Spool V2: Institutional-Grade Infrastructure for DeFi is Here

The latest version of Spool is now live, providing the next generation of institutional infrastructure for DeFi and offering exponential enhancements in efficiency, composability, utility, and security.

Spool has been rebuilt with institutional feedback at its core. We listened, we learned, and we improved and, as a result, Spool V2 has become a powerful DeFi toolbox. With this launch, institutions can now safely engage with multiple yield-bearing solutions to easily create new and innovative financial products.

Now, Spool is ready to become the core financial infrastructure for DeFi.

Executive Summary

In this deep-dive into Spool’s latest upgrade, we cover a number of key topics as we demonstrate how Spool has been fully upgraded to operate as DeFi infrastructure.

Key Benefits such as;

• DeFi-Leading Security and Risk Management,
• Fully redesigned interface and UX
• Multiple measures to improve both institutional and investor onboarding
• Key upgrades around creating bespoke yet regulatory-compliant financial products
• Improved benefits for Smart Vault creators
• Increased flexibility in investing and diversification
• Integration of new Risk Models,

Finally, we discuss how key products can be built with Spool, including one in the final stages of development with our partner, Staking Rewards.

What is Spool?

Spool is DeFi infrastructure, and the latest improvements enable institutions to build risk-managed and automated DeFi investment products for their clients while supporting retail investors in effective and efficient DeFi investing.

The Spool platform has been updated with a new architecture offering industry-leading composability in DeFi. Now, Spool lets institutions design specific and tailored financial products taking advantage of DeFi’s best features while maintaining legal compliance. This is vital for traditional finance entities often hindered by compliance barriers in DeFi.

Upcoming EU regulations, such as “Markets in Crypto Assets Regulations” (MiCAR) in 2024, provide a clear framework for institutions to use DeFi safely, potentially bringing increased liquidity and adoption. For these institutions, Spool’s new efficient solution for creating custom DeFi products without high initial costs both financially and in terms of time, is key.

This upgraded version of Spool continues to incorporate key features and themes previously introduced, including our inaugural third-party Risk Model from our partnership with Solity.

The Benefits of Spool

Spool has undergone a complete rewrite of the highly successful existing release with a range of new functions and features based on institutional feedback during the design and launch of its first iteration. These are designed both for institutions looking for a safe, secure, and effective entry point to DeFi for their clients, and for “crypto-native” members of our community and the Spool DAO, many of whom have faced challenges in DeFi in the past.

DeFi-Leading Security & Risk Management

At Spool DAO, understanding risk management and mitigation is critical and flows through our infrastructure solution. Our goal is to create a DeFi ecosystem where risk is minimised and mitigated, for both product creators and investors, as much as possible.

Spool has continued to implement the feedback of multiple auditors, whitehats, and an MEV team to provide security and safety at its core. The latest version has been audited by leading blockchain audit companies, including Trail of Bits and ChainSecurity, and has an ongoing $1.5 million bug bounty through Immunefi. This ensures our code base is as reliable and secure as possible, providing increased stability and reliability for institutions using it to create their own products.

At Spool DAO, our approach is very much to understand the risks of DeFi rather than shy away from them, and to build an infrastructure solution that mitigates them as much as possible.

Redesigned Interface

For this new release, we went back to the drawing board and rebuilt everything based on user and institutional feedback. Our goal was to design a platform as simple to use as possible while still providing investors full control of everything they needed.

Our new design and user interface are clean, simple, and clear. Built for newcomers through experienced traders, the new design allows them to easily build Smart Vaults, invest how they want, and manage multiple investment strategies through a single location.

Users are taken step by step through the process of creating a bespoke Smart Vault based on their specific needs or investing in one of the many existing Smart Vaults created by a range of industry experts and investors.

The Spool interface can be fully branded to fit the needs and user expectations of institutions looking to create a white-label solution. It can then be seamlessly integrated into their existing systems, giving investors a cohesive, fully institutional-branded experience while maintaining the benefits of the newly designed back-end.

