Cardano DeFi #013: Indigo

Written interviews with DeFi projects on the Cardano blockchain.

Today’s guest on the Cardano DeFi column is a DeFi solution that allows users to mint derivative or synthetic digital assets by putting up collateral: Indigo.

The previous guest was a multisig and smart wallet that does not store any private keys and allows users to create more complex and nuanced custody arrangements.

This column is where I invite Decentralized Finance (DeFi) projects to introduce themselves and share their vision, allowing me to connect with and learn about the Cardano Ecosystem.

Hey, glad to have you here. Please introduce your team, where are you from, what are your backgrounds?

My name is Daniel but you may know me as Defi-dan. I’ve been Marketing Lead for close to 3 years for Indigo Labs, from the days when V1 was still just an early-stage idea, through launch and now still as we quickly approach the release of V2.

Indigo Labs is a software development firm that built and shipped the Indigo Protocol after the Indigo DAO approved its launch in November of ’22. Indigo Protocol is currently the TVL heavyweight champion of the Cardano ecosystem; we hope that the Protocol remains a leader in the space for years to come!

Indigo Labs currently has a team of 15 consultants spread across the globe all with varying backgrounds in entrepreneurship, software development, security, and finance and more, so we’re a very diverse team with many skill sets.

What is Indigo and why have you chosen Cardano for the protocol?

Indigo Protocol is a DeFi tool that allows users to mint derivative or synthetic digital assets by putting up collateral. The new synthetic-assets that users mint — called ‘iAssets’ in Indigo — track the price of BTC, ETH, and USD on centralized exchanges. By minting an iAsset, the user can trade the price action of those assets without actually owning BTC, ETH or USD; allowing for seamless transactions and unique trading strategies. By leveraging blockchain technology to create synthetic assets, Indigo Protocol eliminates intermediaries and enables users to gain exposure to real-world assets, non-Cardano native digital assets, and more without owning the underlying asset itself that the synthetic mirrors.

Indigo Labs chose to build the Indigo Protocol on the Cardano blockchain for a few reasons, based on the features and advantages of a UTxO blockchain like Cardano.

First is Decentralization and Security: Cardano is known for its strong focus on decentralization and security, which are critical for any DeFi project like Indigo. Its Ouroboros proof-of-stake consensus mechanism is designed to ensure high levels of security while being energy and fee-efficient.

Scalability and Performance: Cardano’s layered architecture and ongoing developments in scalability solutions are attractive for DeFi protocols. This is because they require high transaction throughput and minimal latency to function effectively.

Interoperability and Compliance: Cardano aims to provide interoperability between various blockchain networks, a significant advantage for a synthetic asset platform like Indigo that may want to integrate assets across different blockchains. Additionally, Cardano’s approach to regulatory compliance makes it a suitable choice for projects looking to align with future regulations in the crypto space.

Research-Driven Approach: Cardano’s development is grounded in peer-reviewed research, ensuring that its technology is robust and reliable. This research-driven approach aligns with Indigo’s need for a solid and well-tested underlying blockchain infrastructure.

Strong Community and Ecosystem: Cardano has a large and active community, which is beneficial for any project building on its network. This community support can drive the adoption and growth of the Indigo Protocol.

ADA Rewards and Liquid Staking: Cardano’s native token ADA was the first to offer staking rewards, and Cardano’s infrastructure allows for features like liquid staking. Indigo utilizes this by enabling ADA collateral within Collateralized Debt Positions (CDPs) to continue earning ADA rewards from the Cardano network, adding an extra layer of utility and incentive for its users.

One thing that the Labs team did not account for back in 2021, but has opened the floodgates of what is possible on Cardano, is Aiken. Aiken is a relatively new smart contract functional programming language for Cardano written in Rust.

For DeFi, it makes the development process more streamlined without sacrificing the benefits of the eUTXO model. Its superior performance has unlocked doors that were previously closed due to the constraints of PlutusTx. Features that were deemed too complex for the initial version of the Indigo Protocol can now be revisited. These advanced functionalities, which had to be shelved during the development of v1, are now back on the table, thanks to Aiken’s capabilities. As the protocol has grown in popularity and usage, the need for optimization has become a priority for v2 development.

Can you expand a bit on what synthetic assets are? What are their pros and cons?

Synthetic assets are collateral-backed digital assets created by a user that mirror the price of (or derive their price from) other digital or real-world assets without the user owning the mirrored asset. These are commonly used in the decentralized finance (DeFi) space, including protocols like Indigo.

Synthetic assets can theoretically mirror the value of any global asset with a reliable price source, such as commodities, currencies, or indexes just to name a few. The only requirement is a secure price/data feed for the asset that the synthetic can track. Indigo Protocol currently has several iAssets such as iBTC and iETH which track the value of Bitcoin and Ethereum, respectively. Perhaps Indigo is most commonly known for iUSD which tracks the value of the US Dollar to support the Cardano ecosystem with a viable stablecoin solution (though we still need V2 features to help it maintain its peg more accurately).

All iAssets are overcollateralized by the user that creates them. In the DeFi context, these assets are typically created using smart contracts and provide access to a variety of global assets, which might be otherwise inaccessible due to geographical, regulatory, or other practical constraints.

Advantages of Synthetic Assets and iAssets

Diversification: Users can gain exposure to a wide range of assets without owning the actual assets or leaving the Cardano Blockchain.

