When Bitcoin Derivatives Come to Ethereum, DeFi Makes Levers Safe and Exciting
“DeFi The World” series live AMA, session #1
In 2019, we have seen a new term, DeFi, in more and more articles and events after the cryptocurrency market was recovered. DeFi is also called Decentralized Finance (Open Finance). It refers to the Decentralized Finance service built on the blockchain platform.
A system review and summary of the ecosystem of Ethereum DeFi was published by ConsenSys in March. It covers more than 100 projects in multiple categories, including Stablecoins, DEX (decentralized exchange), Investment, Financing, Derivatives, Payment, Lending and Insurance platforms, suggesting that this is an early stage in an entirely new industry.
So here comes the question: Why do we need DeFi? What would DeFi look like, and where would DeFi go? In these sessions, Course Link will jointly launch the first interactive interview session — “DeFi the world series live AMA” with Hydro Protocol, DOS Network and CHAINNEWS at the end of July.
We will invite several promoters and pioneers in DeFi world interpreting DeFi for blockchain enthusiasts from the perspectives of blockchain development and financial market as well as leading everyone to explore and discover the DeFi world.
In the first session, we were honored to invite Seth Rubin, co-founder and CEO of MARKET Protocol and Anton Buenavista, core developer and ecosystem integration lead of Kyber Network to share their insights on DeFi derivatives with us.
❓ Diane: Hey Seth and Anton, could you please introduce yourself and how do you start your career in crypto industry？
: Thanks Diane. I'm happy to be here and appreciate the chance to speak with everyone. I’m Seth Rubin, Co-Founder and CEO of MARKET Protocol. In a past life, I spent 13 years as a derivatives trader and market maker. I entered crypto in 2015 first as a trader, it took until late 2016 to understand how special space was on the tech side. I’ve been working full time on MARKET Protocol since mid-2017.: Hello everyone. Glad to be here as well. I got into crypto first in 2012. It was because of an article talking about Bitcoin and the Silkroad website. As I got more into the technicals of blockchains, I was more interested in other projects that did more complex operations, such as Mastercoin and Counterparty. So when Ethereum was first announced in 2014, I followed the development closely and was one of the early members of the Ethereum community in Singapore. I was doing crypto projects on the side while I still worked at Intel. I joined Kyber in middle-2018 to work on crypto full-time.【Part 1】 MARKET Protocol：
❓ Diane: What is MARKET Protocol and MPX?
: MARKET Protocol lets users mint tokenized derivatives which can represent any asset, such as, Apple shares, YEN, or leveraged short Bitcoin. We are built on Ethereum using smart contracts to enforce token rules with no counterparty risk. Designed as ERC20 assets our tokens can trade on any exchange or application.MPX is our DEX built on 0x and allows users to trade synthetic assets. We think of it as the “tasting room” where users can interact with different assets and allows us to offer to get direct user feedback and quickly iterate UI/UX.
❓ Diane: What is SBTC, LBTC, and MKT? What‘s the motivation for users to trade or hold them?
: Our initial products — SBTC and LBTC represent leveraged short and long bitcoin positions. As the price of bitcoin declines SBTC goes up in value and as the price of bitcoin goes up LBTC increases in value. We offer traders leverage natively by design, it is currently around 2x — 4x and we’ve seen it as high as 35x earlier in the month. All positions are fully collateralized, with no margin calls, or liquidations.MKT is our token and is used to pay reduced fees when minting LBTC and SBTC. As we roll out our version 2 roadmap MKT token holders can act as validators securing the settlement and assisting in dispute resolution in exchange for a portion of the fees generated on the network. Here is a link to our version 2 roadmap:
❓ Diane: We know that the derivatives trading platform needs Oracle to provide the price of the asset when the asset is delivered. How do MPX Oracles get the settlement price? What is your solution?
: Right now, our oracle grabs the price of bitcoin from Coincap (which is an index of many exchanges) and uses that price to settle SBTC and LBTC. There is a 24-hour settlement window during which the settlement value is validated by MARKET Protocol. In the future, using MKT validators we decentralize this process and in the event of a disputed settlement implement a backup.❓ Diane: Last month, the derivative platform Synthetix lost assets because of Oracle attacks. Is there a better solution? What is your solution to the oracle hack like the one that Synthetix suffered from?
: We use oracles differently than Synthetix an oracle issue like that cannot happen with MARKET Protocol as there is no exchange rate to set or streaming market data needed. The price of SBTC and LBTC are not set by an oracle but instead by efficient markets. Traders and market makers know the rules for settlement ahead of time — for example in 28 days we will settle to the price of Bitcoin on Coincap and then buyers and sellers come together and determine the market price based on these rules. The settlement is then validated as mentioned previously to further ensure the integrity of the data.❓ Diane: next question about DeFi market:https://defipulse.com/, https://defi.dapp.review/
Do you think there is a ceiling board for DeFi market？From your point of view, how big is your market? And where are the users?
