【Dapp Pocket】DeFi Weekly Report - Fifth Week of June

2020/6/30

Dear DeFi enthusiasts, this week the fund management platform Balancer has started distributing its governance token BAL to its Liquidity Providers, attracting a lot of attention and funds. Therefore, we have invited Balancer's co-founder and CEO - Fernando Martinelli, to introduce Balancer to everyone.
The Compound community has proposed improvements to the COMP issuance mechanism, and mStable will also launch its governance token Meta. If you think Flash Loans are amazing, you should check out Flash Mint implemented by OpenZeppelin.
Also, what interesting insights do Bankless advocate Ryan, Synthetix founder Kain, and Aave founder Stani have for us this week?

Table of Contents

Chapter One | Our Perspective: Is DeFi Eating the World?

The scope of DeFi includes asset and currency issuance, lending markets, trading platforms, and now fund management and trading can be collectively managed through communities and executed automatically via smart contracts, which is significantly different from traditional fund operation methods.

For traditional index funds, a fund manager is responsible for management, determining the composition of the fund, rebalancing the fund components through trades at regular intervals, and collecting management fees. Trading tasks are handled by traders. In contrast, in DeFi, through fund pool management platforms like Balancer, users can create index funds liquidity pools containing various assets and freely set the composition ratios of the funds. Anyone can buy into this index fund by providing liquidity and receive LP Tokens representing management and dividend rights. The pricing of fund assets listed externally and buy/sell transactions are all automatically executed by contracts. When the market value of external assets fluctuates, the price difference between the listed assets of the fund and the external market assets immediately creates arbitrage opportunities, attracting third-party funds for trading until the arbitrage opportunity disappears, thus naturally completing the rebalancing process.

After the fund is created, the above mechanism does not require any human intervention and is entirely executed automatically through smart contracts; third-party funds looking for arbitrage opportunities are often managed by trading bots. Therefore, we believe that in the future, many fund managers or traders will no longer be needed. Of course, there are still areas where human decision-making is needed, such as the allocation of fund assets and fund pool fees. In the future when DeFi is widely adopted, these parameters may be collectively managed by LP Token holders and protocol governance token holders.

Chapter Two | Highlights of the Week

Compound Community Proposes Modification to COMP Distribution Mechanism

The Compound community members have proposed a modification to the COMP distribution mechanism, removing the impact of borrowing rates on COMP distribution. The community members stated that this patch is a simple protocol upgrade that focuses on resolving two issues in COMP distribution: 1) Users exploiting "flash loans" may temporarily reduce cross-market COMP distribution, and after the upgrade, external accounts (EOA) will be required to refresh the distribution for each market; 2) Users generally want to farm on markets that offer the highest interest rates, and after the upgrade, distribution speed will be determined based on the market's lending size.

Stablecoin Aggregator Protocol mStable Introduces Protocol Token Meta (MTA)

The stablecoin aggregator protocol mStable has announced the launch of the protocol token Meta (MTA), which serves three main functions: 1) as a source of re-collateralization (insurance), 2) for mStable protocol governance, and 3) to incentivize liquidity providers for mStable. For more details on using mStable, refer to the tutorial video made by Bankless.

Bancor V2 Code Expected to Launch Mainnet in July, Kyber Network Becomes Bancor V2 Launch Pool

The decentralized liquidity protocol Bancor has announced that Kyber Network KNC will become the launch pool for Bancor V2. The new KNC reserve pool in Bancor V2 will allow KNC holders to provide liquidity and earn a portion of the KNC reserve pool trading fees while maintaining their long position on KNC. Unlike other automated market maker (AMM) solutions in the market, liquidity providers in the KNC reserve pool will be able to maintain 100% ownership of KNC and avoid impermanent loss, using Chainlink's KNC/ETH price to achieve these functions.

Balancer's Deflationary Token Pool Attacked, Losses of Approximately $450,000

On June 28th, an attacker withdrew funds of about $450,000 from two pools containing STA and STONK tokens. These two tokens charge a transfer fee per transfer, hence referred to as "deflationary tokens." According to Balancer, this attack method does not affect regular ERC-20 token pools.

