How to Fix DeFi with Dan Elitzer

Transcript

Bagless Nation it's time for state of the nation the topic today is defy broken that's the question we raise it's from a post that was written that that caught our attention why Defy is broken and how to fix it part one Oracle free protocols huh how is D5 broken David and how do Oracle free protocols fix it actually that's going to be the topic don't give me the answer but why are we exploring this topic give us some context yeah the guest on today's show Bangkok longtime Bank list listeners will uh be toned completely familiar with Dan elitzer who has written a number of articles that have I think all turned into bankless episodes because he has the uncannon he's got he's got a

great hit rate uh so when Dan writes an article uh I pay attention he doesn't write too many yeah he he conserves his bullets for that when uh he shoots one it really means something and he shot a bullet and so we are going to go and explore why Dan thinks DFI is broken and what D5 needs in order to really not lose 3.8 billion dollars like it did last bull market oh oopsies yeah yeah 3.8 uh that was a number uh so that's the topic of today's show but before we get into the show we got to talk about to our friends and sponsors at consensus because they would like you to make sure that you know that you can get some fuzzing going on if they also don't want you to lose uh 3.8 they also similarly on on theme you'd also don't want you to

lose 3.8 billion dollars so if you have not fuzzed your contracts with consensus diligence fuzzing tool there's a link in the show notes to go plus your contracts I'm not going to explain what fuzzing is because I've already done that too many times it's probably too cringe uh but if you are a co-developer and you would like your code to not get exploited or hacked or co-developer yet anyways uh make sure that your code does not get exported and doesn't lose 3.8 if you if you ever do make a smart contract that hosts 3.8 billion dollars congratulations I hope you use consensus's diligence fuzzing tool to get to that point there's a link in the show notes to get started with that yeah

uh if you're not fussing what are you doing uh David there's also there's also another thing we we have to mention I think that's happening tomorrow right we have a uh what is this dad's chat with dads yeah dads are chatting with dads uh bankless and block Works uh two Founders uh two pairs of Founders are gonna have a Twitter space together so if you are interested in crypto native media I would assume you are because you are listening to this uh me and Ryan are going to be talking to Jason and Yano from block work so we're bringing some questions for them they're bringing some questions for us we're just gonna chat about what it's like in the world of crypto native media uh because this last bear Market has also rocked the world of crypto native media uh so uh that's happening tomorrow uh BYOB

specifically tomorrow it's 12 of my time 12 p.m Eastern Time on Twitter so if you're a Twitter person that is what we are going to be doing at 12pm Eastern tomorrow today if you are listening to this on the podcast feed okay yeah so is D5 broken is the question today I I really feel like um man it's been a while since we've done an entire podcast dedicated towards defy and yet what's ironic here David is that's where we started that's why we're here the reason Bank was started is because we were like oh you know we're not the industry isn't talking about defy enough like the thing that actually makes us fully bankless and yet I feel like while our protocols have experienced tremendous success and D5

now has clear product Market fit there's something missing right like we're we're are we working on a new narrative everyone's talking about okay this is the next Bull Run that'll kind of fix things it still feels like we've got some things to build right in deeper in in the stack here at the kind of the core primitive layer so I think that's on on deck for today uh yeah why else are we talking about this what what's more context I think this episode will pull in some themes that we've been talking around on Bank list since day one uh the protocol when I was reading Dan uh Dan's article the protocol sync thesis came to mind um the other image that came to mind is you know that um that Meme of like apes evolving into men and then like there's like it's like the Darwin picture

there's like seven of them uh but then there's the joke of like the last one is like wait we've gone too far turn back I feel like that's what D5 has been for like the last like 18 months like we skipped a step and I think that's what Dan is saying it's like wait a second we've gone too far we skipped a step we have to go back yep and we have to go back to to progress forward yeah and so uh the words Primitives are going to be said in this podcast I'm going to to bring up the protocol sync thesis which we'll Define later in the show and risk dependencies and oracles these are all going to be themes about why Dan thinks that perhaps we should kind of kind of go back to the drawing board at least in a couple certain respects just to be

able to actually progress forward in the world of defy Innovation so that's the the context I would leave bankless listeners to take the theme is back to the basics this is this is going to sound a little bit like a 2020 Circa bankless 2020 type of episode where we're talking about these fundamentals remember that I can't wait to dive into this guys we're gonna get right to Dan in just a second but before we do we want to thank the sponsors that made this episode possible including our number one recommended crypto exchange Kraken go create an account Kraken Pro has easily become the best crypto trading platform in the industry the place I use to check the charts and the crypto prices even when I'm not looking to place a trade on Kraken Pro you'll have access to Advanced charting tools real-time Market data and lightning fast

