Part 1: A DeFi Vibe Check — Are things really going as well as they seem?
This is Part 1 of my “Why Spool?” blog series, where I lay out the conception, reasoning, and mechanics behind Spool as it happened in my head. Accuracy, detail, and factuality may be compromised in favor of casual language and bad jokes. For detailed information about Spool, refer to our Website, Gitbook, or Litepaper. Read the other posts here: (Part 2) (Part 3)
· DeFi has grown exponentially to over $100 Billion in TVL, but it’s already broken.
· How are we getting the next trillion dollars into DeFi?
∘ 1. Diversification? What’s that and can I eat it?
∘ 2. Risk Assessment? Does using Diffchecker count?
∘ 3. User Experience
· Introducing Spool — Decentralized Middleware for Composable Capital DeploymentDeFi has grown exponentially to over $100 Billion in TVL, but it’s already broken.
Stating that DeFi is broken when it has gained so much momentum in the past year might sound like an edgy statement by a Twitter influencer trying to get hits exploring his philosophical streak, but it’s unfortunately true. This reality only becomes easier to see when we look not five, but just one or two years into the future if DeFi were to continue on its current trend.
If we assume that the exponential growth of TVL in DeFi continues, and the ~$100 billion locked at the time of writing turns into $400 billion by March 2022, we have to ask the logical question — what is the source of that TVL, and is DeFi ready for it? Whether you believe that it’s the retail “masses” or”institutions” that will keep this party going, the reality is this:
Neither retail or institutions will take the time to manually review dozens of yield generators, build a diversified portfolio while carefully weighing risk and reward, approve smart contracts on their ledger, and frequently rebalance their portfolios based on constantly changing APY and other information.
Despite appearances, DeFi is broken and lacking critical infrastructure that could make it efficient enough to prevent hitting a ceiling way sooner than it should. For now, a new flashy yield farm every week helps us overlook this. Still, sooner or later, the market will realize that farmers are moving from high APY to high APY like a swarm of locusts, while the flow of new money into DeFi slows to a trickle because of a lack of infrastructure.
How are we getting the next trillion dollars into DeFi?
To cater to either masses or institutions, DeFi needs infrastructure, piping, funneling, or any other buzzword that gets thrown around — but how is that supposed to look? To answer this, we don’t need to look into the future. Let’s just sit down and identify the major problems DeFi users face right now:
1. Diversification? What’s that and can I eat it?
Diversifying in DeFi feels bad. Gas costs, multiple transactions before even thinking about actually depositing, tracking positions, regularly checking if APY is still worth the risk, more smart contracts to do “DD” on with Solidity knowledge that is sourced from various tweets of people who actually know what they are talking about so we can fool ourselves into sleeping soundly.
Most beginners and many experienced yield farmers decide to skip all that to focus on a single yield generator to dump all their hard-earned capital into. And because everyone is greedy, the APY % is often the major factor in deciding where to go.
DeFi culture acknowledges and even embraces this lack of diversification and DD by calling themselves “degens” who are “aping into” smart contracts their mate told them about at 2.54 am in the morning when they were laying in bed already. If you feel personally attacked, don’t. We’ve all been there, and most of us will not change because we love it.
But we need to collectively acknowledge that both the masses and institutional investors simply will never appreciate the free early morning pick me up in the form of the “Did I get rekt?” check on our smartphones we all enjoy. They require simplified diversification, similar to what ETFs look like on the stock market.
2. Risk Assessment? Does using Diffchecker count?
Let’s be honest, the amount of people able to sensibly judge and compare the risks of both technical exploits and economic attacks in DeFi is very low. This is partly because “risk” in DeFi is a subjective thing with different approaches towards it. One approach to risk is the DeFi Score project, which makes sense — but if someone comes along and suggests different indicators and weighting would make a better model, they could not be disproven per se because we lack the long term data to make informed decisions on what defines risk in DeFi.
Building these models is hard, and anyone who applies risk management practices needs them. Risk scoring exists and is valued in the world of traditional finance for a reason. As the DeFi Score project shows, there is a need and some drive to create risk models, but it’s neither lucrative nor sexy to build them. And if you find a good way to quantify, it would probably be better just to spin up yet another Decentralized Insurance project to monetize it.
Simultaneously, every DeFi user could use intelligible risk models to help them with sound capital allocation. Right now, all we can reasonably do is homebrew our portfolio theory or apply the DeFi Score to build a lending portfolio based on its risk scores and APY. Do you know anyone who would do this? Me neither.
3. User Experience
Scroll to the bottom of any DeFi user’s “Favorite Things To Do List”, and you will find “Moving DeFi capital around” right between “Getting teeth pulled by the dentist” and “Replying to that distant relative who wants investment advice”.
The more positions you hold, the worse it gets. Despite our APY dropping off in one of our pools, despite knowing that moving it right now would yield more efficiency and not doing it is costing us valuable gains, we still put it off. Because sitting there, pressing buttons on our ledger, while Metamask duly reminds us that we are spending a week on the beach worth in gas fees just isn’t fun.
So we find reasons not to do it. Let’s just press F5 on our favorite tokens’ price feeds instead, because who even knows if the gas costs are worth the efficiency gains? Well, someone does. Suppose we have a list of all the yield generators we’d accept exposure to as well as corresponding risk scores, an APY oracle, and current gas scores. Portfolio management suddenly becomes mathematically solvable and thus could be automated.
To solve the DeFi User Experience Puzzle, we need to gather these pieces and put them together, so we finally don’t have to compromise between unhealthy social media usage and portfolio management anymore.
Introducing Spool — Decentralized Middleware for Composable Capital Deployment
There are many reasons to bet on a growing DeFi TVL. DeFi is here right now, and it’s here to stay. The increasing number of available products and the battle testing and refining of the existing ones will eventually attract larger crowds.
But this growth needs to be facilitated. Putting meat on this skeleton requires strong bones to support it. This implies thinking ahead and creating the necessary infrastructure before the growth of TVL grinds to a halt.
Our vision of doing this is Spool — Decentralized Middleware that allows different actors in DeFi to connect to solve all problems mentioned earlier in a positive-sum game.
To find out how Spool is solving these problems, check our website, litepaper, and gitbook (work in progress) for deeper, more factual insights into what we are doing or continue reading the “blog paper” series here: (Part 2) (Part 3)