The new Spool backend is built to give investors all the information and functions they need in a single location. Unlike the traditional approach of DeFi investing, where users have to manually access each underlying strategy’s portals, the Spool solution lets you track everything through a single location giving everyone from individual investors to portfolio managers the power to get the best results with minimal stress.

Easier Onboarding

Onboarding to DeFi is challenging for non “crypto-native” investors but Spool is designed to make the process as simple and seamless as possible.

For non-crypto-native investors, such as those looking to move from traditional financial models to DeFi, custodial solutions are often the preferred method of investing. Spool now allows for easy creation of bespoke Smart Vault investment portfolios by custodial investment institutions. In addition to being able to easily select risk models and underlying strategies, these custodial service providers can also allow their investors easy access to view and understand the nature of the investment portfolio, if they wish.

As the process is managed by smart contracts, the system is fully automated and can not be manually altered. In that way, investors also have the peace of mind that their investments are being handled the way they wish and that all results they see reported are accurate.

For individual investors looking to manage their own portfolios, Spool’s updated release represents a huge step forward for DeFi in terms of increasing ease of access and decreasing friction in safer, more reliable investing.

As well as the new Spool UX allowing for clear and easy access to control and manage their investments, several technical new features are improving both the onboarding process and the ongoing management.

One such feature is Automated Asset Swaps. A key challenge in DeFi is purchasing or trading into the correct assets required for specific underlying strategies.

With Spool, these steps are now removed as assets are automatically swapped, within certain limitations, to the underlying assets required by the strategies within the Smart Vault portfolio. This massively simplifies the process for investors, particularly those looking for a highly diversified portfolio, where previously each yield strategy may have required multiple steps to gain the correct currency. Now, this becomes a central, easy process of sending a single cryptocurrency to the Smart Vault.

Once funds are sent to the Smart Vault, Spool also allows for improved automated handling of assets within it. Advanced automation means funds are re-allocated between strategies based on the risk profile selected, and a combination of factors at any given time. In a global decentralised financial market that operates around the clock, this gives investors the assurance that they won’t miss a critical event. In particular, given the unfortunate nature of attacks on specific DeFi protocols, human intervention and reaction to issues often isn’t plausible. With Spool, advanced detection models operate within the Smart Vaults, moving funds and potentially even removing strategies if they are subject to an attack.

The improved design and Smart Contracts of the new Spool architecture also heavily reduce the fees faced while moving assets between underlying strategies, ensuring a more diversified and ultimately safer investment approach can be followed.

Bespoke & Regulatory Compliant Smart Vault Access

For institutions looking to create DeFi investment products, Spool’s latest upgrade has a number of technological features built in to ensure they are only allowing the correct investors into their products.

Termed “Conditions” (formerly “Guards”), these are functions that only allow access to a Smart Vault product from specific web3 wallet addresses, based on criteria chosen by the creator. For absolute control over access, an institution may want to implement a “Whitelist” Guard into their Smart Vault. This creates a list of wallets that can send funds to it which could be thousands of pre-approved investors or could be a single address maintained by the institution and used for handling custodial assets.

For regulated institutions, this means they can not only quickly select underlying strategies that fit with their regulatory needs, but it also means they can easily manage investors to those who have completed specific KYC or AML requirements. As the system is controlled by automated Smart Contracts, they can also rest assured that no individual can override or bypass any Conditions set in place, giving themselves and regulators increased confidence in adherence to legal requirements.

For more public Smart Vaults, there are a number of Conditions available to give measured control over who and how investors can access them. To begin with “Timelocks” allow for restrictions around minimum wallet age for investors. This allows Smart Vault creators to run promotions on their Vaults without the risk of users creating dozens, or even hundreds, of duplicate wallets in order the game the system.

Non-Fungible Token (NFT) and Cryptocurrency Conditions are also available, offering ideal solutions to crypto-native institutions looking to create products specifically for their communities. For example, a project who have issued NFTs, or wishes to, can only allow access to the Vault to holders of that NFT. In a similar way, crypto-native institutions with their own tokens, or who wish to support holders of specific cryptocurrencies can restrict access based on a specific number of that token.

