Rescue Polygon Project: Discussing Public Chain and DeFi

prologue

Recently, it has been delayed for too long, mainly because the research I have always hoped to do is not the so-called “universal”, “information summary” or “data analysis” research report. Instead, we hope to use a certain field or phenomenon as an entry point to dig deeper into the problem and propose corresponding solutions. The focus of the report is often the discovery of the problem, the thoughts and the final solution, rather than the project itself. Therefore, it takes longer to prepare.

Furthermore, the recent MEME c.oin, the meta-universe flew indiscriminately, and never found what I wanted to write. However, some time ago, the project party we have been following raised a question, and this issue has also caused me a lot of thinking, so I will sort out my thinking here.

The content of this article starts with the existing problems of Polygon, discusses the competition of the underlying protocols of the public chain, the structural evolution of DeFi, and the product direction that I can provide based on the existing ecology, and finally some solutions I expect.

Similar to the previously published research report, reading this article requires a certain foundation, but I will concretely explain some basic principles in a way of thinking flow chart. And this article is not a wealth code, there is no investment advice, it is purely a discussion at the product manager level, if you have any objections, please contact me.

“Battle is the primary productivity of product managers.”

What can I save you! My Polygon

Let’s start with the title. I believe that in the recent period, you have heard of Polygon only a handful of times. The most popular concepts and public chain protocols in the market are emerging one after another. Solana, Fantom, Avalanche, Terra, and Arbitrum have all locked positions. Beyond Polygon.

Polygon’s TVL has fallen by more than half from its highest point of 10.54B on July 15 to 5.04B today. In all public chains, layer2 and EVM Fork chains, the ranking fell from the highest fourth to the current eighth.

Through our exchanges with various Polygon project parties, they generally reported such a problem-“For new types of projects, Polygon’s funding and the number of users have shrunk significantly, and the community’s activity has also declined. Less, traffic and retail funds have been attracted by other underlying agreements.”

The reason for the problem?

Solana, Fantom, Avalanche and other products provide retail investors with more opportunities from 0 to 1.

The high-volume incentive support plan has prompted the repetition of models that have been popular on Polygon and other underlying chains on these new public chains. “Hot money” is constantly looking for fresh hot spots of hype.

The too aggressive cold start strategy prevents Polygon from incubating its own star projects

Since the launch of the DeFiforAll fund in the middle of the year, Polygon has chosen a strategy that seems to be very radical now, introducing blue-chip projects in the original ETH ecosystem such as Aave, Curve, etc. through the incentive of $MATIC . This has had a very positive impact on both sides in the short term. But in the long run, many problems have also appeared.

Based on DeFillama’s data, the top ten TVL projects on the Solana chain are exclusively owned by Solana:

Rescue Polygon Project: Discussing Public Chain and DeFi

And from the perspective of the investment institutions of these projects, most of the projects have received direct investment from the Solana Foundation, Alameda Research and even FTX.

And Polygon currently ranks the top ten projects only Quickswap and Dinoswap are exclusive to Polygon chain.

Rescue Polygon Project: Discussing Public Chain and DeFi

Among them, Aave, Curve, Sushiswap , Balancer and other top-ranked projects all come from the DeFIforall program. Even Aave Dominance has reached a staggering 40%. Except for the relatively close occupancy rate of this head project on the relatively closed Terra, this situation does not exist in other competing public chains.

Judging from the various performances in the later stage, especially the strategy of too Allin in the early stage, Polygon was unable to provide more help and liquidity guidance for new projects in the face of competition in the later stage, making it impossible for users in the market dominated by Fomo’s emotions. Polygon continues to explore new investment targets.

This further led to the loss of flow and funds.

Blindly chasing hotspots and constantly changing marketing focus has led to phased ignorance of developers.

After chasing Polygon’s official community account and developer’s official account, you will find a very interesting phenomenon. In the hot period of DeFi summer, Polygon will mainly promote some DeFi project activity rankings and TVL rankings. But after the market hotspot shifts to NFT and GameFi, Polygon’s main push direction will gradually shift to other areas.

From the perspective of general market competition, this timely strategy seems to be no problem, but due to the existence of the second problem mentioned above. Polygon officials should pay more attention to long-term, stable and sustainable ecological development than other competing products.

Judging from the feedback we have received, the excessively serious financial Matthew effect and changing support priorities make it difficult for the project party to maintain continuous and stable emergency contact with Polygon officials. This makes it difficult to jointly create exclusive star projects.

Hot spots are constantly changing, and the speed of change is extremely fast. But some basic innovations are still in the early stages. Blindly changing hot spots, DeFi2.0, NFT2.0, GameFi2.0 may not have Polygon’s share.