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play and connect at immutable.com bankless Nation I would love to introduce you to Dan eliter a partner at Nason a VC firm that specializes in deep crypto economic Primitives you may remember Dan as the guy who wrote I don't know about the threat of liquid staking derivatives back to when he called them the death of ethereum as in delegated ether uh now we call them lsds uh and that was three years before proof of stake was even a thing uh maybe you remember him from writing about super fluid collateral in 2019 which was a huge precursor to what became yield farming which he also wrote about yield farming called aquaponic yield farming in defy uh I think in June of 2020 right before defy summer and then also wrote

uni chain is an inevitable is inevitable a thesis on the inevitability of app chains all of these things uh have more or less come true with varying degrees of success I would say very strong degrees of success and all of them have also become bankless podcast episodes and Dan has also recently released an episode an article why D5 is broken and how to fix it and so here we have Dan on the show today Dan welcome back to the bank list for I think like the fourth or fifth time uh it's good to have you back my man yes guys always great talking with you thanks for helping us produce all that content I feel like you've owned earned a co-host status here or something hey any anytime I'm always happy to chat on that note like what when you how do

you decide when you are going to write an article because you you like I said in the intro you can serve you don't you don't you know it's not you're not like Dan elliser every single week you're not shooting your shot left and right uh what does it take for Dan to actually put pen down on paper well hey I'm trying to trying to ramp up the frequency here a little bit which is one of the reasons why this was part one I wanted to kind of publicly commit myself but you know you can't wait six months for a part two uh but really when I write it tends to be because I'm seeing a trend and I'm seeing enough teams enough people talking about similar themes and then I'm I try to pull it together and express it in a way where I I have the for great Fortune to be

exposed to a lot of really talented Builders and be talking to them all time and so I see some things and some patterns a little bit before I think a lot of other people have the opportunity to and so when I'm seeing these patterns emerging I then try to take it and condense it and articulate it in a way that I think will help it click for more people the way it started to click for me and to be clear I don't know where things are necessarily going right I'm not claiming that I that I I can see these things I'm just seeing possible Futures and trying to make the case for that future as clearly as I can if I think it's a future that is is worth considering worth discussing well we definitely want to get into what

that trend is but first can we just establish what the problem is uh the trend is here to fix things uh but does that imply that something is broken what what about the current state of crypto what about the current state of D5 is broken well like you I mean I I really got into the space with first Bitcoin thinking of it in what was actually a D5 context before the term D5 even existed but saying Hey how do we actually make financial services available permissionlessly for the world and I think we've made incredible progress with this experiment but we've also had huge problems and I think when you look at that headline number you know 3.8 billion dollars being stolen in these hacks and these exploits just in 2022

right not even the full bull run right that was just last year um and that is just I think a couple orders of magnitude higher than an acceptable rate if we really want this to be the future of the kind of Global Financial system and we can't expect be to be able to recommend to our our friends our relatives entire countries and communities that they should be using defy when there is still this much money being stolen through vulnerabilities and I think it is a tractable problem I do think that teams need to do a better job taking high quality Audits and security practices seriously but I I also think that just doing more of the same is not going to

get us to that orders of magnitude Improvement that we need to have in order to really be able to Advocate normal kind of non-tech forward people like ourselves be using this and being comfortable putting their life savings into these systems so Dan are you are you positing though that the big scalability the the big thing we're missing in D5 the big reason is broken is hacks a stolen money three I would say the million dollars is that the the real reason that Defy is kind of broken and not taking off you know as quickly as we might hope I don't think it's the only reason certainly I think there's a lot of other things we need to work on too but I think that if we don't make meaningful Improvement on the security

front it's never going to be able to be mainstream without improving security and if we manage to improve on ux uh improve on the way that we onboard people into the ecosystem the way people uh manage recovery the way they understand protocols and interact with them if we don't uh if we manage to fix all those other things without addressing security we're actually doing a disservice to the world because that's just going to mean it's easier for more people to lose more money yeah the worst experience is like the one we got with SBF and FTX where it's like exactly so fast but oops doesn't have any of my money right so it's not just about like smart contract vulnerabilities right it also is finding ways to better uh like

self-police hopefully within the within the industry around things like you know scams and uh Bad Bad actors both at the kind of company level at the project level at the like you know Twitter spam telegram spam and scams WhatsApp scams all these things like we need to make progress the number one thing holding back the industry is retail users in particular getting wrecked right because then people don't trust it they don't want to want to use these things they they get a bad impression they get uh it makes sense that Regulators want to come in and regulate when they're seeing retail users getting wrecked because that is their responsibility right as

