Oct 29, 2021
YieldBlox will transform Capital and Incentives in the Stellar Ecosystem
It’s Sprout’s world — we’re all just living in it
The Script3 team is a huge proponent of the Stellar ecosystem and its mission; however, we still realize it has its fair share of challenges. Mainly a lack of capital efficiency and weak incentive structures. Our goals for YieldBlox include tackling these challenges. Now that we’re on the brink of launch, we decided to throw together a quick piece on why these are challenges for the ecosystem and how YieldBlox addresses them.
Capital Efficiency: Activating your money
High-velocity, high-efficiency money is the name of the game in crypto. You can move money across the globe in seconds and leverage it in 15 different ways to compound value creation. Combining these two driving forces has allowed crypto to become the exponentially growing money monster it is today. Stellar excels at the first of these; it’s one of the fastest blockchains out there. However, it’s lacking in the second criterion. Once money enters the Stellar ecosystem, there’s little reason for it to stay there and be productive. By far the biggest reason for this is the lack of money markets. In the programmable blockchain universe, passive participants (casual users and holders) can enter an ecosystem, deposit their assets in a money market to earn some interest, and forget about them. Active participants (traders, market makers, power users) can then collateralize their assets in the money market and borrow passive participants’ assets for trading, yield farming, etc. This relationship benefits both active and passive participants. But most importantly, it benefits the blockchain ecosystem as a whole since a large percentage of money remains active in that ecosystem, constantly creating value.
Stellar currently lacks the money markets that make capital efficiency possible. When passive money enters the Stellar ecosystem, there is no reason for it to stay there. It makes more sense for it to do whatever it came there to do (make a payment, execute a trade, join an airdrop), then move back on to a centralized exchange, and from there move to an ecosystem that supports asset productivity. YieldBlox changes all of this; passive participants now have a reason to keep assets in the Stellar ecosystem, as they can simply deposit them in YieldBlox and earn interest. These assets now become available for active participants to leverage and invest, improving and growing the Stellar ecosystem. We expect this symbiotic relationship to draw significantly more capital into the Stellar ecosystem, resulting in a more liquid DEX (think about people borrowing assets to deposit them into liquidity pools) and more capital flowing into your favorite ecosystem projects (did someone say Smart NFTs?).
Incentives: Cash Rules Everything Around Me (CREAM)
At its core, incentives drive crypto, usually monetary ones (CREAM). In the last section, we already somewhat covered this when we mentioned how passive money has no reason to stay in the Stellar ecosystem. There’s nothing for it to do to be productive and generate revenue (CREAM). We see another example of this by looking at Stellar’s validator count vs. other chains. The Stellar Consensus Protocol(SCP), by design, does not include economic incentives like Proof of Stake(POS) does. This design is fine due to SCP’s unique trust model, but it also means there are much smaller incentives to become a Stellar validator than there are on a POS chain. Stellar doesn’t pay you for being a validator; Solana does. As a result, Stellar has ~30 validators, and Solana has thousands (CREAM). Because of the SCP, the effect on validator counts isn’t really a concern. However, if we expand this incentives rule to the rest of the Stellar ecosystem, things look problematic. Stellar is unquestionably the best blockchain for building fintech platforms on. However, why would I build a non-custodial Stellar-based fintech platform when there aren’t any monetary incentives for doing so? Revenue models for non-custodial fintech platforms are hard (CREAM). Furthermore, why would an end-user use my platform when there aren’t any protocol-level interest rate products I can offer them (CREAM)? YieldBlox is designed to handle these exact issues. Sprout is the king of CREAM.
YieldBlox enabled Fintech Platform Interest Rate Products
With the introduction of YieldBlox, fintech platforms building on Stellar can now use it to offer their users interest rate products while staying non-custodial and trust-free. Since YieldBlox is a DeFi product, it lives at the protocol level of the Stellar Ecosystem and is incredibly easy to integrate. All an integration requires is a button that makes a few API calls, and boom, the platform’s users can now deposit assets into YieldBlox’s lending pools and earn interest.
To add to this, we’re aware many platforms built on Stellar anchor their own assets. We want to support all these assets in YieldBlox. However, we’re also aware that if even one of these assets proves fraudulent, it could bring down the whole platform. As a result, we will be expanding YieldBlox to support multiple lending pools (if governance approves the feature). This feature allows the governance system to isolate riskier assets in their own markets, which will likely command better interest rates. This update will be proposed after launch, as it requires some large changes.
YieldBlox enabled Fintech Platform Revenue Models
This section is probably the one we’re most excited about. A new YieldBlox update will allow users to delegate a percentage of their token yield to another account. This change is tiny, but it’s incredibly powerful when considering the ramifications for fintech platforms integrated with YieldBlox. The goal for fintech platforms building on Stellar is for users not even to know they’re using a blockchain. As a result, most of their users don’t know or care about YBX token yield, so the platform is free to input a high delegation percentage when creating the YieldBlox deposit request for the user. This delegation means platforms will receive a steady stream of YBX tokens from their user’s deposits. That’s revenue!
Let’s take this a level deeper. Remember how we mentioned a lot of platforms anchor their own token? If you’ve read our docs or tokenomics article, you’ll also remember that YBX stakers vote weekly to decide how YBX incentives will be distributed between assets. So, what if instead of selling the YBX tokens they receive from their users, platforms instead stake the tokens and use them to vote to increase the percent of YBX incentives their anchored assets receive? This increases their revenue and creates a compounding revenue stream. Taking this a bit further, it’s easy to imagine a future where platforms integrated with YieldBlox compete to stake the most YBX so that they can secure their revenue stream. And the cherry on top is you can borrow against staked YBX, so staking YBX doesn’t reduce working capital for these platforms! Like I said earlier, Sprout is the king of CREAM.
Closing thoughts
Overall, we’re incredibly excited for YieldBlox. The Stellar ecosystem is going to change forever once it’s released. We’re expecting to release at the beginning of December. There’s a lot of work to do before then. In the near term, YBX airdrops will start being distributed tomorrow at 11:59 PM UTC, so keep your eyes open if you’re trying to scoop up some tokens on the DEX!
Furthermore, we’re hiring for full-time BD and Developer Roles. Come build the future of finance with us!
