0xResearch
Solana Defi 2.0: The Comeback | Jarry Xiao, Lucas Bruder, MacBrennan Peet
Thu Jul 20 2023SolanaDeFiCryptoLiquidityToken IncentivesOrder BooksAMMsRisk ManagementUniversal MarginOpen Source
Description
Crypto true limiters abstract away L1 information from users. Appealing to immediate users is crucial for L1 adoption. Solana's DeFi ecosystem is experiencing explosive growth in TVL. Teams like Jito, Ellipsis, and Margin Labs are hitting inflection points with their products. Solana has a high number of daily active users and liquidity waiting for opportunities. Risk management is a key focus for handling the current liquidity bottleneck. Jito Soul has experienced significant growth due to Solana DeFi narrative and partnerships with other protocols. Points systems developed by Margin Labs, Cipher, and others contribute to the growth of Solana DeFi. Points systems have advantages and controversies surrounding them.
Insights
Solana's DeFi ecosystem is experiencing explosive growth in TVL
Teams like Jito, Ellipsis, and Margin Labs are hitting inflection points with their products. Solana has a high number of daily active users and liquidity waiting for opportunities.
Having a token is game theory optimal and gives an advantage over protocols without tokens
Points are being used to test incentive mechanisms and attract users before launching a token. Launching a token requires product-market fit and involves legal red tape.
Order books provide precise price levels and sizes for each order, while AMMs set those terms for liquidity providers
Order books allow traders to set their own terms, while AMMs act on behalf of the trader. For everyday users, it doesn't make a difference whether they use an AMM or an order book interface like Jupiter as long as the trade goes through.
Solana's brand is evolving from being seen as NASDAQ on chain to a consumer application chain with NFTs
Professional investors are needed for Solana DeFi, but retail users are currently dominant on the chain. Margin Five has adapted its product based on market cycles and user archetypes.
Solana's speed and affordability open up new possibilities, such as providing universal margin between derivatives on different chains
To build DeFi for the future, understand and leverage Solana's technology to create innovative and differentiated protocols. Solana's risk management perspective enables universal margin between derivatives on different taxes.
Crypto can solve real-world problems by acting as a middle layer for global remittance flows
The chain being used will continue to matter for the next 10-15 years due to complexity and tribalism within the crypto community. Crypto needs to attract more users, developers, and liquidity to succeed as infrastructure.
Solana needs to break outside its Western bubble and appeal to the Asian market for broader adoption
Teams need to build on top of existing primitives to seek compounded value and TBL adoption. Solana developers should focus more on open source and verifiability of code.
Open sourcing code should be an expectation for protocols on the mainnet
Having verified code is important for user comfort and adoption of protocols. A decentralized stablecoin collateralized by LSTs is being developed to provide an alternative to USDC on Solana.
USDC is considered a good onboarding mechanism for retail
Arbitrage and liquidity on AMMs are criticized as being criminal. NFTs are seen as having potential but the current profile picture craze is not considered significant.
Knowing what to build and in what order is the hardest part of building a company
Solana currently has 312 million in TVL, 1.5 billion in stablecoin market cap, and 781 million in volume over the last seven days.
Chapters
- Crypto true limiters abstract away L1 information from users
- Token incentives in DeFi can boost short-term growth but may hinder long-term sustainability.
- Solana DeFi needs more LST growth and liquidity on chain
- Jupiter is a powerful interface for trading on Solana, routing trades to the best price.
- High TVL is a good trust signal and indicates more value to secure
- Building liquidity on chain is important for executing large trades at a good price.
- Be skeptical of misleading numbers in the crypto space, especially when it comes to yield farming and random black box deposits.
- Solana's risk management perspective enables universal margin between derivatives on different taxes
- DeFi's power lies in its composability and the ability to work with existing infrastructure on Ethereum.
- Solana needs to break outside its Western bubble and appeal to the Asian market for broader adoption.
- Open sourcing code should be an expectation for protocols on the mainnet
- Staking yield, nav capture, and lending yield are discussed as decentralized options.
- Finding a good co-founder is important for accountability and bouncing ideas off of.
Summary
Transcript
Crypto true limiters abstract away L1 information from users
00:00 - 07:23
- Appealing to immediate users is crucial for L1 adoption
- Solana's DeFi ecosystem is experiencing explosive growth in TVL
- Teams like Jito, Ellipsis, and Margin Labs are hitting inflection points with their products
- Solana has a high number of daily active users and liquidity waiting for opportunities
- Risk management is a key focus for handling the current liquidity bottleneck
- Jito Soul has experienced significant growth due to Solana DeFi narrative and partnerships with other protocols
- Points systems developed by Margin Labs, Cipher, and others contribute to the growth of Solana DeFi
- Points systems have advantages and controversies surrounding them
Token incentives in DeFi can boost short-term growth but may hinder long-term sustainability.
06:59 - 14:24
- Having a token is game theory optimal and gives an advantage over protocols without tokens.
- Points are being used to test incentive mechanisms and attract users before launching a token.
- Launching a token requires product-market fit and involves legal red tape.
- Points serve as an interesting way to experiment with user behavior before introducing a token.
Solana DeFi needs more LST growth and liquidity on chain
14:11 - 21:02
- Stronger and more capital efficient primitives like Phoenix are needed
- More projects launching tokens on Solana will be important for the ecosystem
- Order books provide precise price levels and sizes for each order, while AMMs set those terms for liquidity providers
- Order books allow traders to set their own terms, while AMMs act on behalf of the trader
- For everyday users, it doesn't make a difference whether they use an AMM or an order book interface like Jupiter as long as the trade goes through
Jupiter is a powerful interface for trading on Solana, routing trades to the best price.
