Part 2: Why we are building Spool and why you should care
This is Part 2 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 1) (Part 3)
· Yield Optimizers already exist, why don’t you use them?
· Tailoring DeFi for you, me, and maybe everyone.
· Putting the pieces together to create Spool
· Defining Risk in DeFi — Tackling Risk in Spool
· How automated DeFi portfolios are meant to be — Creating a Spool
· Preview for Part 3 — What will DeFi look like in a few years, and how does Spool fit into it?Yield Optimizers already exist, why don’t you use them?
Automated DeFi is a thing already, but it currently isn’t a thing for me. Andre Cronje famously said that he built Yearn for himself, to automate and optimize his own yield farming. The rest is history, Yearn was and is a huge hit and will probably hold the crown of most cloned DeFi project forever. Yield Optimizers, forks or original code, were shooting up like mushrooms with the same promise: Give me your money and I’ll grow it via the “optimal strategy”.
So if I want automated DeFi, why am I not just dumping all my capital into a vault and be done with it? Simple: Other people’s “optimal strategy” is not my personal optimal strategy. If I give my money to a vault it goes to places I have no control over, and that triggers my obsessional neurosis. Moreover, as more and more people are joining this “optimal” strategy, it becomes less and less rewarding, with yield being spread among all players.
Don’t get me wrong. Yield Optimizers have their place and have contributed heavily to the evolution of DeFi. But them and I, that’s a marriage that simply was not meant to be.
Tailoring DeFi for you, me, and maybe everyone.
So I stuck to manually allocating my funds, but I sure wasn’t happy about it. Thankfully, due to living and working in a blockchain bubble I found a lot of like minded individuals who agreed with my sentiment. After all, if current automated Yield Optimizers were the be all, end all of DeFi, why isn’t the vast majority of TVL routed through them?
This question might be answered differently by different groups of people, but the most common answer is: Sure, I want to automate my portfolio, but on MY terms.
Why can’t we make the interesting choices independently, but automate the annoying things? I want to decide where my money goes, set up my DeFi array, choose my risk appetite and then have an algorithm handle things like tracking APY, rebalancing, and risk management. But that didn’t exist yet. So we decided to make it.
Putting the pieces together to create Spool
After getting a rough recipe together, we had to assemble the pieces while avoiding the pitfalls of limiting a user’s choice.
So that was the task: Make DeFi openly composable, but keep it simple and have it automate whatever makes sense.
The outcome is best described with a food-related metaphor, because any DeFi project worth its salt needs one, right? Imagine a restaurant where the customer picks their favorite foods, with different chefs combining their individual expertise to serve up a balanced meal that is assembled and seasoned to your tastes. After the customer’s tastes and sensibilities have been recorded, all their meals comprising everything they asked for will be served to their table.
Spool is the restaurant, the user is the customer, and algorithmic risk models are the chefs. Risk models are algorithms that dynamically determine the proper allocation of the user’s capital at all times based on APY, Risk Scores, and the user’s indicated Risk Preference.
In clear terms, the user decides the yield generators they want exposure to and how much risk they are willing to take on because that is what they want to be able to freely decide. But actually defining that risk and building a portfolio based on it, that’s where most DeFi users ask for divine help or simply hope for the best.
Defining Risk in DeFi — Tackling Risk in Spool
Before talking about how Spool risk models operate, let’s talk about risk itself first. What is risk in DeFi? What makes one smart contract riskier than another? How does one properly assess systemic risk and economic risk?
There is no single correct answer — we lack data.
While most DeFi users have a general opinion on what constitutes risk, they would benefit from having access to an expert that nails down their general idea in the form of a proper model. But as mentioned, risk is to a large degree subjective. Sure, most people would agree that e.g. Compound is safer than rugpull.finance (Project does not exist yet, go found it!) that was spun up yesterday by anon founders or anime characters with no audits in sight, but when comparing two equally mature protocols opinions will start to differ. (No offense intended to anon founders, I fully understand and respect the decision)
That’s where properly designed risk models come in. Let’s consider a user making a conscious decision about what smart contracts and yield generators they would be comfortable having exposure to. After creating that shortlist, they would likely have a rough idea over how risky each of them could be and how an allocation split between those would look like, but this is a situation that could be better solved algorithmically.
This is where Spool’s risk models come in: Imagine picking an algorithm that defines risk the same way you would as a user, creates a quantified model tailored to your tastes, and finally allocates your portfolio based on these defined parameters.
Spool provides a platform to different ideas of how to define risk. Whether you believe in a model based on extensive qualitative analysis such as the DeFi Score or in simple quantitative models based on the efficient market hypothesis, there will be a DAO-approved risk model for you that allocates your funds based on your risk tolerance.
How automated DeFi portfolios are meant to be — Creating a Spool
Make your choices and automate the rest. Creating tailored portfolios should be easy, and it should be a process that can be understood in a minute:
- Pick your poison — make a list of yield generators you’re generally fine to be exposed to.
- How do you define risk? Pick a risk model that aligns with your thoughts and get risk scores for your list of yield generators.
- Set your risk preferences — How much of that risk are you willing to take on? Are you more focused on diversifying or do you want to chase that APY?
- Deploy your single point of entry that represents your choices above and simply deposit and withdraw from there.
This is all that should be needed to effectively and efficiently create your very own automated DeFi vault. We are building Spool so all of us can easily tailor our own vaults for ourselves.
Preview for Part 3 — What will DeFi look like in a few years, and how does Spool fit into it?
If you paid attention so far, you will have questions. “How is the average user supposed to know what to pick when creating their Spools?” A valid question. If you found this post, you likely have an idea of what your Spool would look like, but newcomers will give up at step one, because they have no clue what an Aave or a Curve are supposed to be.
In the next part, we will develop on how curated and educated DeFi usage will take over, and how Spool prepares for this new reality. Who are Spool users and how do they uniquely benefit from it from their own perspective?
To find out how Spool works, 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 3). Or return to (Part 1).