How to solve

DeFi2.0 reutilization of interest-bearing assets

Before discussing the solution, we need to understand such a stablecoin project-Abracadabra (Spell). For the convenience of writing, Spell has been replaced.

Spell also released a version of ETH MainNet, which has a heavier capital Matthew effect. The total number of agreements on it exceeds 276, but the top ten products account for more than 80% of TVL.

At the same time, most of these projects have been released for more than two years. In the DeFi meta-universe of ETH MainNet, it is almost difficult for the new stablecoin protocol of the over-collateralization model to attract new funds to lock up positions.

In order to solve this problem in product design, Spell made a bolder decision to use interest-bearing assets as collateral for the agreement.

These interest-bearing assets include yvAsset and CvxAsset. It even includes yvcrvAsset, a combination of interest-bearing assets with higher risks. The main logic of this is shown in the figure:

Rescue Polygon Project: Discussing Public Chain and DeFi

Users deposit native tokens, USDT, ETH, etc. on platforms that can generate interest-bearing assets such as yearn finance. And get interest-bearing assets such as yvUSDT. Then use yvUSDT and other interest-bearing assets as collateral mint out of Spell’s stable currency MIM. And MIM can be exchanged for other stable currency assets through curve ‘s MIM3POOL.

The advantage of this is that the user’s native assets can obtain the benefits provided by platforms such as yearn finance and can also expand the leverage through Spell again, and repeat operations to obtain more benefits.

At present, Spell supports amplifying the leverage of a single mortgage in the form of flash loans. In essence, this greatly improves the efficiency of the stock funds.

In addition, another advantage of this is that it is very conducive to the cold start of the project party. At present, Spell’s total agreement TVL has exceeded 4 billion U.S. dollars. In fact, most of them come from such interest-bearing assets.

Then through Spell, we can find that stimulating the creation and reuse of interest-bearing assets may be a feasible solution to Polygon’s dilemma.

What should the Polygon ecological project do?

The Polygon ecological project itself should begin to try to reuse the stock assets of blue-chip leading projects. For example, the aToken of Aave, the largest DeFi project on Polygon. This is an interest-bearing asset. Users can deposit any supported assets such as ETH, USDT, DAI, etc. into Aave’s deposit contract. Aave will provide the corresponding aToken, and aToken will calculate the user’s principal + interest income. After we acquiesce that Aave has no major contract risks, we can even think that the risk of aToken is smaller than that of native assets such as ETH, because the ever-increasing interest is constantly hedging the risk of price fluctuations of native assets.

However, the interest-bearing assets provided by different products are different in calculation methods, quotation models, deposits and launch mechanisms. This leads to difficulties for new project parties in the process of reusing these stock assets, and may even be forced to modify the contract or be upwardly compatible. This is inherently problematic.

Let’s take aToken as an example. The number of aTokens users get is not anchored at 1:1 (to be honest, it’s a bad idea from the perspective of composability), but it keeps increasing, and the interest income you get will be directly added to aToken. The quantity is calculated based on the currency standard.

Such as: deposit 1ETH to get 1aETH. As the interest continues to increase, you will find that your 1 aETH slowly becomes 1.1 1.2 1.3. When you decide to withdraw, 1.3 aETH can be exchanged for 1.3 ETH. Among them, 0.3 ETH is the interest income during this period.

Although, it is easy to understand from the user’s point of view. However, if assets such as aToken are to be reused, problems will arise.

Such as when borrowing other assets as collateral. Under normal circumstances, the amount of collateral is constant, while the price is a variable. However, the number of aTokens is constantly increasing, which causes the amount of collateral for mint and burn to become variable.

Taking Curve as an example again, the Polygon version of Curve provides 3crv, an interest-bearing token aave. Its form is:

Rescue Polygon Project: Discussing Public Chain and DeFi

As shown in the figure, the LP token provided by curve here is also a type of interest-bearing asset, but this type of interest-bearing asset includes the deposit interest of aToken and the fee income of LP.

And the LP token provided by Curve is a token that provides a quotation and the quantity remains unchanged. This type of token basically meets the conditions for becoming general collateral.

But the problem is that the Polygon version of Curve is more focused on large exchanges of stable assets. Therefore, there are not many interest-bearing assets available.

And, the most serious problem is that LP tokens need to be mortgaged before they can get the official Matic liquidity incentives issued by CRV and Polygon. damn it! ! If a project wants to use this type of LP token as collateral, it means that the liquidity incentive it provides must be greater than the liquidity incentive provided by curve and Polygon to be eligible to attract users.

Convex supports the mortgage of the LP tokens of the curve pool to obtain income including LP pool income, CRV, CVX incentives, but again, convex is currently only deployed on the Ethereum main network, and its cvxLPtoken cannot be effectively used on the polygon. .