Investors can then purchase those items as a form of digital key to gain access to the investment portfolio, or they may sell it when they no longer wish to invest. In this way, Spool V2 can become a powerful tool both for institutions with an established community, or those looking to create one, by adding a valuable additional function to specific tokens.

Conditions can also be applied on withdrawals from Smart Vaults. In these instances, the funds are held by the smart contract and the investment can remain fully non-custodial. For example, an institution may whitelist wallets that can invest, but may also whitelist which wallets funds can be withdrawn to for KYC and AML purposes. They may also set up minimum term investments, to drive a longer investing strategy among their community.

Key to the Conditions solution within V2 is that new Conditions can be created and added into the system as required. For institutions and Smart Vault creators with specific needs, this adds a new level of flexibility in creating bespoke products fitted to their exact needs. In terms of the rapidly evolving DeFi ecosystem, it gives Spool V2 the necessary level of longevity to adapt and improve as new technology and products enter the ecosystem. As regulation of DeFi increases, it also provides a means for institutions to ensure they are building products that comply with the latest legal requirements.

Increased Benefits to Vault Creators

We’ve discussed how Spool V2 improves the onboarding and management of investments for investors, and how it enables institutions to create bespoke Smart Vault products based on their specific needs. But, what about improving the earnings of Smart Vault creators, both to give them a reason to create the products, and to enable a long-term approach to create and improve product offerings?

Spool V2 has a powerful set of solutions for this, collectively called “Actions”. They are configured by the Smart Vault creator when they first set the Vault and are automatically triggered when an investor sends funds to the vault, or when they withdraw. As they are built into the vault using smart contracts, once they have been created there is no management needed and investors can be assured that they are working exactly as intended and no manual manipulation is occurring.

Actions include the ability to trigger specific fees to be paid by investors. For example, a fee may be required to deposit into the vault, to cover costs for management, or to cover mandatory insurance in certain regulatory areas. Alternatively, if a minimum investment period is set on the vault as a Guard, an early withdrawal fee might be applied.

These approaches, a key feature of the traditional financial world, have sorely been lacking in DeFi and when required, often add a new layer of complexity and management to DeFi investing. With Spool V2, flexibility is built into the system to allow institutions to have the level of control and functionality they, and their investors, are accustomed to. Critically, as with Conditions, Actions can be added as required and institutions are welcome to discuss specific requirements with the dedicated Spool team.

Investment Flexibility & Diversification

Diversification is a key factor of risk management, and Spool V2 opens the floodgates of diversified DeFi investing. As mentioned, the automated solutions and single-portal approach of Spool V2 give people the ability to more easily diversify, but Spool V2 also allows for a much wider range of investment options.

To begin with, multi-asset vaults are now available, allowing a range of tokens within the underlying yield strategies to be present within a single Smart Vault. This is combined with the new automated asset swap feature to enable a single portfolio to contain a much more diverse range of assets, not only in terms of strategies utilising them. For risk management, this enables a wider attack surface in an ecosystem where an attack on a single strategy could impact others using the same underlying tokens.

Spool V2 also moves to include more volatile assets within the underlying strategies. While stablecoins will continue to be a key feature, many investors are looking to mix the safety they offer with the higher yields of alternative currencies such as ETH, the native cryptocurrency of Ethereum. This enables investing with a wider risk appetite, while still balancing that risk within a single Smart Vault portfolio.

Further to this, Spool V2 offers support for Ethereum Liquid Staking Derivatives (LSDs). These are tokens issued when a user deposits their Ethereum into a staking provider and acts as a receipt of that stake. As yield-bearing products themselves, a new financial layer is rapidly emerging which is supported by Spool V2 by enabling easy investment into them.