they see it is that they're supposed to help keep people safe and if people are not safe then they're going to feel like they need to step in even if they really don't understand this thing and don't want to be touching it in the first place so that 3.8 billion dollar number that you cited uh you're not saying that is because of one specific part of D5 it is a global problem there are many different types of hacks perhaps absolutely perhaps that's why there's part two coming maybe more parts after that but let's focus in on what the content is around part one uh what what is broken about the current state of defy that is leaky in in the capital like why why is defy uh vulnerable and why does the current flavor of D5 that we have not suitable to scale up to the

masses yeah so I think that the major problem here that you know oracles fit in the headline but it's not fundamentally about oracles right it's about thinking with a layered approach to how Protocols are being designed uh one of the things that we've spent a lot of time focused on at Mason recently has been around security and really understanding the whole security process the security stack and working with both portfolio companies and looking at other code bases understanding how hard it really is to go in and understand the surface area of a contract all the things that could potentially go wrong with it and so our view is that the right way to do

this is to start with A Primitive and A Primitive is a contractor set of contracts with zero external dependencies and an Oracle is a type of external dependency governance and upgraded ability are our massive external dependencies and so if you have to reason about all the possible values that could be changed or different ways in which external data can be brought onto chain in both an accurate and timely manner and how even if slight deviations in that accuracy or that timeliness can cause really bad consequences for the protocol for users

of the protocol that the more we can strip that out at the lowest level the better and there are absolutely very good reasons to be using oracles to have governance to have forms of upgradability but the point is we want to be very explicit about the range of scenarios in which those come into play when do those dependencies matter and what can we have and reason about and allow to be used that does not have external dependencies so it's been a while since we've done an episode on oracles and I think that we should kind of go back and re-establish how oracles are actually used in some of the most popular D5 protocols today

so what is an oracle are we talking about a price Oracle what does it do what are some of the popular uh defy applications that make use of this and can you describe that in some more details I think the number one thing that oracles are used for today is around price oracles now oracles are a very general tool um overall right and I think that uh chain link in particular and a number of others have made great progress on being able to bring various types of data that is exogenous to blockchains right take real world data things that occur that can't be defined within ethereum or other blockchains natively and how do we import that data how do we bring it on

chain and I think the one of the ways that people have tried to get price data via Oracle on chain without pulling it in off chain uh via chain link or something similar has been to use uh these kind of t-wops uh the time weighted average price pulling it from uniswap or other places the problem is those have a very very strong trade-off between uh how essentially accurate and timely the price is and how manipulable it is because t-wops over a say 10 minute period pretty easy to manipulate for a lot of assets over a 24 hour period pretty hard to manipulate for most

assets but if you're trying to do you know perps with 50x leverage you can't look back at the average price over a 24 hour period you want it closer to that 10 minute window and so there's this inherent trade-off with doing stuff in this very robust on-chain way and so chain link and other providers who are pulling things in off chain really look to to change how you approach that trade-off so we have the um the slow oracles that are kind of on chain with with kind of the t t WAP um thing that you mentioned which is um this is something that that uniswap and other protocols like it sort of brought the market but we're still missing that that fast Oracle to give us kind of up to the second up to the

minute types of uh prices and so there's an external off-chain dependency if you want prices like that so what popular Protocols are using say a chain link or some sort of off-chain Oracle in order to like um actually do what they do is it a lot of them pretty much all of them right um if you look at you know compound Ave these lending protocols today any uh derivatives uh protocols all like uh synthetics and GMX and others like they're all using um a form of price Oracle most of them are using chain link then if if chain link went down how effect would we be up be pretty bad right and I think you

know a lot of folks commenting greatly pointed out like they're actually it's you'd be hard-pressed to come up with uh an example of an exploit where chain link did not function as advertised and where the exploit was due to chain link um and I'm and not at all claiming that there is I think the problem is that we are now using chain link in such a way that if there is a problem with chain link it creates a problem across all of D5 on like basically every different blockchain or L2 it's not just ethereum that would be affected here um and so I think that you know again they performed very well so far um and while you know there's always room for improvements um and I think chain link has done a great job

improving over the years I remember some of the early protocols using chain link and there was a lot of kind of uh performance and reliability concerns back in the day that have largely um been addressed but this really is on a go forward basis right what I want what I'm thinking about is hey the next Bull Run what are the things that if we don't get ourselves on solid footing now that we're going to regret because when the bull runs happen you guys know right everything gets crazy people are are just like trying to like you know go to the Moon as fast as possible right and so yeah so I I think that that is the thing that we need to be doing during these quieter periods is like taking a step back and saying hey even if stuff