It seems to have gone around a circle and returned to the awkward situation of stock fighting.

However, this situation does not occur on the ETH chain, because income aggregators such as Yearn Finance will package all the aforementioned liquidity again to provide interest-bearing assets such as yvAsset. And includes the token incentives for liquidity mining.

From the perspective of the interest-bearing model, we can divide the interest-bearing assets into the following categories:

Rescue Polygon Project: Discussing Public Chain and DeFi

So the solution to the problem seems to come into being: if Yearn Finance or similar products can be more adopted, it may be able to increase the activity of the stock funds. Further promote the development of new types of projects.

From the data of defillama, currently Polygon’s largest Year product is Beefy.finance. But the overall TVL is only 150 million, and it is still concentrated in strategy pools such as Curve, quick, and sushi.

From the basic product design and data point of view, maybe Beefy is in line with our vision, but Beefy’s credibility is not high enough, and the multi-chain development strategy is not in Polygon’s own interests. So hope that relying on supporting Beefy to break the game may not be the best choice.

So what kind of product is most suitable for Polygon ecology? This leads me to another thought-to layer ecological products according to demand.

Maslow’s demand stratification in DeFi ecology

As we all know, Maslow divides human needs into five levels psychologically, namely, physiological, safety, social, respect, and self-actualization.

Among them, the first four levels are called defect requirements, and the highest level is called growth requirements. One of the most important points is that low-level needs must be met before high-level needs arise.

We will find a very obvious phenomenon from the mapping of psychology’s demand classification theory to the demand hierarchy of DeFi products. The user’s demand for DeFi products also presents a relatively obvious demand stratification.

Let us use an architecture diagram to illustrate this point:

Rescue Polygon Project: Discussing Public Chain and DeFi

The above figure simply classifies various DeFi products at a level according to actual needs. According to the structure diagram, we will find that when only the underlying protocol appears, the blockchain essentially cannot produce too many changes. This stage can be regarded as the stage of Bitcoin and altcoins.

When ETH appeared, programmable assets appeared on the chain, which could be used to create smart contracts with complex logic. Therefore, all kinds of DEX came into being.

When the liquidity on the chain is sufficient to provide a stable predictive price, or there are users with professional oracle quotation agreements such as chainlink, the collateral can be priced, so lending agreements such as makerdao, compound, and aave begin to appear.

The only controversial area here is insurance. In the traditional financial system, insurance has always played a very important role in infrastructure, but the decentralized production relationship has made insurance not play its role as a basic agreement for the time being, but the idea of ​​insurance is different. It is the basis of derivatives agreements such as futures and options, so I still put it on the first level of demand.

So from the perspective of combinatorial innovation, we can also express it in a tree-like form.

Rescue Polygon Project: Discussing Public Chain and DeFi

According to such a logical process, it is not difficult to find that the development of the DeFi ecosystem is also continuously evolving strictly in accordance with the demand hierarchy theory. And the emergence of high-level requirements basically occurs when low-level requirements are met.

In the Polygon ecosystem, the first-level demand has been provided with a sufficient liquidity foundation, and the second-level demand has also been basically met. However, due to the excessively aggressive incentive strategies mentioned above, there are fewer new second-level demands. Makes the overall vitality poor. Therefore, giving full play to the three-level needs and creating a more stable and sound interest-bearing asset ecosystem through the establishment and support of high-quality asset management may be able to stimulate the innovation of the four-level derivatives agreement, generate new hotspots, and also provide feedback. NFT, GameFi and other ecosystems.

So what is the best product solution I understand?

Ideal asset management tool

Standardized primary and secondary demand function integration

Regardless of any ecology, basic primary and secondary needs are the prerequisite for ecological explosion, because primary and secondary needs provide the basis for liquidity and agreement combinations.

However, in the actual operation process, users will also encounter difficulties in information retrieval, difficulties in separate authorization, and certain learning thresholds.

Therefore, better asset management tools should first be able to standardize the integration of primary and secondary demand agreements. Instadapp is a good example in this regard.

Instadapp provides standardized functional integration of multiple basic protocols, and provides a unified account management system and rich developer support.

This greatly reduces the various operations and learning costs that are generated when users transform between different needs, and provides many targeted functions for the changes of different protocols, such as the debt transfer function of Maker~Compound, Sai~Dai Debt renewal

But this is not perfect. Instadapp has also released a Polygon version, but the only protocol currently supported is Aave. Moreover, Instadapp only considers the needs of users, and does not provide further asset management functions.

Rich strategies and income aggregation asset management functions with clear risk ratings

As we mentioned earlier, the Matthew effect of funds can expand leverage by supporting interest-bearing assets in accordance with the idea of ​​spell, and provide financial efficiency.

