick buck, but are trying to build something longer term that that could be a decentralized money, basically. Yeah, I guess I mean, where I kind of disagree is the characterization of it being a stable coin at all. I think that's the misleading part.

Um Ampleforth's maybe the easiest to talk about. So, if you look at Bitcoin, in Bitcoin, you always have the same number of coins in your wallet unless you spend them. Um but the price of these coins fluctuates in the open market. And Ampleforth flips that around where the price of your coins is always a dollar, but the amount of coins in your wallet constantly fluctuates. So, that's kind of what the rebasing mechanism does, right? And I feel it it's very hard to argue that this makes your balance more stable, right? The balance fluctuates just as much based on market demand as it does with a coin like Bitcoin. So, I don't think it's it's a it's a scam or anything. It's just a scam if you sell it as a

stablecoin because people who want to own a stablecoin, they want the number of their coins multiplied with the value of those coins to be stable. They They want neither uh one of them to be stable and the other not, right? You can think of both Ampleforth and ESD as like a base layer money, like Bitcoin, but where I kind of disagree is the way that it's being sold as a stablecoin. So, talking about Ampleforth, right? But but ESD, in ESD not everyone's balances change all the time. So, they go a step further. They kind of keep the balances of those who don't want to participate in kind of the economic game stable.

They can just keep their coins either in their account or in the DAO. And then they kind of incentivize some people to reduce their balance by burning their coins in exchange for more coins in the future. And yeah, I mean, ultimately, if you if you if you want to argue that ultimately these coins can have both a stable balance and a stable amount, then I think that's just not going to work without some kind of backing. I think that's the real problem. Like, not really can you make money trading these or can they go to like billion dollars in market cap and then maybe collapse and have a new cycle and so on. I think those things are all possible, but

what I don't see is that you will eventually convince someone to hold these as an actual stablecoin when there are also other alternatives like USDC, Tether, Dai, sUSD, and so on. I I have something to add, you you is uh I used to be fairly skeptical of the algorithmic stable coin model because I just think that in practice that's unlikely to work because the problem is when it's below the peg even if you believe it will go back to the $1 peg that it can go way below the peg before it start going there. I mean, you can use some economic incentive to incentivize that, but it's Who's going to step in? I mean, nobody wants to step in earlier. I mean, everyone want to be the last

person to support the price and then I buy the bottom. I don't want to buy when it's going to drop another 20%. That's always a question of the algo stable coin's stabilization method because you can't redeem it at par. But, um uh I think one thing changed my view on this is like I've been reading Sapien. I know it's a very popular book and I've been pretty late to this book. Uh but it basically say that, you know, a lot of things is like it's Homo Sapien imagination and I do believe that for money there is some aspect to it and I do think that some people might claim it, but I think a lot the empty set dollar community do recognize that it's not it's not going to be stable right now, but what they want to achieve is to use the speculative

component of ESD to bootstrap the initial network effect to uh to a certain level where that it can be more stable. They don't think you'll be stable right now. They think that you'll be stable when it hit like 5 or 10 billion dollar market cap or even higher. I'm not sure what's the target right now, but I think that it's there's some uh possibility that it will happen there, but I don't think it is a very high possibility event. Uh again, and I also think that one key issue with the algo stable coin is um it might not be there when you need it the most because what happened is on the Let's say what happened to March this year, March 13th this year, when the crypto market dropped like 50 to 70% in a day for most uh and I think in that moment can algo stable coin withstand

the test of being stable on that kind of situation. That would be the greatest test to them. If they can't, I think that the confidence will be destroyed in one single moment because that is not there to be stable when you need them the most. Yeah. I kind of think that the the the entire question of is it really a stable coin is almost is almost irrelevant because because I think like everyone involved knows that it's uh that it's a that it's a game of betting on can this is this game fun enough that the whole world will play it? Right?

