Development in DeFi is not slowing down in the face of bearish sentiment in the market with many new protocols being launched recently. Generally speaking, DeFi protocols can be separated into two distinct groups:
- The protocols that generate revenue from crypto assets through lending or liquidity provision i.e. Curve and Aave.
- The protocols that enable efficient use of the above protocols through exploitation of bonuses or by reducing gas fees on transactions i.e. Yearn and Convex.
Visor Protocol (visor.finance) is a protocol generating yield from automatically optimising liquidity provision to Uniswap v3 pools. The Uniswap pools allow users to provide liquidity for trades to occur on the platform, generating fees in the process. Uniswap v3 liquidity positions contain many more manipulatable factors such as concentrated liquidity, range orders and flexible fees.This creates opportunity for more sophisticated strategies in liquidity provision.
Through a smart contract Visor automatically manages your assets according to an algorithmic liquidity provision strategy produced by Gamma (a liquidity provision strategy research organisation). Essentially, the algorithm auto-rebalances to concentrate liquidity around the market price and automates fee reinvestment.
Users’ positions in Visor are represented by a vault NFT (Non-fungible Token). An NFT is a digital representation of rights which is cryptographically secured on a blockchain. Ownership of the vault NFT allows the holder to receive assets provided as liquidity to the Uniswap pools and the income generated by the assets.
Using NFT’s to represent ownership in DeFi is a relatively new concept. The use of NFT’s may unlock further composability in defi products. One example of this would be allowing a lender to provide a loan using such an NFT as collateral. Upon a default or liquidation event, the ownership of the NFT could transfer seamlessly without extraneous transactions to relinquish custody ahead of time. Once the lender has the NFT transferred to them, they acquire the right to interact with the assets that underlie the liquidity position. This allows greater efficiency of capital by allowing a user to maintain exposure to the yield generated by liquidity provision while still borrowing against those assets.
Providing NFTs as collateral is not here yet, but it may not be far away. Recently, Stani Kulechov, CEO of Aave tweeted that “NFT as collateral is coming to Aave”.
Another recently launched DeFi protocol is Ribbon Finance (ribbon.finance). Ribbon is a protocol that steps out of the bounds of lending or liquidity provision and is part of a new class of DeFi primitives providing crypto structured products. These structured products are packaged financial instruments that use a combination of derivatives to achieve a return.
Currently, Ribbon offers products that generate yield through an automated ETH and WBTC covered call strategies (WBTC refers to bitcoin that has been “wrapped” so it can be transferred via the Ethereum Network). The option trading is done on-chain through Opyn and Hegic which enable the protocol to trade options automatically.
The strategy aims to automate the process of selling call options, and compound the premiums to generate a higher yield. A user can deposit into the protocol to save on the gas fees and avoid the complexity of running their own options strategy.
Tokens with high liquidity and low borrowing demand can be difficult to generate a yield from e.g. WBTC is generating 0.07% APY on Aave at the time of writing. These structured products allow these assets to generate value. Currently, the WBTC covered call strategy on Ribbon is returning 15.05%.
There are a few parts of the Ribbon Finance protocol which are centralised to enable the protocol to work i.e.management of certain aspects of the trading strategies are done by a group of strategists voted on by the token holders.
While whether entrusting certain functions of a protocol to individuals is going to become more common in DeFi remains to be seen, it does allow for more complicated products to be provided on-chain. It also allows DeFi protocols to move towards more traditional notions of asset management which some may find exciting and others may find loathsome.