In a similar model to LSDs, Spool V2 also supports tokenisation of Vault deposits, which in turn can become tradeable assets themselves. When a user deposits into a Smart Vault, they are issued an NFT as a receipt of their specific deposit and the Smart Vault creator can decide if these NFTs are tradable or not. For example, a highly regulated institution who have whitelisted investors may not wish these NFTs to be swapped between wallets and to potentially unknown holders.

Alternatively, a Smart Vault creator may wish to encourage the creation of a derivative market where assets are locked into the Smart Vault for an extended period, but the derivative assets can freely be traded. In those instances, the NFT can be broken down into smaller tokens representing a smaller share of the overall Smart Vault. These can then be freely traded as potentially yield-bearing assets themselves, potentially even becoming part of a new strategy within a new Smart Vault.

Finally, as seen with the recent launch of Spool V1 onto Arbitrum, Spool V2 will continue to develop into new chains, offering an increased range of underlying strategies to investors. This marks a potential further step in diversification, both encouraging investors to look at chains they may not have, and enabling investors who are users of these chains to take advantage of Spool V2 solutions.

The key with Spool V2 is that it offers increased choice at reduced risk. It enables products to be built for a wider range of risk appetites, across a wider range of chains, with as much diversification as is desired, while ensuring support for new and exciting DeFi investment opportunities as they develop.

New Risk Models

Following approval by the Spool DAO, Solity Network’s Risk Model will become our first 3rd party risk model to be integrated, giving institutions more options when crafting their DeFi products. Initially, the “Spool Labs” risk model was the sole option for investors making Smart Vaults and, while it offered an in-depth risk assessment of platform strategies, our vision was to let any entity design and maintain a unique Risk Model for use by investors following Spool DAO approval.

Solity Network uses a comprehensive approach based on machine learning and real-time fundamental risk processing to improve how users choose their investment risk appetites. Creators will shortly be able to select this risk model when building their investment product on Spool, which then allocates funds and dictates investment activity within it based on an extensive set of vetted risk parameters.

Solity Network’s model provides a multi-level risk score for each protocol, creating a transparent risk framework using the following parameters and dimensions:

• Development Activity: This score consists of a few sub-elements and factors. These include developer contribution, engagement, code quality, code documentation, and dependency on individual contributors.
• Social Activity: The model analyses key social channels such as Telegram, Discord, and Reddit to create a score based on performance metrics. These include unique user accounts, user activity, message and post frequency, user sentiment, and other vital community indicators.
• Security: Solity Network analyses indicators such as smart contract deployment dates in combination with TVL, smart contract audit and auditor information, upgradability, static analyses, bounty size, whitepapers team data, hacks, and smart contract statistics.
• Liquidity: The methodology for the liquidity score depends on the protocol type, making a careful effort to differentiate between lending protocols, decentralised exchanges (DEXs), and yield aggregators.
• Lending protocols: This score takes the overall health factor of the protocol into account. This includes top wallets and assets, lending pool liquidity, total liquidity, daily volume, token price, collateral value, debt health, liquidity rate/depth, active borrowers and lenders, and unique addresses in the protocol.
• DEXs: Specifically accounts for the market efficiency of a DEX, underlying asset correlation, liquidity concentration, volume, and an assessment of TVL.
• Yield aggregators or optimisers: Analyses account capitalisation factors for the respective protocol
• Decentralisation: The decentralisation score measures the number of tokens, token holders, tokens per wallet, wallet ages, network participation, and governance parameters in addition to distribution (e.g., Gini coefficient).
• Tokenomics: The tokenomics score analyses risks concerning token price manipulation, market positioning, block producers, circulation, value stability, utility, distribution, and liquidity.

The first vote by the Spool DAO to authorise a new third-party Risk Model Provider marked a clear step forward for Spool, giving both institutions and private investors more choices and opening up the Spool ecosystem for increasing flexibility with the launch of Spool V2.

What can be built on Spool V2?