has been working so far what are the what is the kind of like technical debt um right ecosystem debt that we can clean up I would I would put usdt as pretty high on that list as well as like just hey ustt has been fine so far but there's a lot of reasons that people have been concerned for years and continue to be concerned and so like let's let's find these things having a single Oracle or single Oracle Network as the dependency for everything having usdt is dependency for everything how do we start uh really diversifying the the rest of your business that is what we're trying to build right it's a more robust Financial system and just because a bank isn't the single point of failure

doesn't mean that we don't want to find more ways that people can choose the trade-offs choose the risk models that they want and again no one's going to be choosing directly and piecing together every single piece of the stack but having composable layers that people can choose service providers or other protocols that are piecing together the different dependencies and creating the Right End user product I think that's the exciting thing here right the fact that we have these permissionless protocols underneath especially Primitives at the base layer and that you can build whatever you want on top of it I think that is what excites me

and that's the really the the call to action that you're presenting in your article this uh we've been talking a lot about oracles and and I just really want to double down on this is actually not an oracle conversation it's deeper than the Oracle it's dependencies generally the dependencies generally yes uh oracle's being the biggest one the biggest systemic uh issue that we might have as an external dependency but is the fact that we rely on external dependencies in the first place which is the area of emphasis that that you're bringing to the conversation and you said this word um exogenous dependency exogenous to the to the blockchain system right something external needs to come into our defy apps in order to make them work and that an exogenous dependency is also risk uh and I think what you're trying to uh

advocate for are not just a reduction uh the elimination of exogenous dependencies but also producing what we need would otherwise need as like an external Oracle but being able to produce it internally so that we can actually it's like an inversion can you walk us through like uh this part of this conversation yeah I think a lot of what we see now is like the kind of centralized exchange world and the things that exist outside of blockchains just they're much much bigger than the on-chain uh kind of like ecosystem today and we've been kind of catching up right as defy has grown as as usage of protocols has grown um that that Gap has shrunk and

eventually I I hope and I believe we will uh hit this Tipping Point where the on-chain uh volume is actually higher than the off chain volume right the activities that is happening uh in this kind of crypto native on-chain context will become the primary Market not the secondary Market where we need to refer off chain to data from the primary market and we've already seen that with certain assets that have gotten very large uh before getting a listing on a centralized exchange but there is still much deeper liquidity for them uh within defy and that's awesome but that's the exception and I hope someday will be the rule will be stuff is more liquid the

primary Market is happening on chain and then we don't have to pipe in information from off chain as much we can be more reliant on things that are wholly on chain uh but today that's been a really bad idea to make that assumption because the primary Market has been off chain so let's design in a way where we can eventually transition to a more on-chain Centric world where the dependencies can be fully defined um and are not subjecting to the the very complicated process of bringing data outside of a blockchain context and print and bringing it on chain by the way for people who um are like well Dan

will always have centralized exchanges and you're living in this fantasy crypto world I remember when back in 2019 people this is Grandpa Ryan coming out I remember when uh 2019 people said decentralizes exchanges would never take off and if you looked at the market share in um 2019 so that's just four years ago 0.06 percent of spot trade volume happened on decentralized exchanges the other 99 Point like whatever percent was on centralized exchanges you know where we are now we're at 20 percent all right decentralized exchanges are now up to 20 four years later basically

nothing I'm still impressed David all right and by the way much higher post guess what SPF FTX all that whole mess so this kind of thing can happen and it gets to the core of actually what we mean when we say defy because remember that guy Alex machinski was saying I got some D5 for you come on over to Celsius I'll give you some defy um it wasn't really defy if you go to kind of the most extreme version of what D5 is on the fully decentralized side of the spectrum it would be something that doesn't have any external off-chain dependency

no exogenous type of data source and so something like ether the asset is very Unchained right it has no external dependency that is a very much economic bandwidth defy probably the closest protocol we've seen and I don't know if you'd agree with this but that's hit kind of mainstream is something like uniswap which really has like it has its own Oracle it doesn't doesn't require some sort of like that doesn't really need I mean yeah it produces like a two op that you can use other places but like it fundamentally doesn't need an oracle it is people just trading right right and it produces an oracle it does not ingest an oracle Yeah the more off-chain sort of uh dependencies you inject the less D5 something becomes

until you're kind of like all the way to Alex machinski I suppose so what we're talking about is getting back to the core of like defy by trying to like reduce I feel like we've become complacent somewhat a little bit and that we're like ah oracles work and these you know governance depends whatever I mean we're just kind of papering over some things and you're what you're saying is hey let's while we're sober now because we're sober it's 20 23. no one's no one's drunk on the hype of whatever bull market let's Shore this up let's make sure we get this right I think that's what you're saying here right and I think it's it's a it's an idea about having choices along the Spectrum right like if you look at Celsius you look at FTX like right they

