The Primitives Needed to Power a Complete DeFi Ecosystem
By 0xbrainjar & Karel Kubat, CTO
When working to build a better DeFi industry, it is pertinent that we consider the space from the ground up and architect a solid foundation. A solid foundation can then form the basis of everything constructed upon it to be able to perform steadily and optimally. Moreover, this foundation needs to be unified, cohesive, and interoperable which represents the ethos of DeFi industry — composability.
These reasons underpin the importance of DeFi primitives as critical infrastructures that allows anyone to build and solve the current challenges developers and users face when interfacing with DeFi. Primitives are the essential building blocks of technology that can be combined and leveraged in a variety of ways to facilitate higher order DeFi functionalities — current and future.
While there are many great initial offerings for DeFi primitives, as an industry, we still have a long way to go to reach DeFi’s maximum potential. Many existing primitive options are currently not interoperable or composable, posing an obstacle to the chain-agnostic DeFi of the future. Below we outline a vision for a complete suite of DeFi primitives, which, if all constructed, can be combined in a LEGO-like manner to build any sort of powerful dApp imaginable.
In this article we describe what we believe are the necessary primitives for a healthy DeFi ecosystem. We then go on to showcase actual examples of independent primitives that leverage Composable’s technology stack. These primitives can work together in the holistic ecosystem and are capable of birthing new primitives and solutions through collaborative innovation.
DeFi Primitives, as envisioned by Composable Finance
There have been many proposed lists of what DeFi primitives entail, including those considered by some of the top universities in the world (such as this list proposed by Campbell R. Harvey of Duke University, or this article out of Imperial College London and Cornell University). Yet, there is no real consensus on precisely what should be considered a primitive, or what is considered a more advanced core or application tool.
At Composable Finance, we envision the DeFi primitives as consisting of the following:
- Oracles to provide the most recent and accurate pricing data
- Vaults for securely storing funds for purposes including providing liquidity
- Automated market makers (AMMs) to automate and remove third-party reliance in the liquidity providing process
- Liquidity mining to ensure sustained liquidity via incentivizing the liquidity contributing process
- Lending/borrowing to enable increased functionality while retaining ownership of the collateral asset (or, on the borrowing end, having an opportunity to earn yield)
- Synthetics to mimic the value of another asset without the actual need to purchase that asset directly
- Governance tooling to ensure democratic, participatory advancements in the DeFi space
- Derivatives allow users to gain exposure to the risk/reward profiles of underlying assets without owning them. Derivatives can be leveraged to magnify risk/reward profiles.
- Bonding curves is the decentralized infrastructure required for permissionless price and token allocations. Bonding curves are a necessary feature for any blockchain as they ensure a predetermined price discovery for assets so that price is not affected by any external factors
- Indices to track performance across the market and improve user decision-making
- Money markets to provide short-term funds and trade debt instruments, lending positions and more
- Stablecoins to deliver a consistently-valued asset for stably storing funds, forming payment contracts, and more
Composable believes this to be an appropriate list given how vastly the DeFi industry has expanded. Further, the more building blocks available to DeFi developers, the more they can build — and the more value that users can derive from the space.
How Composable is supporting new and improved DeFi primitives
We have always envisioned these primitives to build together into core tools, which can then be integrated into the most advanced applications (as has been described in this article and others). To summarize, DeFi primitives are essential base-level components powering the industry. Core (secondary) components build on primitives to create key value-generating processes. Application (tertiary) functions are more advanced, and incorporate core and primitive components to generate sophisticated financial tools. This ultimate goal is supported by the efforts of Composable Labs as they provide capital and knowledge resources through the incubation of primitives that are looking to launch into the ecosystem.
Current primitive offerings in the Composable Ecosystem
As an ecosystem pushing forth absolute blockchain agnosticism, Composable’s tech stack is already being leveraged to deploy vital DeFi primitives specifically on our cross-chain hub — Picasso. The teams that are building these primitives have identified the benefits of collaborating and integrating within the Composable ecosystem. Here we outline a growing list of projects that are either exploring integration or have already been integrated within the Composable ecosystem.