Spool V2 is a toolbox, designed to allow institutional-grade DeFi products to be built by anyone. While we can’t say exactly what will be built in time, we are already seeing some exceptional new financial products emerging from discussions with existing DeFi partners as well as traditional financial institutions looking for a more regulated market approach.

srETH From Staking Rewards

A key product launching and built on Spool V2 infrastructure is the highly diversified “Staking Rewards Optimised ETH”, or srETH. Staking Rewards is the market leader for staking data and research. Founded in 2017, they provide insights and investment tools for private and institutional investors through unbiased & live staking market data.

Moreover, Staking Rewards provides simplified portfolio & calculator tools and conducts deep and unbiased research analysis about the staking industry and leading industry entities such as Bloomberg, Binance, Kraken, and Coinbase already use the Staking Rewards API.

The srETH index fund has been engineered using the Spool V2 API and will be available directly through Staking Reward’s website to their users.

The combined aim is to construct a comprehensively diversified investment asset, covering a wide range of strategies. This will serve as an all-weather liquid staking index that minimises volatility and generates a more predictable yield for long-term Ethereum investments and is distinct from current market offerings such as Exchange-Traded Products or token baskets, which are mere collections of staking-based tokens.

As an optimised ETH staking rewards product, srETH leverages strategies from premier ETH staking providers such as Lido, Rocket Pool, and Frax Finance, ensuring the best vanilla staking rewards on ETH.

srETH then allocates a small percentage of funds to a diverse selection of robust and track-proven DeFi strategies. These strategies have demonstrated their resilience across various economic environments and are proactively kept in check by the Staking Rewards team. This meticulously managed approach is made possible through the implementation of Spool V2’s Smart Vault technology, ensuring the portfolio remains well-positioned in changing reward market conditions.

This approach comes with a number of key benefits for investors.

• Automated Portfolio Optimisation: Funds will be automatically allocated across various Ethereum DeFi yield protocols, assuring optimal returns without manual handling.
• Reduced Gas Fees: srETH will adopt a capital-efficient strategy to minimise gas fees and flash-loan costs.
• Transparency and Performance tracking: Complete performance metrics will provide investors with a transparent view of product operation and performance tracking.
• Regulatory Compliance: srETH aims to meet applicable regulatory and legal constraints, making it accessible to a broad international investor base.
• Future-Facing: srETH is designed to accommodate adaptability and future enhancements, allowing for the addition of new protocols and strategies.
• Resilient Rewards: The index uses risk-optimised yield strategies that are specifically designed to produce reliable yield for Ethereum investors over the long term.
• The Best of Staking + DeFi: Always the best vanilla staking rewards on ETH, backed by additional yield from Staking Rewards’ trusted DeFi partners.
• Guidance from Staking Pioneers: srETH is proactively kept in check by Staking Rewards’ team of unbiased researchers committed to your staking success.

For investors, the srETH product, and similar ones enabled by Spool V2 infrastructure, act as a new DeFi investment solution with diversification and potential previously unknown in the ecosystem. Not only will it allow crypto-native investors to more easily diversify, but it also paves the way for wider adoption from investors outside the DeFi ecosystem, looking for a highly risk-managed entry point.

Next Generation DeFi Infrastructure

Spool V2 is your DeFi toolbox. The all-new features put Vault Creators in control, giving them the tools to create the institutional-grade financial products and services DeFi has been missing and institutions have been calling for.

Spool offers a level of composability that enables the creation of DeFi products in a way that fits a vast range of specific requirements, including regulatory and compliance needs, and particular client investment goals.

Financial experts and traditional institutions now have an unprecedented degree of flexibility over how they engage with DeFi, paving the way for a significant influx of capital into the DeFi sector as adoption continues to grow. To find out more, visit spool.fi.

Spool is a permissionless DeFi platform that connects Capital Aggregators with DeFi Yield Generators. Funds are dynamically and efficiently allocated to ensure optimized yields, for custom strategies, managed by DAO-curated Risk Models.

Spool was established as a DAO, with a selection of founding contributors representing a diverse cross-section of the blockchain community.

Website | Telegram Ann | Twitter | Medium | Discord