Accessibility and Inclusivity: Synthetic assets democratize access to various markets, especially for those in countries where mature financial tools are not available to the average citizen.

Efficiency and Lower Costs: iAssets offer comparatively low transaction costs compared to trading the underlying assets and can be more efficient in terms of execution and settlement.

Innovation in Financial Products: They allow for the creation of unique financial products and strategies that may not be possible with traditional assets. Having the ability to utilize iAssets for not just their spot holding potential, but also the ability to be used as collateral in other DeFi systems allows for true composability which benefits the pursuit of creating valuable utility of iAssets.

What will the release of Indigo Protocol V2 bring to the Cardano ecosystem? What are the new improvements, optimizations, and features?

The Indigo Protocol V2 marks a significant evolution with its restructured fee system, aiming to bolster the protocol’s economic health and provide consistent opportunity for INDY stakers. Detailed in the articles “Indigo Protocol V2 Fee Restructure” and “Introduction to the Indigo Protocol V2 Transition,” this update introduces key components such as the Maintenance Ratio (MR), Redemption Margin Ratio (RMR), and the Interest Mechanism.

Maintenance Ratio (MR): This new ratio ensures responsible borrowing by setting the minimum required collateral for minting additional iAsset, enhancing the protocol’s financial stability by disincenivizing excessive debt minting.

Redemption Margin Ratio (RMR): Integral for maintaining iAssets’ peg, the RMR balances the costs and incentives in the redemption process, crucial for the protocol’s hard peg targets.

Interest Mechanism: A major introduction in V2, this mechanism generates consistent ADA revenue for the Indigo DAO and contributes to the peg stability of iAssets.

DAO Revenue and INDY Stakers Benefits: The V2 fee structure is designed to provide a stable revenue source for the DAO and a more consistent flow of protocol fees for INDY stakers, aligning their interests with the protocol’s performance and growth.

For an in-depth understanding of these updates and their impact on the Indigo Protocol and its users, read the recently released “Indigo Protocol V2 Fee Restructure” and “Introduction to the Indigo Protocol V2 Transition”. They offer valuable insights into the specifics of the new fee model and the broader enhancements introduced in V2.

You have 2 proposals for Project Catalyst’s Fund 11, tell us about them, what are they bringing to Indigo and the Cardano ecosystem?

Proposal #1: Indigo Protocol V2 Audit | Cardano.ideascale.com/c/idea/112532

The first proposal centers around the Indigo Protocol V2 Audit. This initiative is crucial for advancing and enhancing the security and trustworthiness of the Indigo Protocol. Our team is proposing a comprehensive audit of the Version 2 Aiken Smart Contracts by MLabs. This audit is not just a routine check; it’s a fundamental step to ensure that the new version retains the robust security features of its predecessor while integrating new functionalities and improvements.

The impact of this proposal on the Cardano community is multifaceted.

• Firstly, it significantly boosts the security and reliability of the Indigo Protocol, a cornerstone for user trust in the DeFi space.
• Secondly, it aims to enhance the protocol’s efficiency, aligning with Cardano’s overarching goals of scalability and seamless transaction experiences.
• Thirdly, the expansion of iAssets on the Cardano DeFi ecosystem, which this audit will facilitate, is expected to open up new avenues for financial innovation and user engagement.

As with any completed project proposal that Indigo has entered into a Catalyst funding round for community review and grant funding approval, the protocol will be open-sourced with license as with V1.

Proposal #2: Indigo Iris | Cardano.ideascale.com/c/idea/113424

The second proposal, Indigo Iris, addresses a critical need within the Cardano ecosystem: streamlined access to decentralized exchange data. Spearheaded by the Labs tech/development team, this project aims to develop an open-source indexer and API/websocket feed. By doing so, it seeks to solve prevalent issues related to data accessibility and fragmentation across DEX-related tooling on Cardano.

This proposal is poised to make a substantial impact on the Cardano community. It will enhance the accessibility of DEX data, which is vital for developers and traders alike. The open-source nature of the Iris tooling, coupled with our comprehensive documentation, will enable community-driven development, fostering innovation and collaboration within the ecosystem.

Furthermore, by providing standardized, user-friendly interfaces, Iris will empower developers to create a diverse range of applications, analytics tools, and trading bots, thereby enriching the Cardano trading experience.

Amazing. Any closing thoughts? Where can people learn more about Indigo?

It’s been a pleasure to share insights about the Indigo Protocol, V2, and the contributions to the Cardano ecosystem. We are deeply committed to innovating within the DeFi space through the Indigo Protocol as well as tools like Dexter and Iris.

We hope to significantly improve Cardano with new methods to enhance the user experience, bolster security, and streamline operational efficiency. Our approach is community-centric, valuing and integrating user feedback and participation, which are pivotal in driving the evolution of the Indigo Protocol.

Looking ahead, we are thrilled about the upcoming release of Indigo Protocol V2 and our ongoing projects, reflecting our dedication to offering secure, transparent, and user-friendly DeFi solutions. These endeavors are not just milestones but stepping stones toward a more robust and innovative future in decentralized finance!

Website | Protocol | Discord | Twitter | Indigo Paper

Disclaimer: The opinions and views of the people interviewed are their own and do not necessarily reflect those of the Cardano Foundation or IOG. Moreover, this content is for educational purposes, it doesn’t constitute financial advice.