Significance of a Permissionless & Fully Decentralized Money Market
We take a deep dive into why Permissionless DeFi is important and how Timeswap’s Oracle-less design is the most secure implementation
Why Permissionless-ness matters
Since the introduction of programmatic smart contracts, the cryptocurrency ecosystem has grown into a permissionless and borderless landscape that enables a diverse set of decentralised apps to run concurrently. The first generation of blockchain-based apps focused on creating digital tokens and tracking their ownership. However, with DeFi it has progressed beyond ownership to novel ways of administration and transfer that mirror and expand on existing traditional financial instruments. Let’s take a look at two key issues with traditional finance.
Traditional centralised financial services are intrinsically permissible to expand on, necessitating legal promises-based contracts between the two or more parties. It increases the disincentive for developers to construct fully automated or unbiased financial apps because access can be cancelled at any time. The central entity now has control over critical sections of the application, calling into doubt the deterministic assurances sought by the third-party developer.
DeFi flips this dynamic by being permissionless by design, establishing an open basis from which any developer may gain instantaneous access to financial systems which are trustless and dependable. This enables mostly unbiased and deterministic apps that run as code and cannot be turned down. Connecting to DeFi infrastructure does not require authorisation from the original creators, resulting in smooth innovation without a central chokepoint.
The traditional financial world is inherently a black box to everyone, except those who control the box. This results in unclear amounts of risk exposure and a reduced ability to control risk.
DeFi products, on the other hand, are transparent by default since they are built on open-source technology and every transaction and contact between users and dapps is documented in an open, immutable ledger dispersed throughout the world.
Is DeFi truly permissionless?
Permissionless app design means that protocol’s services are entirely open for users and communities, with no ability to selectively restrict either a user or a community. Protocols such as Uniswap is completely permissionless. Anyone can swap tokens or provide liquidity or create new markets at will. This birthed the liquidity mining frenzy as well as IDOs which led to the unlocking of liquidity for long tail assets.
However, within DeFi money market protocols, permissionless listing of collateral is still unheard of.
In popular DeFi money markets such as AAVE, Compound only a handful of assets can be used as collateral, this leaves a large untapped long tail asset market with billions of dollars of value waiting to be unlocked. Additionally the governance overhead for creating new markets are costly and inefficient to respond to market demand and are susceptible to anti-competitive behaviour.
Some protocols such as Fuse by Rari Capital have tried permissionless collateral, but the issues associated with choosing an external Oracle that can be manipulated from a low liquidity venue remains a major barrier. Multiple oracle manipulation hacks are proof of this issue as detailed here.
Permissionless money market design that currently exist within DeFi are inherently insecure owing to the relative ease of manipulating the Oracles due to the low liquidity associated with long tail assets
Timeswap as a Permissionless & Secure DeFi primitive
Timeswap is a permissionless money market i.e anyone can create a money market for any pair of ERC-20 tokens, similar to how liquidity pools are created on Uniswap.
Being Oracle-less, Timeswap is resistant to Oracle manipulation attacks that have plagued all the existing money markets. Timeswap’s design itself is a fundamentally new architecture that doesn’t exist today in DeFi, using a 3 variable AMM for discovery of interest rates & collateral factor.
A money market any pair of ERC-20 tokens can be created using Timeswap, without the need to figure out which Oracle to be used. Instead the AMM natively discovers the interest rate & collateral factor based on the free market arbitrage i.e the market oracle.
This enables communities to create a native economy without having to rely on an external governance.
Similar to how Uniswap enabled communities to create a means to exchange value, Timeswap enables communities to capture time value on their asset in a completely permissionless & truly decentralized manner.
Timeswap is a fully self sufficient money market, that is completely decentralized and highly capital efficient owing to the ability for both lenders and borrowers to customize their risk reward profile for each transaction.