That's a good way to put it. It is It's like, you know, you know, laugh and the world laughs with you, right? But cry and you cry alone. So, right now they're trying to get more people to laugh with them and I think the they do recognize that if they if they can get more and more people on board and that the game is easier, if the game is easily understood, um then they can expand that way. And you know, if people own a small percentage of their portfolio in it, like I did kind of like I was kind of drawn to the original Ampleforth idea, which is that this is a commodity money, which is very de

you know, arguably less correlated with other crypto assets, right? Because it yeah, like if the whole market nukes 80% then probably Ampleforth's going to nuke also, but you know, in normal markets it it generally exhibits lower correlation. Uh you know, it might be like 1.05 and then it might not rebalance or might be like 0.88. Um And so, but but the but the initial problem they had was like liquidity and then later on they solved that with the geyser. So, I think I I like algo stable coins were probably in the first chapter.

I think they're the the biggest issue I have them with with them is just Genie coefficients. I think reality is that there's still not that many people involved in some of these. Uh and and I think the Genie coefficients are not great. Uh so that that kind of makes it like not a distributed enough game. Um but I think if you can properly distribute the game and you can then create the right uh crypto economic incentives uh like you kind of need that mix of brainpower and distribution, which is tough, right? Because I think you know, ESD they probably have the brainpower, but they don't I don't know if you can achieve the distribution.

Uh and and you have those waves of, you know, coin distribution, profit taking get it out because the way that the DAO locks everyone in, right? Like kind of it's kind of like a cartel, basically. Like you you kind of need no you kind of need nodes of actors. And and so like but but then it makes it almost like a like a relevant with the market cap is. Like the market cap you can call it 20 billion. But if everyone's locked in the DAO and then no one can you know, it it it's only 1% of the people can ever crystallize that value. Um so so it's it's like the market cap is almost like a marketing to get you to come in before it's you know, before it's even higher.

Uh and kind of like uh you kind of say like all DeFi games can be can be reduced to FOMO 3D. Right? Where you know that it's being programmed to go higher uh each each each period. And and so you're you're kind of having to decide either either you don't play at all or you play as early as possible. Um so so I think like no one's really mis no one's really misled that it's actually a stable coin because if you thought it was a stable coin, you wouldn't buy it anyway because you you know, like like you're trying to you're trying to 5x your money, right? If you buy this stuff and then you play with it. Um and I think it's like it's it's it's more

Bitcoin-like in that sense where you're trying to make a bet that this is something that this is something that other people will like as a game. It'll eventually because it's so fun, it'll become a money. And then because of that, it'll have better liquidity and then probably be less volatile. It'll always be like a commodity-like money basically. Yeah, I think that's I think that's spot on. I think it's it's exactly right. I think of it as a commodity-like money. Same as I said before that has different properties from Bitcoin. I think where you're also right. I mean equating like all money games in DeFi to to something like FOMO 3D, right? I think some of many of the projects that

we talked about like are not games, right? They are actually Yeah probably. Like legit protocols where like people interact with each other in a sustainable way. And the more they interact with each other, the stronger they get. But here this these are games that that have mechanisms that make the system inherently unstable. That's kind of the whole point of it, right? That you have these these waves of uh basically FOMO people depositing and you have these extreme incentives not to withdraw your coins. That's kind of the whole point and ESD it actually it started with I think a one epoch on a one epoch was eight hours unbonding period for your coins in the DAO. And

then they raised it for 15 period to 15 periods. So, five days. And um I think that just shows that they like they were never interested in like making it more stable because if you if you wanted actually to stabilize to get the coin back to $1, then the method you would do that you would do that would be to bring more supply to the market, right? Actually so you have the re- the positive rebates, people in the Dow get more supply, and then those people can go to Uniswap and sell the supply.