were they were just like scamming basically but if you think about what is the kind of future State look like it is not an incredibly purist everybody is doing everything fully on chain with zero external dependencies but uh I think Andreas Antonopoulos had had a great uh bet that he did you know years ago where he talked about what is the benefit of having a kind of permissionless systems and permission systems how do they coexist and his point was you can build a permissioned system on top of a permissionless system you fundamentally cannot build a

permissionless system on top of a permissioned system and so I think for D5 similarly what we're talking about here is let's actually start with this incredibly low attack surface zero external dependency low level primitive and then you can build things on top that have dependencies and you can choose which dependencies and if you want to go all the way to something that you know is a fully centralized custodial KY seed service that is built on top of that you can and that can still be built on top of the same base level primitive but people can choose kind of like what what is their points

along that Spectrum what services do they want to trust while still actually concentrating all of the liquidity all of the economic exchange at the base layer can be happening in this very secure share third Market but Dan building defy apps like that is hard it is hard it's so hard right and that's what we haven't seen a lot of it and so we've been cutting corners but I think also uh you know then this might be a another controversial point I think you know amm's uh automated market makers you know that unit swap really helped popularize have been uh a real Leap Forward and of allowed defy to get to where it is today and we tried the pure kind of like order book style

peer-to-peer exchanges for both trading and for Lending markets prior to that none of them worked amms were what allowed it to break through the improved usability given the constraints of like kind of like low user base small user base um and just like low throughput high cost doing stuff on chain early on amms were great I think we're actually going to circle back we're actually going to end up like the the ultimate efficient end state is we're going to have things that are much much closer to order books than to amms as they exist today and I think univ3 was a big step in that direction with concentrated liquidity being effectively a gas efficient on-chain order book um and we're going

to see more shifting in that direction so we're it's hard to do certain things we've kind of got to look at how things are going to evolve over time and so a lot of the things about layering and thinking about what is possible with these isolated markets um what is possible for going this pure no dependency version of defy that wasn't possible previously it was tried uh in various forms but it wasn't really possible now I think we've evolved to the state where we have enough users we have enough liquidity we can be more thoughtful about building the architecture that is actually long-term and robust because we've gone through an

initial bootstrapping period to get there so this isn't necessarily some ideas are probably just like bad and wrong other ideas the timing is off and then you think that it just means that this architecture is wrong this idea is wrong it was wrong for the time but now we can do it with advantages that didn't exist before and it is I think the people who are trying to do those things weren't wrong that those were the right ways directionally to build up a decentralized financial system uh that the timing was just off so Dan how many uh defy apps check this box as a very deep primitive that has no

external dependencies we got uniswap how many uh apps after that yeah it's it's pretty pretty slim pickings um in terms of like what's what's live today um I think there are uh a few that have hopped out uh I think it was panoptic uh may have called out for like Oracle free uh options that they may have actually uh originated the term of kind of like uh Oracle free protocols um there's there's others um I think uh is it Timeless or others that have been doing this in various forms I think finding the right way to not completely mess up you know ux and actually keep keep the liquidity there keep the ux um

up to par is tough and so I but I'm seeing this kind of wave of folks coming both ones that we've invested in nascent ones that we haven't invested in like the two mentioned previously I think that there's there's this trend coming and uh it's we're gonna see how how it plays out I think it has potential to be a lot more robust and that if we are are thoughtful if we've got teams like Oasis like D5 saber and others who are building on top of some of these um you know that's going to be very helpful to maintain a consistent ux on a solider base and I think that there are are many many more services and protocols that will build on top of these if they can get the initial

initial traction going such that the average D5 user today will see equal ux while having essentially a more robust stack that has been built up to support that so uh uniswap is one uh but we'll talk about how all the other major defy apps that have tvl do not check this box so we got Ave we got compound we got maker Dao uh which will be I think the the next like synthetics I think all have an external Oracle yeah and so I think what really you're saying is like hey anything with lending derivatives all of this stuff is using external price oracles yeah basically if you're not using uniswap you're probably using an external

dependency and an external dependency is just a fancy way of saying bank I'll say uh if you really want to generalize what a bank is it's like somebody that can control your funds uh in ways that you don't agree with uh and so very very general yes yes and no I think the the custody distinction is really important right because a lot of these things they don't have custody of your funds they could in theory be upgraded in a way that is like ends up resulting in them taking custody or being very custody like in these things so I think that's that is an important distinction but the fact that there could be these like really bad upgrades that could happen means that like man we better hope that the governance systems are robust and I