: I don’t think there is a ceiling to DeFi. As we create products and bring new users to space we will see more and more growth. Speaking about our market, right now we see about $5bn in crypto assets traded daily versus $5 trillion in the traditional space. There's a huge amount of potential as we bring more and more assets on the chain. We have an opportunity to improve the way people access, trade and custody those assets delivering value to anyone in the world.❓ Diane: The price floor and cap are set up by your team but why not give the right of pricing to users？
: A few quick definitions. The reference asset is what we are tracking so, in this case, its Bitcoin. The Price Floor and Price Cap are the minimum and maximum values the reference asset can trade to before the token expires. This allows us to always define the max loss of long and short positions which in turn allows us to remove credit risk and guarantee solvency.This blog post details pricing:
https://cms.marketprotocol.io/blog/post/mpexplained-pricing-position-tokens/
This one details settlement and expiration:
Currently, we set the price floor and price cap. We would love to have our users help us make these and other governance decisions and expected in version 2.
❓ Diane: What do you think of UMA Protocol and SET protocol？
: I think both projects are pretty cool. The ETH moving average cross trading bot SET Protocol recently released is awesome. We could bring other assets on-chain allowing the same types of strategies to be run with Bitcoin, EOS, Oil or a stock index. UMA is similar in some ways to MARKET Protocol. But we differ significantly in our architecture and how we handle margin, leverage, and liquidations. I respect and appreciate their work. They are also more focused on the oracle side and recently released product to testnet. We’ve had early discussions with Allison (UMA co-founder) and their team around their decentralized oracle design.【Part 2】Kyber Network：
❓ Diane: What do Kyber and WBTC work？
: So Kyber was one of the founding members of the WBTC community initiative. Kyber initially helped bootstrap WBTC liquidity, encouraged adoption, and helping with the consistent development of the standard. Kyber is one of the WBTC merchants that can send requests to mint and burn WBTC tokens in the WBTC DAO. You can learn more about WBTC in https://wbtc.network. We also have a community group in Telegram. Currently more members are being on-boarded into the WBTC DAO as merchants.❓ Diane: It seems that KYC makes the supply of WBTC under the need. Do we have any solution to minting more WBTC for DeFi market?
: We are continually onboarding more merchants through the DAO. Together with the other WBTC DAO members, we are exploring more ways to make the minting process more streamlined. The WBTC supply will naturally increase as there is more demand for it to be minted, such as in DeFi projects. In the last weeks, we have seen the supply of WBTC increase exponentially due to market demand.❓ Diane: Actually I ask this question because I find it hard to get WBTC from BitGo.
: Right now, it is better to get WBTC through the merchants. But there is an upcoming solution from Ren I believe where they allow users to easily convert their BTC into WBTC. If you are planning to acquire large amounts of WBTC, you can reach out to us directly, and we can assist!❓ Diane: Kyber is a good old friend in CN community. With the time and efforts you guys have put in liquidity and DeFi, what is your core competitiveness and what are the lessons learned?
: For takers, our core competitiveness comes from the ease of integration, where we provide a single endpoint to tap on liquidity with good documentation and guides. Takers are also assured that they are getting competitive rates, as we tap on multiple liquidity sources.The ability to have multiple reserve types is another core advantage we have. It enables us to work with professional makers, token teams, decentralized liquidity pools/services like Uniswap, DutchX, and Eth2Dai. As for lessons, liquidity is still very important to us, so we try to onboard as many reserves from diverse sources as much as we can, for DeFi applications to use.
❓ Diane: What about sharing your latest progress? Any exciting news?
: We recently announced limit orders on KyberSwap. It’s a feature that many people have been asking for. The challenge was to make it work in a non-custodial way and to make it as trustless as possible.We’re really proud of it, and of course, we strive to continually improve it. We are also actively working on the Waterloo project to bridge between Ethereum and EOS. We recently had a DAO proposal where we transferred 1 KNC from ETH to EOS as an experiment.
Speaking of the DAO, we are currently running experiment #2 with DAOstack. We foresee it to be a slow process where we learn and explore together with the community on not just the platform to use but discover and figure out solutions to issues that arise with decentralized on-chain governance.