Pablo is a decentralized exchange (DEX) and forms a central part of Picasso’s core infrastructure. By design, Pablo is able to generate significant value and houses deep liquidity with the effective combination of protocol-owned liquidity (POL) within a DEX and a DEX’s dynamics. In addition to providing core DeFi functionalities similar to stableswap AMMs and Uniswap, Pablo adds distinctive features like AMM-owned liquidity, LBPs and bonding functionality.
Pablo adopts the bonding mechanism to attract deep liquidity to its DEX pools, where LPs bond their LP tokens to get $PBLO tokens at a discount. By this, Pablo permanently owns the LP tokens, which means the Picasso treasury holds them therefore,Picasso can use them for market-making functions. With the token being 100% community-owned, 80% of trading fees will be distributed to LPs and 20% to Pablo token holders who are staking.
CHAOS is Picasso’s rebasing treasury owned liquidity token for distributing value to holders within its ecosystem. As the native token for the treasury pallet on Picasso other pallets on Picasso will be enabled to deploy on it. CHAOS allows value generated within the network to be distributed effectively. This is the case with Picasso as an L1, where CHAOS acts as its treasury management asset and moreso, the CHAOS treasury allows Picasso to compound the value of protocols built in Picasso for the entire ecosystem whilst providing incentives and liquidity to effectively bootstrap activity. Unlike other ecosystems, the treasury will be actively managed to ensure assets are being allocated as efficiently as possible within Picasso protocols.
Ultimately, CHAOS allows the L1 ecosystem of Picasso to become self-sufficient in TVL and liquidity, and additionally in securing future parachain leases. On top of this, CHAOS acts as a creative way of distributing value from the significant revenue that it retains, manages, and distributes back to token holders while also acting as a gauge for determining the emissions and liquidity directed to protocols on Picasso. All these functionalities thrive without resorting to selling pressure of protocol owned funds.
The Mosaic transfer availability layer uses machine learning liquidity forecasting methods and leverages a network of existing bridging infrastructure to rebalance funds on its LP vaults on different chains. To ensure a transaction goes through successfully, Mosaic employs JIT liquidity bots in case passive liquidity rebalancing falls short of the mark while equally employing a dynamic fee modeling to ensure LPs supplying funds into Mosaic’s vault can do so at a competitive rate. As a result, Mosaic is able to facilitate the biggest cross-chain and cross-layer transfers to create a new generation bridging infrastructure among L1s and L2s including Polygon, Arbitrum, Optimism, Starknet, Avalanche, Fantom and Moonriver.
Cubic is a primary pallet that sets the standard as the first vault pallet in DotSama. Vaults are vital infrastructures leverageable universally in DeFi. Their utility is tied to storing and moving tokens for other primitives or dApps such as lending protocols and automated market makers (AMMs) that require vault technologies to store and move collaterals without incurring expensive transaction costs. In general, vaults act to combine user funds into a single managed pool to perform additional functions such as collateralising or yield farming like Yearn. Their primary purpose is to aggregate these funds and pool gas fees for executing complex transactions among users.
As a primary pallet built into the runtime of the Picasso parachain, pallets and protocols on Picasso and other substrate-native blockchains in DotSama can leverage Cubic to pool funds where assets are staked towards any particular strategy for generating yields across vaults. Cubic ties the Kusama ecosystem, Mosaic (encompassing all the major EVM chains and L2s), and Centauri (Composable’s Picasso-IBC bridge connecting DotSama to Cosmos Network) together for the unification of yield generated between the DotSama, EVM-compatible and Cosmos ecosystems in vault strategies.
For developers to securely deploy innovative solutions, dApps or protocols require reliable price feeds for effective functionality. Apollo is a MEV-resistant decentralized oracle that is leverageable by pallets to get accurate information in a decentralized manner. Apollo will be flexible enough such that protocols can employ it based on their differing levels of security. We have orchestrated the design of Apollo into a leverageable oracle stack and we intend to work with partners who wish to utilize this technology.
Overall, Apollo sets the standard for oracles first in DotSama and other ecosystems using different blockchain hooks to medianize (i.e. calculate and bring towards the median) and update data.