don't think there's anybody who's been deeply involved in governance for any of these D5 protocols that has like their view is like oh yeah governance works great I love it I feel totally comfortable with it right okay so maybe to be less hyperbolic not a bank but trust like these things aren't a bank but they do but you do have to trust them to not turn into a bank uh if the wrong governance proposal went through uh and this like this goes right back to the roots of what like Ryan and I got into defy in the first place right it's like hey what about bankless Finance what about trustless Finance like my Twitter name is called trustless State and so I think what you're saying is like hey all these defy apps Beyond uniswap haven't been trustless and so we

need to get back to Our trustless Roots uh Dan I know you've got a number of protocols I want to pick your brain out to understand how these things are actually built and if we're going to do like lending without an oracle how does that even work and how this is kind of like inverting the the model as we know uh to build and produce a new set of perhaps permissionless trustless Oracle free protocols uh but before we get to that part of that part of the conversation a moment to talk about these fantastic sponsors that make the show possible learning about crypto is hard until now introducing metamask learn an open educational platform about crypto web 3 self-custody wallet management and all the other topics needed to onboard people into this crazy world of crypto metamask learn is an interactive platform with each lesson

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become Primitives is there a pattern for how Oracle free or dependency free defy apps emerge like how does one actually remove an oracle or is there an underlying pattern that we can understand here yeah so on the trading side like pretty well established right we've seen the amm model xyk and then all the variations on it on the lending side it's admittedly a bit more complicated and so usually what we're seeing with you know with Ave with compound with these other pooled lending models is you're relying on an oracle saying like hey what is the price of ether right now and being able to say hey we've got these kind of universal uh collateral factors basically how much

how much can you borrow against uh a a given you know set of collateral and how much at what point do you then start getting liquidated right uh what when you move to an oracle free context what you generally have is the lender so let's say I want to lend uh usdc uh and I'm willing to have ether as collateral against it I can choose essentially what is the amount of usdc that I will lend against one eth or against 0.58 or against 100 eighth whatever whatever it is I can choose that that ratio and I'm implying the collateral rate that I'm comfortable with based on what I see as

the current price of ether now if the price moves we don't that does not automatically get updated right and so uh I would need to if I don't want to see a liquidation occur uh as both a a borrower or a lender who wants to uh lend it say a new ratio based on the current market price of eth I would need to then update the terms of the either the current loan um or of a future loan to reflect that and so some of these different protocols will address how that liquidation process works and how both lenders and borrowers initially Express their preference in the market but at

the core that is what's happening is you have a quote asset and a collateral asset and you're agreeing like what are the kind of ratios between these assets that both lender and borrower are comfortable with so instead of depending on One external Oracle you just heard the Oracle you're you are just the one that inputs the desired ratio uh and that's how you remove the Oracle uh simply put yeah and I think we're seeing that you know with with nfts in particular right where it's been harder to have that kind of like off-chain price so it's like okay here's an nft as collateral like what are you willing to lend against how much you want to land against it and generally the platforms are defining it based on the price but you could

you know choose what price you're comfortable with maybe this is a floor asset in which case it's easy if it's not a floor nft then it's going to be a lot more subjective what you consider the price to be and what what you're comfortable so this is just saying Hey We're not gonna say we're just trusting we're all agreeing to trust this person saying the price it's like no no you come in you choose what you are comfortable with using uh as the price either based on your own information or whatever other service you want to trust to provide accurate price data for your you know kind of risk profile preferences so in in the history of of defy I remember there was in the very early days there was peer-to-peer lending yeah and I think that's what Ave was pre in very early yeah oh my God it

was pivoted yeah yeah they pivoted from peer-to-peer where two people said the terms also we had Dharma well we talked about that uh in the in the commercial break which was peer-to-peer like two like each side of the market would individually find each other and they would come to an individual agreement and these appear to peer Finance peer-to-peer uh defy just got absolutely Smoked by peer two contract yeah I failed Bonnie stani had to Pivot towards which is peer to contract and so this is what what uniswap is this is what Ave is um this is what maker Dao is it's like instead of having to match make between individuals uh just you just go to the contract and the contract is the aggregator between all the marketplaces

and so what I heard you say is something much more closer to the peer-to-peer world where two individual people come together and have to come up with terms and then they can make an agreement and that's how we get rid of the Oracle but then we introduce a problem of liquidity how to how how do you have do you have any thoughts on this yeah so there there are multiple ways ways to to get there right and so in the case of ajna right which is which is doing this I would say they're using a uni V3 style model where you have ticks based on the collateral ratios and as a lender you deposit into specific ticks and so just like unib3 where you have these kind of