❓ Diane: ERC20 is not exciting anymore. As a trading infrastructure, what’s your thoughts on assets with big liquidity for DEX in the case that we don't have a perfect cross-chain solution？
: It is still in early stages, but we are definitely working on a great cross-chain solution. We announced the Waterloo relay bridge between Ethereum and EOS. We believe that different crypto assets will be present in different blockchains. In the long run, these relay bridges will be used to transfer crypto-assets between the different blockchains to enable trading activity across blockchains while using each one’s distinct advantages. For example, the EOS chain has the advantage of enabling higher frequency trading due to its higher transaction-per-second rate.While the Ethereum chain is considered more secure by the crypto community at large and currently offers more advanced financial primitives, such as with DeFi projects.
The ERC20 is a defacto standard. What’s interesting is the different projects being built on top of it, as we have seen in the space now. I think there will still be more unique uses of ERC20 or other standards derived from it.
❓ Diane: What do you think of the liquidity sharing？Is that not a tech problem but a business problem because liquidity is the core competitiveness for DeFi products so why they sharing it?
: There are many approaches to providing liquidity. For on-chain liquidity, for example, you have the Uniswap model that provides liquidity permissionless by using on-chain automated market-making smart contracts. Gnosis’ DutchX provides liquidity through the dutch auction model.The maker has a large algorithmic ecosystem that mints and burns Dai, which is pegged to the US Dollar. There are many more projects that provide on-chain liquidity. Finally, Kyber both helps provide liquidity through its reserve model and also aggregates these different liquidities into an aggregated liquidity pool that any user can access. So I think everyone can provide liquidity in their own unique approach.
❓ Diane: Do you think there is a ceiling board for DeFi market？From your point of view, how big is your market? And where are the users?
: The users mainly have to first familiarise themselves with crypto even before using these applications, so it is an additional barrier for adoption. However, we think that crypto should be as commonplace and easy to use as fiat money over the years. As such, we are hopeful that users will grow over time. So in essence, and echoing what Seth said awhile ago, I don’t think there’s a ceiling to DeFi market. Our market will naturally grow, as more users are on-boarded into the crypto space.【Part 3】General Questions For Both Guests
❓ Diane: How do you capture value by your token？
: Initially, our token provides a discount to anyone minting on the platform. In version 2, by staking MKT, participants can perform a service for the network and are in turn share in the fees generated by applications on the network. The MKT token creates a link between the quality of the work performed on the network (settlement, dispute resolution, governance) and stakeholders.: In Kyber, for every trade execution, 0.25% of its value is charged in KNC to the reserve. Majority of these fees are burnt. To date, we have burnt 1.7M tokens. Hence, KNC is a deflationary asset and should increase in value over time. At the same time, we are continually exploring other use-cases for our token, such as for on-chain governance and for discounts to products we are building, like the limit order feature, where users get discounts on trade fees based on the amount of KNC tokens they hold.❓ Diane: What do you think of the What are the obstacles before DeFi massively adopted？And are there solutions？
: I think the biggest issues now are UX and users. Some of the UX issues are addressed through technology scaling but in general, it’s still challenging for people to use DeFi and more broadly blockchain applications.We’ve seen a lot of great work go into making DeFi applications more usable and we’re on the right path but we have a long way to go before the general public is comfortable.
Right now most people in the space are hobbyists and professionals, it takes time and a desire to learn something new to use most DeFi products we need to get past that to be successful.
: To add to Seth’s answer, the better question is what obstacles must be solved before crypto/blockchain is massively adopted? The entire crypto market cap is at 300 billion USD. The US stock market is approximately 30 trillion USD. Crypto is still very small compared to traditional markets. If the rest of traditional finance adopts and participates in crypto/blockchain, then naturally there will be massive adoption in DeFi as well.In the meantime, DeFi projects will continually build their solutions to adopt for tokenization of real assets, cross-chain trading, scaling, and many many more.
All the while being transparent and decentralized as much as possible.
❓ Diane: DeFi projects can be divided into 2 types: trading (which is a verb) and assets (which is a noun). What do you think of the interoperability of DeFi projects?
: I think this is important to DeFi and the overall space. It means projects can focus on solving specific problems and leverage the work of other projects. It lets us grow the entire space. But problems can arise, including added complexity, backward compatibility and potentially compounding security vulnerabilities.: I think the DeFi space is very collaborative at the moment. We are seeing DeFi projects built on top of one another. For example, the Jain brothers created InstaDapp and DeFi Saver for users to open CDPs to draw DAI which is then immediately put into Compound to gain interest. As such, I think we’ll still see this movement of DeFi projects working in tandem to launch new products. Composability is a big feature of DeFi protocols and projects.❓ Diane: Built on Ethereum, what are the advantages and disadvantages? Do you think the incompleteness and limitations will be solved on ETH2.0? Will there be a better smart contract platform or public chain for DeFi projects?
