Revelo Roundtable #6 - Lending

In Revelo Intel’s Twitter Spaces which took place on March 21, 2024, Kirk hosted Michael Bentley from Euler Labs, Sam MacPherson from Phoenix Labs, Greg Di Prisco from Ajna Protocol, Patb from Inverse Finance, and Kirk Hutchison from Ethereum Credit Guild to discuss lending in DeFi, technological advancements, risk mitigation strategies, and more! Read our notes below to learn more.

Background

Kirk (Host) – Head of Business Development at Revelo Intel

Michael Bentley (Guest) – Co-founder and CEO of Euler Labs

Sam MacPherson (Guest) – Contributor at Spark

Greg Di Prisco (Guest) – Co-Founder of Ajna Protocol

Patb (Guest) – Head of Growth at Inverse Finance

Kirk Hutchison (Guest) – Founder of Ethereum Credit Guild

Euler Labs – a modular lending platform on Ethereum that enables users to lend, borrow, and build without limits

Spark Protocol – an $ETH lending and borrowing protocol simplifying users access to $DAI, powered by Maker DAO

Ajna Protocol – a peer-to-pool, oracleless, permissionless lending protocol with no governance, accepting both fungible and nonfungible tokens as collateral

Inverse Finance – the decentralized autonomous organization that develops and manages the FiRM fixed-rate lending protocol, DOLA, its debt-backed, decentralized stablecoin, and sDOLA, the yield-bearing version of DOLA.

Ethereum Credit Guild – The first decentralized lending pool — lend and borrow without trusting an oracle provider

Lending: Perspectives on Rate Dynamics

Greg shares his journey into DeFi starting from his involvement in the BitShares community in 2015 and later joining Maker Dao as head of business development.
Michael shares his background as a research scientist and his journey into Ethereum and DeFi, highlighting his shift from skepticism to full involvement in 2020 during the pandemic, driven by an interest in Compound and Uniswap.
Sam recounts his entrance into DeFi in 2017 as a hobbyist investor and his later involvement with Maker, highlighting his focus on fundamentals and cash flows.
Patb discusses his start in DeFi in 2018, his engagement with Index Coop during the pandemic, and his role in leading growth at Inverse, highlighting an interest in stables and lending markets.
Kirk Hutchison shares his interest in crypto sparked by Occupy Wall Street, his decision against traditional finance, and his inspiration from Maker Dao to work on implementing alternatives to banking onchain.
Greg talks about Ajna as a permissionless, immutable lending and borrowing protocol without Oracles or governance, focusing on the protocol’s ability to quickly adapt to any asset due to its opinionated model that places the Oracle outside of the protocol.
Michael talks about the upcoming Euler V2, highlighting its modular, composable lending platform nature, compared to an AWS for DeFi lending, offering both customizable and prepackaged modules for creating lending protocols. He mentions the start of the largest code audit competition in history on Cantina for $1.25 million.
Sam discusses Spark‘s focus on connecting Maker’s liquidity to innovative DeFi products, highlighting the use of the $DAI stablecoin to support user-friendly lending experiences. He describes SparkLend‘s success and the importance of predictable rates for borrowers, facilitated by Maker’s direct lending capabilities.
Kirk asks whether Spark offers fixed or variable rates, noting the importance of predictability.
Sam says that Spark offers predictable, not fixed, rates, with advanced notice for rate changes, contrasting this with the unpredictability of rates in many other lending markets.
Patb shares Inverse‘s experience with variable and fixed rates, detailing their pivot to a fixed rate model through a mechanism called FiRM, which offers tokenized interest rate rights for specified borrowing durations. He advocates for the inevitability of fixed rates in DeFi, given their prevalence and preference in traditional finance, highlighting the deployment of $DOLA liquidity on multiple chains.

Navigating Oracle Risks and Governance: Insights, Strategies, and Trade-offs

Kirk Hutchison discusses the Ethereum Credit Guild, mentioning its position as a middle ground between a purely permissionless setup like Ajna and an actively governed pool like Aave, highlighting its unique feature of not requiring trusted oracles or real-time price feeds.
Kirk Hutchison explains the Credit Guild, highlighting it as the first lending pool without trusted oracles or real-time price feeds, mentioning the governance processes involved, and the concept of optimistic governance which includes delays and quorum thresholds for changes.
Kirk brings up the topic of oracle risks, referring to them as a significant concern due to past exploits involving oracle manipulations, and suggests discussing how their protocol and others view and mitigate oracle risks.
Greg discusses oracle risks, identifying them as a critical risk to the space, but says that the focus should rather be on the market opportunity presented by removing oracles, especially for assets hard to trade like NFTs. He describes Ajna’s approach, which allows for a lending market without a secondary market or the risk of bad debt.
Michael agrees on the massive risk posed by oracles and discusses the complexity of pricing assets. He describes the Euler V2 approach as agnostic, allowing users to decide on the level of oracle dependency they’re comfortable with, highlighting the trade-off involved in oracle-free solutions.
Sam contributes by focusing on the approach to handling Oracle risks for high-scale assets like $ETH, LSTs, and $BTC. He mentions Spark’s plan to use redundant Oracle feeds for the $ETH-$USD price to mitigate tail risks, highlighting the importance of redundancy in Oracle feeds for lending protocols.
Michael asks if the primary market price is hard-coded, specifically questioning the price relationship between $ETH and LSTs.
Sam explains they utilize the exchange rate from Lido, hard-pegging $stETH one-to-one with $ETH.
Patb talks about a pessimistic price Oracle as a safety measure for borrowing, which uses a 48-hour low to determine maximum loan value, aiming to mitigate risks in volatile markets.
Kirk Hutchison discusses the trade-off between price feed freshness and accuracy, advocating for a design that allows for disputing price changes, aiming for a system where price updates and liquidations can be contested and resolved through auctions.