non-fungible LP positions where different people are lping across different ranges uh but as a Trader you can come in and trade across all of them the same thing happens within ajna where lenders come in and again the Lem say usdc um in certain ticks against eth but then if you want to come post etha's collateral and borrow you can access liquidity from multiple uh suppliers across a variety of ticks and so I think that's how you can make it what's one of the ways that you can make it work is we can still use this kind of like peer-to-pool model peer-to-contract model uh and just make the kind of

supply side uh non-fungible and make it a little bit uh I'd say more intensive but that that's also natural right if you look at any of these peer-to-peer marketplaces even outside of crypto what typically happens is you see one side of the market getting professionalized very very quickly and then you have retail on the other side because that's just the efficient way to do it and that's ultimately everybody benefits uh as long as you do have an Open Marketplace because you make it I would say uh High barriers to entering requirements essentially on one side just in terms of just how sophisticated you have to be while allowing people on the other side to need to be less sophisticated but as long as there is a competitive market uh

that is operated in a fair manner then they can't be taken advantage of hmm is is one way of saying this though Dan that rather than removing the oracle it's kind of like bring your own Oracle maybe maybe there's a synonym here maybe we're saying one of the same thing because now that I I look back at kind of uniswap V3 right or any of the versions of uniswap basically I you know we might say that's an oracle this um no Oracle protocol Oracle lists Oracle lists protocol um but actually you kind of have to bring your own Oracle don't don't you also you get kind of like owned and I'm not saying a specific Oracle but you have to kind of know at what price point you're going to like LP uh you have to

kind of set your ranges yourself you have to sort of bring some sort of source of knowledge what they call it an oracle or not um so maybe that was already bring your own Oracle and that's what you're what you're saying we could do the same with lending and borrowing uh my understanding this like how would you how would you articulate this yeah more more or less and I think the same way that we've seen as uni V3 you know has made it harder to LP um that there have been a number of uh different services and protocols that have popped up to make it easy for retail users to LP for certain types of pools in certain ways uh because they're they're kind of monitoring and bringing in this external information for you but if you want to go and use it raw

yourself you can uh but there's essentially a lot of uh even if we don't call them options effectively people are offering forms of options when they're lping either in uh you know dexes or in lending protocols and here it's just being made more explicit where there is essentially embedded options uh in a lot of the lp activity that's happening in these uh you know oracle free versions of lending protocols and and also various if you want to get to like Oracle derivatives absolutely that's a big piece of this is you're you're effectively embedding options but in such a way that you don't have to like go deep on options pricing

and Theory to be able to use these protocols in various ways but you you probably do uh for at least one side of the market want to Outsource uh your lping to somebody who has that level of knowledge whether it's an individual whether it's a centralized service whether it's a decentralized protocol um any of that is possible and the advantage of this design is if a chain link Oracle goes dark like the entire protocol doesn't just kind of disintegrate under it which could be the case with many your Oracle designed protocols today like really bad things happen if the price feed kind of

stops erratic goes erratic yes well absolutely and to be clear that hasn't really happened um and and also if you think about it let's say that you know 95 people are relying on then chain link via Services built on top of the Oracle free protocol that doesn't necessarily like help overall except that right except that the way these Protocols are then designed is saying okay we're we're actually effectively embedding puts in uh the liquidity provision piece of this and so you're saying hey worst case if this can't be liquidated um in an efficient manner I will accept

this collateral at this ratio in return and so therefore you have already said like hey worst case scenario oracles down whatever happens here is is essentially the arbitrated outcome that will take place as opposed to saying like oh man now look this this pool is insolvent the protocols and solvents everyone's like beating it to the exits we've got all these problems uh it's keeping risk much more isolated and more clearly defining what happens in extreme Market dislocation situations and I think that is very powerful because we've seen time and again where the uh like manipulation of you know price

feeds for certain assets but they're on chain or off chain um or you know or or exploits or other things protocols will end up in a state where like the Dow is like well what do we do um and and try to figure out like what is the right way to handle because different people have different expectations and there's not like necessarily A a clear way that this is supposed to be resolved because by definition when these things happen they they were unexpected um and then we we so uh governance will deal with it and I think it's better if we say okay look you were coming you were getting rewards there's risks and they're very clear up front and yes we can use external tools other things to help manage those but fundamentally you need

to know what you're getting into and you can choose different risks than I choose where then David chooses um and so we can all still be interacting in the same Market with our different risk preferences and still have pooled liquidity and I think that is what is super exciting about these protocols is that ability to not massively fragment liquidity but still allow individual expressions of the risks and dependencies that you're willing to accept now this is very cool I mean this is um so a very clean wind down and another word that comes to mind to describe this is kind of resilience so these protocols would have sort of a self-healing type of nature so one

