DeFi Money Legos and Klaytn
Among the emerging industries that have been bringing out great innovations since 2020, DeFi (decentralized finance) has blown many people away, much like when humans in the Stone Age first discovered fire or when generation X first started to use the internet. At present, not only individual investors who are the major players in the current crypto market, but also institutional investors are paying close attention to the DeFi. Meaning, it has established itself to be one of the major industries in this market.
In particular, DeFi money Lego system, which was formulated by the Ethereum based, first generation DeFi which are now blue-chip protocols heralded the golden age of the industry.
Money Legos
Money Legos is about putting together various financial services provided by different protocols in the market like Lego blocks to maximize the yield. In this article, we will discuss the examples of the first money Legos that use the first generation DeFi built on the Etheruem.
First generation DeFi
We begin by introducing some of the most well-known protocols that represent the first generation of DeFi that marked the beginning of the innovation.
Maker DAO
Maker DAO is a platform where a user is allowed to place cryptocurrencies as collateral and mint the DAI stablecoin.
It allows long positions to be maintained for the collateralized cryptocurrency while liquidity can be drawn from it, increasing capital efficiency unlike holding it in idle. Notably, Maker DAO is not a platform that lends out stablecoins but works as a central bank that mints stablecoins as currency and charges fixed-rate interest(%).
Compound
Compound is a platform that enables protocol users to lend and borrow cryptocurrency assets simultaneously. Users, instead of keeping their assets in the wallets, can deposit it into lending pools making it accessible for other users and earn interest on it. Also, Compound may increase capital efficiency by allowing users to use lent assets as collateral to borrow other crypto assets.
For instance, a user can deposit ETH, borrow DAI and purchase other assets. This might look similar to what Maker DAO provides, but in the case of Compound, the deposit and borrow interests are determined by the demand and supply in the market.
AAVE and Euler Finance are also the lend/borrow protocols similar to Compound.
Uniswap
On DEX like Uniswap, capital efficiency can be increased by swapping one’s crypto which was minted or borrowed after collateralizing the asset on Maker DAO or Compound to some other asset the user wants to own. Also, a user could only swap half of the crypto the one minted/borrowed and create a liquidity pool to create additional yields. Uniswap is the first generation AMM and it is the most well-known DEX in the cryptocurrency market.
Curve Finance
Curve is famous for its best swap rate when it comes to stablecoins. When the yield of stablecoin pool provided by Curve is higher than the interests paid for minting/borrowing, it’s possible to earn additional yield in a consistent manner. What’s more, depositing the LP token issued at Curve to a derived protocol such as Convex Finance can generate even higher expected yield.
Lido Finance
While it can hardly be said to be one of the first generation, Lido is also the leading component that can also form a part of money Legos. For the ETH staked at Lido, users can receive the stETH with the same amount as the ETH staked. There are quite many protocols that support stETH going beyond the Ethereum ecosystem like Terra, meaning, one can enjoy the ETH staking interests provided by Lido and pursue additional profits from stETH.
Yearn Finance
Yearn Finance is a platform that uses the protocol’s proprietary strategy to create additional yields on the deposited crypto assets so the users won’t need to navigate through other protocols with the liquidity obtained from their assets. Such a platform is called Yield Aggregator.
Individuals with a small deposit amount don’t need to pay for gas fees on every compounding. The platform leverages the economies of scale coming from deposits made by many individuals’ to enable optimal yielding service.
Examples of Money Lego
- Deposit ETH to Maker DAO and mint DAI => Deposit DAI-USDT-USDC pool at Curve => Deposit the LP token to Convex
- Deposit ETH to Compound and borrow desired assets => Deposit to Yearn Finance
These first generation DeFi protocols on the Ethereum with a long history have great compatibility with each other, which means they have excellent composability. Various second-generation layer 1 that have appeared since then are developing money Legos with excellent composability to provide a platform that tightly secures assets within the said layer.
So far, we’ve briefly covered the great advancement in DeFi and money Lego which was first found on the Ethereum ecosystem.
So, what kind of money Legos are being developed on Klaytn, a Kakao-backed blockchain? Currently, the system that can intertwine various assets with decent composability is still very infant in the Klaytn ecosystem, showing an absence of infrastructure that can incorporate a variety of assets at large amounts. What is the reason for this?
Five essential factors of DeFi
First of all, let’s have a look at the five requirements that a DeFi protocol should have as suggested by Messari, a cryptocurrency research company.
1. Financial use case: The protocol should be geared towards finance such as assets, derivatives, credits, etc.
2. Permissionless: The code must be open source allowing anyone to use it.
3. Pseudonymous: Users are not required to reveal their identity.
4. Non-custodial: Protocol assets are not in custody by a single third-party person.
5. Decentralized governance: Authorities for the decision-making and management of protocol should be based on decentralized governance, not focused on a single entity.
Klatyn’s challenge
The biggest problem faced by the Klaytn DeFi ecosystem is that most of the source codes are not public and guarded tightly. Because of this, each only focuses on selling its own product, making it harder for them to collaborate with each other, and each product has very poor composability to each other’s DeFi protocol.
Also, the protocol’s governance is not decentralized enough and decisions are made by a few key members. Therefore, the integration between each protocol becomes difficult, making it hard to stack up money Legos properly.
Money Legos of the Ethereum ecosystem have been established since long ago and are advancing continuously thanks to the high composability, but in the Klaytn ecosystem, due to the low overall composability, there are hardly any effective money Lego to be developed yet.
Klaytn has advantages that being a blockchain backed by Kakao and having Klip wallet which is built in the Kakaotalk app, providing easy access to the Klaytn ecosystem for the Korean users. However, despite these advantages, users may leave Klaytn for another layer 1 unless Klaytn’s ecosystem can provide sustainable DeFi yield.