20:35 - 27:06
- Order books have a proven track record of allowing liquidity providers to be profitable.
- AMMs can be unprofitable and people often don't understand the nuances of their strategies.
- For DeFi to succeed in the long term, unsustainable models of liquidity provision need to be addressed.
- Solana's brand is evolving from being seen as NASDAQ on chain to a consumer application chain with NFTs.
- Professional investors are needed for Solana DeFi, but retail users are currently dominant on the chain.
- Margin Five has adapted its product based on market cycles and user archetypes.
- Building a DeFi product requires sensitivity to interest rates and market conditions.
- As rates go up, DEXs will play a bigger role in capturing opportunities on Solana.
- The broader push is to integrate crypto into the real world for more predictability in product building.
- TVL (Total Value Locked) is a trust signal and high TVL indicates legitimacy of a protocol or platform.
High TVL is a good trust signal and indicates more value to secure
26:46 - 33:44
- TVL is influenced by the price of the L1 token
- Capital efficiency is important for traders
- Phoenix has higher capital efficiency compared to Uniswap and other AMMs
- Phoenix regularly does $5 million volume with less than $100,000 in the book
- Market makers on Phoenix consistently perform well, unlike on Uniswap
- Volume over TVL is a metric that highlights differences between order books and AMMs
- Metrics to assess protocols include TVL, volume, liquidity depth, and execution at a good price
Building liquidity on chain is important for executing large trades at a good price.
33:23 - 40:13
- Having liquidity on chain makes DeFi tools more practical for bigger players in the finance world.
- Understanding the risk involved in DeFi is crucial for users.
- Claims of high APR or yield should be approached with caution and skepticism.
- Numbers that seem too high are likely hiding something from the user.
- There's no free lunch in DeFi, and high returns often come with hidden risks.
Be skeptical of misleading numbers in the crypto space, especially when it comes to yield farming and random black box deposits.
39:49 - 46:58
- Staking yield is generally transparent, but options protocols often hide information.
- Bar of land pools are reasonable because they pay interest for capital provided.
- Expect more teams to do vertical integrations in Solana DeFi to direct fees towards the treasury.
- Liquid staking adoption on Solana is expected to increase, as less than 2% of all stake solas are currently in liquid staking.
- Solana needs to level up its retail adoption and mature like Ethereum's EVM has.
- Solana enables unique innovation due to its execution and programming model, allowing for things that are difficult or impossible elsewhere.
- Jupiter is an impressive aggregator on Solana that leverages the unique capabilities of the chain for optimal swapping prices.
- To build DeFi for the future, understand and leverage Solana's technology to create innovative and differentiated protocols.
- Solana's speed and affordability open up new possibilities, such as providing universal margin between derivatives on different chains.
Solana's risk management perspective enables universal margin between derivatives on different taxes
46:41 - 54:09
- Solana has the ability to liquidate faster, cheaper, and safer than other chains
- Solana is launching two products tightly integrated with the margin 5-bar blend
- Fast and cheap transactions enable interesting new use cases and composability
- Automation is relevant for AI integration in crypto
- In the future, users may not know what L1 they're on or if they're using margin-fi due to consumer-grade applications
- It's important to understand the nuances between EVM and Solana users now, but the goal is for users to use applications without knowing the underlying architecture
- Tokenization of off-chain assets could be interesting in the future
- Permissioned defi systems may exist for tokenized real-world assets
DeFi's power lies in its composability and the ability to work with existing infrastructure on Ethereum.
53:51 - 1:01:24
- Real-world assets, such as moving forex markets on-chain, could be a natural fit for DeFi.
- Crypto can solve real-world problems by acting as a middle layer for global remittance flows.
- The chain being used will continue to matter for the next 10-15 years due to complexity and tribalism within the crypto community.
- Crypto needs to attract more users, developers, and liquidity to succeed as infrastructure.
- Teams building in crypto should adopt crypto governance and not conform to traditional finance norms.
- The main reason Solana might fail is if it fails to attract users, which could be due to products or storytelling.
Solana needs to break outside its Western bubble and appeal to the Asian market for broader adoption.
1:00:59 - 1:07:45
- Teams need to build on top of existing primitives to seek compounded value and TBL adoption.
- Solana developers should focus more on open source and verifiability of code.
- Decentralized leverage will always have some element of centralization, such as price or risk parameters.
- The difficulty of DevEx and lack of shame culture contribute to the reluctance in open sourcing Solana projects.
- Public source code should be attached to programs on the mainnet for transparency and optionality.
- Protocols that are not open source should be lightly bullied into adopting public source code.
Open sourcing code should be an expectation for protocols on the mainnet
1:07:20 - 1:14:37
- Opening source code later can be more stressful if there are exploits or a large TVL
- Closed-source protocols are not necessarily safer, but open source sends a better signal to users
- Having verified code is important for user comfort and adoption of protocols
- Freezing programs on Solana can make sense under certain conditions, such as multi-sig control and community awareness
- Time locks for program upgrades can provide transparency and allow review of changes before execution
- USDC is considered a great product, but decentralized stablecoins have their challenges
- Solana's ecosystem heavily relies on USDC, making a depeg detrimental to the ecosystem
- A decentralized stablecoin collateralized by LSTs is being developed to provide an alternative to USDC on Solana
Finding a good co-founder is important for accountability and bouncing ideas off of.
1:21:33 - 1:23:02
- Knowing what to build and in what order is the hardest part of building a company.
- Being comfortable with being uncomfortable and pushing yourself and your team is crucial.
- Solana currently has 312 million in TVL, 1.5 billion in stablecoin market cap, and 781 million in volume over the last seven days.