: Right now Ethereum makes the most sense for us and most others. I’m hopeful for ETH2.0. If it makes sense in the future we would switch to a different platform or chain but right now its hard enough to get users and adoption on Ethereum let alone another chain.: Advantage of Ethereum: It’s the most popular and actively used smart contract platform currently. Disadvantage: Needs to solve scalability.I don’t think ETH 2.0 is a silver bullet to the current problems. There are still many issues that need to be considered (e.g. migration of current contracts from 1.0 to 2.0, and how they live in the sharded space).
There are of course alternative platforms that see good traction and developer activity, such as EOS, Cosmos, and Polkadot. We may see some kind of aggregation towards a few platforms, but honestly, only time will tell.
❓ Diane: We need more quality assets for liquidity. What is the key problem of bridging BTC or even off-chain liquidity to DeFi market?
: In this context, we need to give people an opportunity to make more money (leverage, new assets, access), protect the money they have (decentralized custody, shorting) and then can begin building liquidity.The value of the opportunity has to exceed any potential UX or educational speedbumps to really gain liquidity.
: One key problem to answer is how do you prove the value of an asset on-chain if it is pegged to an asset off-chain in a trustless, transparent, and decentralized manner? Tether is one of the simplest solutions to peg the US Dollar to a digital token. But it is completely centralized and the USD reserves are not transparent. The WBTC initiative is transparent, as anyone can review the reserves on-chain, and although it is managed by a DAO, it is not completely decentralized as the BTC reserves are held by a custodian.So there are still a few challenges to solve in order in order to bring more off-chain assets in a way that has no central point of failure.
❓ Diane: Which DeFi product do you use the most (except for your own product)and what do you think the killer DeFi Dapp will be like?
: I probably use Uniwap the most. It's straightforward and simple to use. The killer DeFi app is clear, intuitive and entirely abstracts that its DeFi. It's built with DeFi because it allows something previously impossible. It's trustless, it's democratic and it's borderless. That being said, I’m unsure what it actually does!: We have tried a lot of DeFi products out there, especially the ones that have integrated the Kyber protocol, to see what they can do. I’vetested out Compound / Set Protocol / DeFi saver / InstaDapp / Betoken to name a few. But there really is a lot of DeFi projects there which is great!
It’s hard to speculate what the killer DeFi project would be. But yeah, I guess it would mainly solve UX and onboarding issues, and maybe can do cross-chain transactions!
【Part 4】Questions From Community
❓ Diane: 「 Seth Rubin: There is a 24-hour settlement window during which the settlement value is validated by MARKET Protocol. 」More details, please.
: So at settlement right now there is a 24-hour window during which settlement can be disputed. In this case for version 1 MARKET Protocol will validate settlement and provide the correct value. That is how it is currently set up.As we improve and decentralize settlement MKT validators will approve settlement values.
If the settlement value is rejected we will use a backup settlement value.
❓ Diane: Will there be any further modifications/updates to tech implementation of WBTC? or will EOS bridge is the priority for now?
: So WBTC is a community-driven project, so it will be up to the DAO members to decide if any upgrades are necessary. As of now, the token contacts is quite stable. The DAO itself also working as expected.We are focusing more on our cross-chain efforts such as Waterloo and deploying Kyber protocol on other smart contract platforms. We are also refining our limit order feature in KyberSwap.
❓ Diane: A follow-up question. What do you think of Uniswap being the largest among the Kyber reserve pool? If it continues to dominate, can Kyber still capture value from Uniswap?
Is it possible that the collaborative nature of the DeFi space change in someday? if yes why?
As for Uniswap, it is not actually the largest in volume. You can check out the volumes of reserves in our tracker: https://tracker.kyber.network/#/reserves
So some of the reserves are quite competitive in terms of volume for certain tokens.
At Kyber, our interest is to aggregate liquidity, so it would still be great for us if any of these reserve’s volume increases!
Much thanks to
, and for spending your precious time here sharing thoughts and insights in the Chinese community!Please stay tuned for our following “DeFi The World” series live AMA sessions!
Project Summary:
DOS NETWORK is a scalable layer-2 network that implements decentralized oracle services, aiming to provide real-world data and computing power for mainstream blockchains. It connects blockchain smart contracts with real-world data and events, and provides verifiable computing power for blockchains, enabling more application scenarios to be implemented. DOS Network can support a variety of mainstream blockchains, such as Ethereum, EOS, TRON, ThunderCore, Quarkchain, Ultrain and etc.
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