DeFi applications continue to push the automation and decentralization of finance at an aggressive pace. The term hyper-liquidity comes to mind because DeFi is creating infrastructure that enables a level of market efficiency that was previously impossible. In this post, we highlight:
- Curve.fi for enhancing stablecoin liquidity,
- yearn.finance for finding the best yield for users, and
- KeeperDAO for aiming to facilitate the health of the entire collateralized lending market.
A note of caution: Quantstamp is very excited about all of the cutting-edge experiments in the DeFi ecosystem, but we want to be clear that these projects can present risks for users. If you are using any DeFi application, please do your own research, think for yourself, and understand that even audited projects are not free of risk.
Stablecoins are a top Ethereum use case, and Curve improves the utility of existing stablecoins by enhancing their liquidity. Curve is a decentralized exchange similar to Uniswap, except that it optimizes for stablecoins. Curve’s differences include:
- Focusing on stablecoin-to-stablecoin and synthetic-Bitcoin to synthetic-Bitcoin trades (think wBTC and sBTC)
- Lower trading fees
- Lower slippage
In Uniswap, users expecting to trade large volumes of stablecoins at close to a 1-to-1 basis are often disappointed due to slippage. Although this slippage is not ideal for stablecoins, it is necessary to keep Uniswap’s markets alive because Uniswap is designed to support volatile trading pairs.
Curve fulfills an important niche in the DEX ecosystem. By only supporting trading pairs with assets pegged to the same value, Curve can support a pricing mechanism that reduces slippage while sustaining healthy markets. Low slippage in combination with low fees has led to massive volume for Curve and, more importantly, enhanced liquidity for the entire stablecoin ecosystem.
In addition to enhancing stablecoin liquidity, Curve recently transitioned to decentralized governance. Just last week, CurveDAO was launched and began distributing the CRV governance and utility token. CurveDAO and the CRV distribution mechanism was audited by Quantstamp.
Another thriving DeFi use case is earning interest on your digital assets. A challenge users face in DeFi is ensuring that their assets are loaned to the market offering the best APR. This is difficult because the market with the best APR can change frequently.
The brainchild of Andre Cronje, yearn.finance was created to automatically find the best APR for your stablecoins. Users just need to deposit their stablecoins into yearn.finance and then the protocol will automatically deposit their funds into Aave, dYdx, or Compound. If a user’s funds were originally deposited into Aave, and then dYdX started offering a higher APR, that user’s funds would automatically switch from Aave to dYdX.
Yearn is constantly innovating, so be on the lookout for new financial products—but also be aware that Yearn regularly publishes unaudited updates. While Quantstamp recently completed an informal code review of yearn.finance, yearn.finance published an unaudited update shortly after.
KeeperDAO provides another way to earn yield for DeFi users by participating in liquidations. Liquidations are an underappreciated mechanism that ensure that collateralized lending markets like Compound and Maker are in a healthy state. For every loan issued to a user, these protocols must hold enough user collateral to break even should a user default on their loan.
Maker, one of the earliest and most reputable DeFi projects, recently experienced an under-collateralization crisis that put their entire system at risk. The price of Ether dropped sharply, causing many loans to default. The collateral auction began, but there were no liquidators available to purchase the discounted collateral. If the community did not quickly respond, the entire DAI system could have failed.
KeeperDAO is a pool of funds designed to let “Keepers'' use flashloans to borrow from the pool in order to take advantage of liquidation opportunities of any size. The creators of KeeperDAO also designed the “Grim Trigger,” an incentive mechanism to prevent frontrunning and gas wars amongst Keepers and external liquidators. The aim of KeeperDAO is to ensure the health of the collateralized lending market, allow non-whales to take advantage of liquidation opportunities of any size, and encourage healthy competition between liquidators.
Quantstamp has audited KeeperDAO in the past and is currently in the process of auditing updates to the KeeperDAO protocol.
A Rocky Journey, But a Hyperliquid Future
As we warned throughout this post, many of the same DeFi projects that are at the cutting edge of innovation also present high risks to their users. Updating existing systems with new, unaudited systems is extremely risky—but even audited projects carry some risk.
Having said that: despite the bumpy road, we are slowly moving to a decentralized and hyper-liquid future. At Quantstamp, we often say “It’s 1994,” comparing the current state of blockchain technology to the early stages of the internet. Like the early internet, we do not know exactly what the future holds for us, but it is hard to imagine a future where traditional finance will ever be the same.