Finance Redefined: DeFi gets shiny new money Lego parts, Jan. 27–Feb. 3

Finance Redefined is Cointelegraph's weekly DeFi-centric newsletter, delivered to subscribers every Wednesday.

The end of January saw a string of interesting announcements from projects building innovative products that may well push DeFi forward. And more price gains of course.

To briefly touch on the market side of things, this does feel like a much quieter rally than three years ago. Most things are going up, with some DeFi projects being particularly lucky, but it’s nowhere close to the insane gains we saw early in 2018. Although Dogecoin did set a new all-time high, so there’s that. Still, the crypto market has definitely matured — at least we’re not seeing anything particularly scammy topping the charts. Stock markets decided to take some of that craziness away, judging by the GameStop debacle. For that reason, I would keep a close eye on global markets to see which way the wind is blowing.

Let’s move on to the more interesting part: Tech advances in DeFi.

Balancer keeps innovating in the decentralized exchange space

I’m particularly impressed with Balancer’s new design for Version 2. They basically turned the concept of pools on its head by unifying all of them into a single vault of liquidity. Individual pools can then set whatever logic they want: Fees, bonding curves, pool percentages. Balancer already allowed a significant degree of customization, but the new design should allow it to take Curve’s niche of pegged asset exchange, for example.

The update also introduces a bunch of interesting capital and gas efficiency improvements. For example, arbitrageurs can now balance the pools without having any tokens of their own. Similar to flash loans, if the trade makes money, there’s no limit to its size. Plus, the money in the pools can be used by a new class of asset managers, special smart contracts that can use some of the liquidity held in Balancer for lending and other purposes.

The single token vault design improves gas efficiency, and it’s coupled with the interesting feature of internal balances. The idea is that if you don’t expect to hold the token you’re buying for long, you can just let Balancer keep an internal record that you own it, without making any token transfers. This should be quite a bit cheaper than calling the ERC-20 contract.

The V2 should be coming around March. Of the major AMM protocols, only Uniswap has yet to announce details for its next upgrade. With the caliber of competition facing them, they had better deliver something good.

A DEX on Polkadot set to deliver truly private swaps

For another major advance in AMM land, Manta Network on Polkadot made the first public announcement of its private DEX.

Powered by zk-SNARKs, the platform uses an architecture very similar to Zcash’s with added functionality for token swaps via AMMs. This is a very big deal for decentralized exchanges, since users broadcast their trading activity to the world, both on blockchain explorers and on mempools. Nodes see pending exchange transactions, and a class of front-running bots exploit this information to place their own copies of that transaction with a much higher fee — Thus getting to that opportunity first. Beyond independent bots, there is also the issue of miner extractable value. Basically, miners would be the best front-runners in the world. And by miners I mean existing proof-of-work miners, proof-of-stake validators, rollup operators etc. It’s a generalized issue that can only be fixed by obfuscating blockchain activity, and that’s the idea behind Manta.

It remains to be seen if users will actually care about privacy issues enough to move to Polkadot, since such a technology basically cannot be implemented on Ethereum due to the complexity of the computations, at least for now.

Race for DeFi derivatives heats up

Another platform we covered this week is Futureswap, a futures platform essentially designed for whale traders. One under-appreciated aspect of platforms like Uniswap is the amount of liquidity they can absorb in a single order. An order to buy or sell over $1 million worth of Ether currently results in something like 0.6% slippage, an amount comparable to a trading fee. If you optimize the slippage curve a bit and attract large amounts of liquidity, you could easily make an AMM platform that is more liquid than any centralized exchange.

Futureswap is trying to use the concept of liquidity pools to build a whale-centric exchange for futures. The platform uses custom-built oracles that give high frequency price data. Since the Ethereum blockchain is a limiting factor for speed, they devised a mechanism that would allow users to “certify” that they wanted to execute the transaction at that price, even if that price is no longer quite exact by the time the transaction gets to a block. This should work to prevent front-running issues, the biggest obstacle to using oracles on AMM exchanges. The oracle data is used to optimize the pools and offer as little slippage as possible.

Futureswap’s oracle solution seems like a very interesting approach that I’d like to see more platforms adopt. AMM exchanges are not really good for price formation anyway, since markets are ultimately a collective expression of an opinion and not a simple money-in vs. money-out balancing act. A readily available demonstration of this is the concept of a gap in stock markets — A stock may open at a completely different price than the previous day with no real trading occurring in the meantime.

GameStop’s had a lot of those gaps lately, making it yet another showcase of why crypto and DeFi are just so much more efficient than traditional markets. Even the trading bans were ultimately just a consequence of the archaic infrastructure.

In other news

• An Australian used DeFi to refinance his mortgage, except that he had millions in crypto.
• Crypto crime is dropping, but DeFi hacks rose in the last quarter of 2020, report finds.
• Traditional finance makes yet another case for DeFi.
• Bridging protocol Ren “merges” with SBF’s Alameda Research.