To connect the Cosmos ecosystem to Kusama, Composable created Centauri — a bridging infrastructure that can communicate with Cosmos’ IBC (Inter-Blockchain Communication) protocol and enabling the interecosystem transfer of assets between Cosmos and Substrate-native protocols. As an internet of blockchains, Cosmos houses thriving protocols like Osmosis which has exploded in TVL in recent times. Centauri creates the underpinning link between existing and soon to be deployed pallets on Dostama and Cosmos, a first of its kind Kusama — Cosmos bridge that will further help boost utility for assets within both ecosystems.
Angular is another primitive that serves as a cross-chain money market which DeFi developers and end-users can leverage to get exposure to isolated lending pools for leveraged trading, derivatives, options trading, and further opportunities for yield-generation through liquidity pools. Whereas Angular falls under the broad category of DeFi lending protocols, its distinguishing feature is the ability to isolate lending pairs, helping to isolate risk to a single pool. This singular feature is not always the priority of other lending protocols.
As a hub for cross-chain lending and borrowing, Angular introduces the concept of leverage-as-a-service for DotSama with its powerful, yet malleable capabilities. DeFi developers can leverage Angular to create basic protocols built around lending for use cases such as leverage on interest-bearing assets while equally serving as a lending protocol for leveraged trading, options, and derivatives for Picasso and Kusama-based projects. This creates avenues for DeFi developers and end-users to better utilize countless assets or LP tokens not available in other existing lending protocols as collateral assets. By this, Angular helps to accelerate DeFi adoption with its native ability to leverage lending protocols to create more sophisticated financial tools readily available in centralized finance.
Liquidity provisioning (LPing) is one of backbone that continues to power DeFi where liquidity providers (LPs) supply funds into pools that other essential infrastures like DEXs, lending protocols leverage to offer their value-offerings. In exchange, LPs earn yield for their risks. But due to the siloed nature of DeFi, LPs find it rather difficult to maximize their earnings through switching of LP positions because of gas fees and interoperability issues.
Instrumental Finance provides an opportunity for users to maximize their earnings from LPing, without facing interoperability issues through chain- and layer-agnostic LPing solution. Users simply deposit funds into an Instrumental Vault (powered by Cubic) which automatically allocates LP funds to the highest yield-generating LPing platform and pool available, regardless of the layer or chain it is on. Instrumental leverages Mosaic SDK’s cross-chain functions to route LP funds to the best paying yield paying platform out there. Via its chain-and-layer agnostic LPing service, Instrumental opens up yield opportunities and less liquidity fragmentation.
Due to the radical transparency of blockchains, the need for an anonymity-preserving protocol where users can maintain privacy while carrying out their financial transactions is a no-brainer. Whirlpool is a Substrate-native privacy protocol. It enables anonymized transactions, an important ethos of decentralization and cryptocurrency. Overall, Whirlpool Cash will be the strongest privacy protocol in the DotSama ecosystem through the implementation of zkSnarks and innovative cryptographic proofs to achieve absolute asset-transferral anonymity for users.
Although Whirlpool cash which allows tumbling services like Tornado cash helps to preserve privacy, it comes with an additional feature where users tumbling their funds can simultaneously generate yield on their assets. Whirlpool Cash represents a first of its kind 100% non-custodial asset transferral system in DotSama that developers can use to spin-off their unique privacy-preserving financial applications. Ultimately, Whirlpool Cash enables users to master cross-chain privacy transactions.
A strong foundation of primitives are the key to the successful building of a healthy DeFi ecosystem, just as strong building materials are necessary for a reinforced architecture and good ingredients are vital for a delicious meal. As DeFi is still evolving, it becomes ever more crucial to have a landscape available for interoperable primitives to flourish in order to create powerful and inter-connected applications to craft a strong overall DeFi industry.
The current offerings for DeFi primitives are largely limited by their lack of interoperability and composability, subsequently holding back the entire industry. Composable is thus setting out to provide the necessary groundwork to enable teams to build and sustain their primitives. This inturn provides users with a complete set of DeFi primitives, designed to allow DeFi to reach its full potential.
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If you are a developer with a project you think fits our ecosystem and goals, and you would like to participate in an interactive testing landscape with the team at Composable Labs, please send a direct message to @ComposableL on Twitter.