This can actually liberate the funds that have sunk in the primary needs. Therefore, an ideal asset management tool must have the function of revenue aggregation, so that users can pass the funds through the product first, and then deposit it into the first-level demand product. While enjoying the basic income, get standardized interest-bearing assets.

Standard interest-bearing assets

However, there are also problems. The risks of interest-bearing assets are actually closely related to the risks of the strategy itself.

Still this picture:

Rescue Polygon Project: Discussing Public Chain and DeFi

Different interest-bearing asset strategies represent different income risks. For example, for the interest-bearing assets of stable currency deposit interest, the price fluctuation of the original asset is minimal, and the deposit interest basically does not experience negative changes. Therefore, this type of asset can be considered the lowest risk. And some more complex strategies, such as

Rescue Polygon Project: Discussing Public Chain and DeFi

The user stores USDT in the strategy pool of the year, and stores the asset in the aave pool provided by curve in the year, and gets aToken interest + curve handling fee + crv + matic. Yearn will realize all the income obtained at a certain time and calculate it as the income of yvUSDT and distribute it to users.

In this process, three major agreements have been experienced, and active transactions have emerged. The probability that there will be a risk is much greater.

Such as protocol loopholes, oracle quotes hijacking, etc. The risk rating of such assets must be lower. When used as collateral, the required minimum mortgage rate should be higher.

So I think: If our goal is to improve the overall ecological capital efficiency, and improve the composability within the ecology.

  • The first thing to do is to have a credible risk rating mechanism for the product’s interest-bearing assets
  • Secondly, the key indicators of interest-bearing assets must also be more standardized

If the quantity remains the same, provide a stable quotation, transferable, unlimited withdrawal, etc.

  • Markable income ownership

This is a point worth discussing. Assume a scenario: If a synthetic asset product expects to support a certain interest-bearing asset as collateral, without any targeted improvement, two situations must be met.

1. The quantity remains the same, provides a stable quotation, can be transferred, and there is no limit to exit

The reason for meeting this condition is that if the interest-bearing asset contract does not provide a stable quotation, and the synthetic asset agreement needs to calculate the value of the asset based on the interest-bearing rules of the asset, so as to avoid the liquidation value when the interest-bearing asset is liquidated Conditions that are lower than the actual asset value.

However, there is also a risk of hijacking the quotation provided. For example, the stolen incident some time ago in the Year’s agreement with Cream, is because Cream directly obtained the quotation provided by Year when yvASSET was used as collateral, and the recurring loan of Cream’s direct flash loan. The hacker used Flash Loan to control the offer provided by Year and thus emptied Cream’s fund pool.

So is there any other way?

2. Interest-bearing assets that can mark the ownership of income

When users deposit interest-bearing assets as collateral in synthetic asset A, the synthetic asset agreement may not consider the impact of interest income on the overall collateral value. Because when depositing the contract, the right of income can still belong to the user, only when the collateral is liquidated, the income will be settled and the principal will be auctioned to the liquidator.

In this process, the synthetic asset platform does not require special treatment of interest-bearing assets, and only needs to be fully returned when burned, or to trigger income settlement when cleared.

And as an asset management platform, there is no need to actively exchange some low-liquidity platform currency proceeds into some high-liquidity tokens. In this way, there is no need to provide a quotation by the asset management platform.

This form of interest-bearing assets has some combinations of tokens and NFTs, which can be regarded as a new type of token that can mark ownership and can be split.

For this idea, we have also thought about submitting a new EIP-token protocol standard. But this scheme also has some limitations.

For example, it will increase the complexity of the liquidation process, and the value of interest-bearing assets cannot be directly reflected in the debt (the appreciation of interest-bearing assets means that the proportion of mortgage debt will correspondingly decrease, and the appreciation of interest-bearing assets is actually in the first-level demand agreement. The income is the debt repayment of the third and fourth grade products).

However, as the aforementioned risk rating strategy is the same, more choices mean improved combination. I think this is very worthwhile.

3.Asset Management Middleware——Asset Management Middleware

to conclude

The idea of ​​this product is more like creating a middleware with first-level and second-level requirements to fourth and fifth-level requirements for assets in the ecosystem according to the requirements.

Users can have a one-stop basic demand function site, and secure and reliable to obtain basic income for funds. And through this middleware, a standard risk-rated interest-bearing asset certificate is obtained, which further improves capital efficiency.

The fourth and fifth-level demand projects can obtain a richer selection of liquid assets, and no longer need to be caught in the battle with the capital stock of the top projects.

For Polygon and other similarly problematic project parties, it is possible to give full play to the liquidity foundation obtained by the incentive plan, and expand this type of product into a unified front-end of all funds through official support and guidance.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/rescue-polygon-project-discussing-public-chain-and-defi/
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