And that's what pushes the price back down to a dollar. But the the way they are taking it is actually the exact opposite direction, right? They make it even harder to to to cash out to actually liquidate any coins. So, you have this this wave where like everyone's balances grow inside the Dow, but when they actually want to withdraw, then the price collapses to like 30, 40 cents. Um and the question is always well, will those kind of expansion periods make up for for the drop or will there be an eventual time where it doesn't recover? And that you're exactly right that this depends entirely on basically how how much fun the game is to play

and if it can find constantly find new money and new market participants to come in. So, yeah, I I guess those really don't have much to do with DeFi um in the sense well, that that those other protocols have. They they do compose with with other DeFi protocols, I guess, to a small bit. So, kind of something like ESD uh and Ample, I think they both use the the Uniswap V2 uh TWAP um as their oracle. So, that's cool.

Um but apart from that, yeah. I think it's good that we talked about it because the hype for these things is really large right now. But yeah, I wouldn't really wouldn't really count them toward DeFi. Yeah, I I sort of agree. It's this is this is the in a sense, you can say it's DeFi, but yeah, it's it's definitely a lot more speculative component into it right now than being used as like a the product like a goods and services, yeah. So, wrapping this up, so we covered all the categories.

Um I'd like to spend a few minutes. Where do you see DeFi going in in 2021? We kind of covered like the categories that are like very obvious kind of first satisfying the whole ex- speculative demand of the market. You have bridges that the tokens to DeFi that exist outside of it. Then you have kind of the DEXes where you can trade them. And you have this the lending protocols where you can lend them out, get some yield on them, others can borrow them. Um then you have kind of the synthetics.

It's where you also can deposit or use your your tokens as collateral and then create like token as debt against it. So uh what is next? I think uh one of the thing that uh is like next I think next year uh of 2021 um more use case will be unlocked in DeFi. I think right now we only scratching the surface. We have a built all of the basic uh base layer primitive like lending and borrowing, spot DEXes, uh some asset management protocol, but there's still a lot of other financial use case that I wouldn't I think there's still a lot of room to grow and prove on this potential. I think one of this is insurance. So, I think right now only

Nexus Mutual can claim to provide a successful insurance. I think that there will be more insurance protocol to emerge next year. And uh also uh like derivative. I think that a lot of the derivative trading use cases is hampered due to the performance issue of Ethereum blockchain. Uh and I think that's on my count there's at least eight derivative trading protocol uh that is launching soon or already launched as well. So, I expect this competition to be really heat up next year. And with combined with the launch of layer two solution and hopefully they will also unlock some other use case like some micro payment.

And or even under collateralized borrowing. I think this is something that kind of the holy grail of finance and a lot of people hope DeFi can achieve. Although it will remain to be seen how it can be done, but I think there's actually I think at least a two or three protocol trying to tackle this issue and they are going to launch I think next year as well. And I think a few others um I think Yeah, I think we're just going to see it continue to grow uh barring any regulatory actions. And it's also potential that we see some established fintech application tap into some of the product offering of DeFi offer to their users. You can call it CeFi, but probably bridging this to the mainstream

audience as well through their fintech offering. I think that's also likely to happen. Yep. Yeah, I'm excited to see uh DeFi derivatives really take off next year. I think there is a lot of pent-up demand to use these. A lot of pent-up use cases. I think if you think about existing DeFi with borrow lending and kind of uh be able to to draw against an asset. You You can kind of generalize that to being long that asset as a perp, right? Or as a future. Uh so I think that being able to do so and then get really get the liquidation cost down very low.

Almost as low as possible. You then allow people to use it properly. Uh so I would like to see transaction cost go as low as possible. I would like to see um these kind of usability metrics really do really well next year. Because I think that then the then the canvas for DeFi goes a lot bigger. Uh So I think whether it's AMM or more more central limit approach, I think once you have that and it's composable, you can For instance, you you you can package a stablecoin that is like the coin plus it's short per you can you know, package a you can, you know, have an options protocol which liquidates into a perp

or an aggregation of perps. There's all these things you can do. But step one is to just get it get the market actually liquid, get the market actually going. So, fun to see.