Innovating Lending: Navigating New Assets and Strategies in DeFi

Kirk talks about the interest in new asset classes, like LRTs and Ethena’s synthetic dollar, asking about the approach to integrating and assessing these new assets in lending platforms.
Greg shares their experience of being the first to launch a $sUSDe pool, highlighting the quick adaptation and pricing strategies that reflect confidence in the asset’s stability and cautious over-collateralization by lenders.
Sam announces Maker’s plans to onboard $sUSDe and $USDe pools as collateral for loans, highlighting a conservative approach with a focus on safety and over-collateralization to leverage high-yield opportunities presented by Ethena while maintaining a robust margin of safety.
Sam explains Maker’s strategy to balance yield generation with safety, detailing the multiple layers of protection designed to safeguard Maker’s protocol and $DAI holders, including over-collateralization, insurance funds, and the $MKR token as the ultimate backstop, aiming to bridge the revenue gap and provide users with access to high yields through a structured safety mechanism.
Michael expresses concern about the rapid integration of new assets like Ethena into lending protocols due to their potential volatility and the risks of cross-collateral systems. He prefers isolated lending pools for new assets to mitigate risks and highlights the importance of assessing market liquidity and stability.
Patb shares optimism about the Ethena team’s performance but criticizes the reliance on third-party custodians and centralized systems. He mentions his project’s yield-bearing stablecoin, $USDe, which generates yield organically from their lending market, contrasting it with Ethena’s approach and expressing a preference for decentralized solutions.
Kirk Hutchison says he sees merit in both decentralized approaches and the structured custody setup of Ethena, which he considers more decentralized and resilient than traditional centralized systems.
He mentions the Credit Guild’s risk management strategy, highlighting the need for different approaches based on the size of the lending market and the importance of adapting to evolving risks in the DeFi space.

Novel Assets in Lending Platforms: Perspectives

Kirk questions how they are considering Liquid Restaking Tokens (LRTs) in light of their views on the EigenLayer and liquid restaking. He references a recent panel discussion on LRTs, suggesting they may become a more significant asset class, akin to version two of LSTs.
Greg highlights Ajna’s protocol agnosticism, indicating a consistent approach across all assets.
Michael sees substantial opportunities in LRTs, akin to those with Ethena assets. He discusses the potential for various trading strategies involving LRTs and other assets, highlighting the versatility of Euler V2 in enabling these strategies.
Michael expects a market bubble but advocates for safe, two-sided trades within isolated, chained vaults rather than large, monolithic protocols.
Sam expresses caution in rushing into new markets, preferring to wait for sustainable demand. He reflects on past experiences with MakerDAO and the limited success of loans against smaller assets, indicating a more conservative approach toward adopting LRTs.
Patb shares concerns similar to those regarding Ethena, focusing on safety and a cautious approach towards embracing LRTs, pending further observation.
Kirk Hutchison discusses the Ethereum Credit Guild’s openness to LRTs but stresses the importance of mitigating smart contract risk. He mentions the high demand for products related to liquid restaking and derivatives, highlighting ECG’s careful approach to integrating new assets based on thorough audits.

Immutability vs. Governance in Lending Markets

Kirk asks about views on whether governance should be integral in a lending market or if protocols should remain immutable and free from governance. He notes the merits of both models.
Greg says that their protocol has no governance, everything is permissionless and immutable, similar to Uniswap, with no upgrades. He mentions the trade-offs but highlights the benefit of scaling well in the long run by having an immutable protocol.
Michael shares an agnostic approach, highlighting the Ethereum Vault Connector at the core of their protocol, which acts as a communication protocol between vaults. He discusses the flexibility for vault creators to decide on governance and mentions writing an opinion piece on governance in risk management.
He breaks down governance into three types: free market-based, opinionated systems like Aave or Maker, and intermediate types like aggregators. Michael prefers an immutable model but acknowledges that not all users might agree, highlighting the importance of allowing the free market to determine the best models.
Sam says that governance should be used only when necessary, advocating for an open and competitive marketplace to prevent entrenchment. He highlights the Morpho design for its competitive nature and expresses his disinterest in governance, focusing more on product development.
Sam explains Maker’s Endgame strategy, which involves removing decision-making from the core and distributing it to growth arms, maintaining honesty through competition among sub-DAOs. He remains hopeful for the future of decentralized governance, despite the current reliance on token-weighted voting and the potential for new governance primitives.
Patb stresses the importance of striving for immutability and transparency, noting the iterative process toward achieving full immutability. He highlights recent changes in revenue distribution to autopilot mode as an example and highlights transparency to compensate for human intervention in protocols.
Kirk Hutchison expresses skepticism about the benefits of immutability and external risk management for passive lenders, saying that these features are more beneficial for active lenders. He mentions the challenges faced by passive lenders in lending markets and the need for adjustable governance to accommodate various assets and loan terms.
Kirk Hutchison discusses the Ethereum Credit Guild’s approach to governance, aiming for scalable, trust-minimizing governance that ensures safety for passive lenders. He mentions inspiration from optimistic rollup challenge periods and the MakerDAO model, highlighting the importance of unbundling governance into processes with different rules and checks.

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Show Information

Medium: Twitter (Audio)
Show: Revelo Intel Twitter Space
Show Title: Revelo Roundtable #6 – Lending
Show Date: March 21, 2024