OpenZeppelin Open-Sources Experimental Project FlashWETH Similar to Flash Loans

Austin Williams of the OpenZeppelin research team released the experimental project "Flash-Mintable Asset-Backed Tokens" Ethereum contract code, deployed on the mainnet. This experimental project is similar to "flash loans," allowing users to mint any amount of asset-backed tokens such as WETH through the contract and then destroy the same amount of tokens in the same transaction; otherwise, the transaction will be invalid.

Other News:

Chapter Three | Insights from the Industry Leaders

Bankless Advocate Ryan Sean Adams

Ryan Sean Adams – rsa.eth 🏴 @RyanSAdams

One way to describe liquidity farming: Earning google shares by using google in 1999

Synthetix Founder Kain

kain.eth @kaiynne

One of the cooler things about @CurveFinance is it tends to expose market inefficiencies fairly quickly. Here are two examples recently. First wBTC:

Aave Founder Stani

stani.eth ’Lean DeFi’ Kulechov 👻 @StaniKulechov

Lean DeFi = Design DeFi with sustainability in mind.

Chapter Four | Expert Visit

In this expert visit, we invited Fernando Martinelli, Co-founder and CEO of Balancer, to discuss Balancer. Balancer is a DeFi protocol that combines liquidity management and an automated market maker, allowing users to create their index funds. Additionally, Balancer's governance token has recently started trading, experiencing a significant surge in value, attracting widespread attention. For those interested in the core theory and technical details of Balancer, please refer to the Balancer whitepaper.

What is Balancer?

Fernando: Balancer enables users to create index funds that automatically rebalance, not charging management fees and allowing users to earn fees from each rebalancing trade. Each Balancer liquidity pool represents an index fund, with the asset value ratios in the pool determined by the creator, which can also be changed by community voting. When external market asset prices fluctuate, pools need to rebalance to maintain the constant asset value ratios, creating arbitrage opportunities between external market prices and pool buy/sell prices. Anyone on-chain can trade with the pool to complete arbitrage until the pool's asset values return to the weights, completing the rebalancing, and the arbitrage opportunity naturally disappears; the pool charges transaction fees to arbitrageurs, providing income to liquidity providers.

For those familiar with Uniswap, Balancer can be understood as an extension or generalization of the Uniswap bonding curve. While Balancer's core concept predates Uniswap, both have independently developed. Uniswap liquidity pools consist of a pair of assets, with one necessarily being Ether, and the asset value weight fixed at 1:1. Balancer extends this to allow any number of different assets to form each liquidity pool, with users determining the weights. Therefore, compared to Uniswap, Balancer offers more flexibility to liquidity providers. Additionally, such index funds have a derivative function—providing price signals.

Popular Balancer pools include: MKR-ETH pool, composed of 75% MKR and 25% ETH, appealing to investors who want to hold more MKR. Instead of selling MKR to achieve a 1:1 MKR:ETH ratio on Uniswap for liquidity, providing liquidity on Balancer with a higher MKR ratio can generate income. SNX-USDC pool, subsidized by the Synthetix team; BAL-ETH pool, where BAL is Balancer's governance token, suitable for those bullish on Balancer.

What Different Pools Does Balancer Offer?

Fernando:

Private Pool: A monopolized asset type and weight, transaction fee settings, and only the creator can provide liquidity. The creator can even pause trading for the liquidity pool.
Shared Pool: Also known as "Finalized Private Pool," where the pool parameters cannot be changed further; each shared pool issues its ERC-20 governance tokens to liquidity providers of that pool.
Smart Pool: A private pool managed by a smart contract. Smart pool use cases include flexible adjustment of transaction fees based on market demand, bringing more income to liquidity providers; Liquidity Bootstrapping Pools to facilitate high liquidity trading pools for new tokens.

What are the Risks of Using Balancer?