Oracle goes down like chain link or something well guess what the market is very incentive to put an another Oracle solution in place so you know Market participants can kind of bring their own Oracle and the kind of the protocol self-heals we've seen something similar with ethereum and it's Mark multi-client architecture right where we had that you know finalization event where ethereum wasn't finalizing a few weeks back and uh it was because there was an issue with with two of the clients it turned out but good thing we had a third good thing we had a fourth and the network kind of continued to march on this also when you're talking uh reminds me of like this is all about maintaining Fair orderly and efficient markets right it's like orderly and efficient markets by

the way that that is the mission of the SEC so uh I'm sure Gary Gensler and and team would be a fan of this or at least they would if they operated on on first principles but um I guess like um a higher layer of of or a lower layer of of kind of primitive that other protocols other things can build on and I guess we would have kind of an app layer maybe a D5 saver or something like this helping individual retail users kind of manage their their positions across these so do you think in terms of broad categories we've talked about decentralized exchanges and we've seen Oracle lists decentralized exchanges do you think we the future really for Lending and borrowing on um in D5 is oracleless lending and borrowing can we

like take that entire category and make it oracleless are there other categories Beyond lending and borrowing yes uh I I think we can whether we will is is very much an open question right I think it is absolutely possible but to David's Point like it's hard right like it's our I think maybe your point around it's like it's harder than what we were what we have been doing it requires rebuilding some of the things that we've already been built and can we do that fast enough um can we can't do people care enough to do it uh I I hope so but I don't know uh uh we might see that just like there's no demand for this in the market and

then people don't do it um and that will you know that's a choice that kind of like we as an industry have made that individual users have made uh but you know I want to at least draw out this potential future path that I think would be more robust uh and again I've seen a bunch of teams that are already starting down this path and so I want to help shine a light and bring more awareness to that and hopefully encourage more teams to think about this path if it wasn't already something that they had in their head well I think if we're thinking if with an advertarial mindset which we should be thinking in an adversarial mindset if it can be exploited if it can be hacked if something can go wrong it will go wrong

at some point in time and so I think we should all be concerned when like as 50 of the tvl is one Oracle erratic Oracle away from getting liquidated it's like I think perhaps we should assume that that is going to happen and I think really the question is uh just like how on chain Dex volume is up post FTX do we win do we want to get our on-chain borrowing and lending up into uh Oracle free protocols before or after there's a major Oracle exploit I think is the big question but either way it's going there uh it's just a matter of time Dan and to be clear this is not the only thing that we need to do to affects device security I think this is just part one all right

so three and there's a lot of other ideas I'm sure that other people have and I want to get the conversation going but um I'm going to be touching on topics like uh how do we actually introduce circuit breakers in a way that maintains permissionlessness and composability while presenting you know uh hundreds millions of dollars from just like disappearing in one transaction uh how do we actually get to what I'm calling generalized multi-party Sentinel contracts basically permissionlessly delegate in a non-custodial way to multiple parties to help protect protocols and individual users um and then also really thinking a lot more about bounties and how we can have significantly larger bounties that scale with the value of risk and create the

incentives to better secure the ecosystem so these are just a few ideas that I'm looking forward to writing about and to discussing with people um and I know there's a lot of other people that are starting to think more about security but I've started here because I think this idea of a layered approach while allowing for unified markets actually underpins a lot of those other ideas as well well Dan thank you for coming on and walking us through this conversation you even mentioned a handful of projects and teams but overall who are the the leaders in this space of Oracle free dependency free protocols if people are curious to go and poke around and learn a little bit more uh what are some standout projects well I mentioned a couple earlier that were very early in

terms of like panoptic and Timeless um the I would say blurs blend um is a great example of this now that that has become very popular uh there's a bunch of others uh that are that are coming up soon uh you know number of which were invested in it nascent so those um some of these are ajna uh ethereum credit Guild uh meta Street which does kind of nft based lending uh with their automated tranche makers doing some very cool stuff so there's a number of folks that are coming in this space and and um very excited to to see them all be in market and see how it plays out in real life well awesome we'll uh end it there Dan this has been great always always game to make D5 a bit more d a bit more uh

decentralized I should say hey we got to work on that now right now it's it's it's the time uh so hopefully some of these these teams and projects are coming to Market soon uh and uh we appreciate you sharing all this with the bankless nation thank you well thanks for having me on for the discussion recent disclaimers gotta remind you of course none of this has been Financial advice it never is on bankless ethify all this stuff is kind of risky you could lose what you put in but we are headed west this is the frontier it's not for everyone but we're glad you're with us on the bankless journey thanks a lot