Bell Curve
Solana Defi 2.0: The Comeback | Jarry Xiao, Lucas Bruder, MacBrennan Peet
Thu Jul 20 2023SolanaDeFiL1 AdoptionToken IncentivesPoints SystemsLiquidityOrder BooksAMMsJupiter InterfaceMetricsRisk ManagementOpen SourceDecentralized StablecoinsBuilding a Company
Description
The episode covers various topics related to Solana DeFi, including the importance of immediate user appeal for L1 adoption, the growth and liquidity challenges faced by Solana DeFi, the use of token incentives and points systems in DeFi, the need for stronger and more capital efficient primitives, the differences between order books and AMMs, the role of Jupiter as a powerful interface for trading on Solana, the metrics used to assess protocols, the importance of building liquidity on chain, the risk management perspective of Solana, the potential of DeFi and Solana's future, the need to expand Solana's adoption and open source culture, the importance of open source code and decentralized stablecoins, and insights on building a company. The episode emphasizes the need to attract users, developers, and liquidity to succeed in crypto infrastructure.
Insights
Immediate user appeal is crucial for L1 adoption
Crypto true limiters abstract away L1 information from users
Solana DeFi needs more liquidity and growth
Solana experiencing an explosion in TVL (Total Value Locked), teams hitting inflection points with their products
Token incentives and points systems are used in DeFi
Token incentives can boost short-term growth but may not be sustainable in the long term. Points are being used as a way to test incentive mechanisms before launching a token.
Stronger and more capital efficient primitives are needed
Solana DeFi needs more LST growth and liquidity on chain
Differences between order books and AMMs
Order books provide precise price levels and sizes for each order, while AMMs set those terms for liquidity providers
Jupiter is a powerful interface for trading on Solana
Jupiter routes trades to the best price and order books have a proven track record of allowing liquidity providers to be profitable
Metrics to assess protocols
TVL, volume, liquidity depth, and execution at a good price
Building liquidity on chain is important
Having liquidity on chain makes DeFi tools more practical for bigger players in the finance world
Solana's risk management perspective enables universal margin between derivatives on different chains
Solana has the ability to liquidate faster, cheaper, and safer than other chains
DeFi's potential and Solana's future
DeFi's power lies in its composability and the ability to work with existing infrastructure. Solana needs to attract more users, developers, and liquidity to succeed as infrastructure.
Chapters
- Crypto True Limiters and L1 Adoption
- Solana DeFi Growth and Liquidity
- Token Incentives and Points Systems in DeFi
- LST Growth, Liquidity, and Order Books vs AMMs
- Jupiter Interface and Solana's Brand Evolution
- High TVL, Capital Efficiency, and Metrics for Assessing Protocols
- Building Liquidity, Risk Management, and DeFi Skepticism
- Open Source, Decentralization, and Stablecoins on Solana
- Solana's Risk Management and Attracting Users
- DeFi's Potential and Solana's Future
- Expanding Solana's Adoption and Open Source Culture
- Open Source Code and Decentralized Stablecoins
- Decentralized Options and Building a Company
- Building a Company and Solana's Metrics
Summary
Transcript
Crypto True Limiters and L1 Adoption
00:00 - 07:23
- Crypto true limiters abstract away L1 information from users
- Immediate user appeal is crucial for L1 adoption
Solana DeFi Growth and Liquidity
00:00 - 07:23
- Solana experiencing an explosion in TVL (Total Value Locked)
- Teams like Jito, Ellipsis, and Margin Labs hitting inflection points with their products
- Liquidity, users, and dev ecosystem are present on Solana
- Bottleneck of liquidity due to risk factors
- Jito Soul experiencing hyper growth in the last month
- Narrative around Solana DeFi contributing to growth
- Liquid staking tokens gaining utility in DeFi platforms
- Points systems developed by Margin Labs and Cipher driving growth in Solana DeFi
- New D5 protocols and users entering the chain
- Controversy surrounding points systems and their advantages for teams
Token Incentives and Points Systems in DeFi
06:59 - 14:24
- Token incentives in DeFi can boost short-term growth but may not be sustainable in the long term.
- Having a token is game theory optimal and gives an advantage over protocols without tokens.
- Points are being used as a way to test incentive mechanisms and attract users before launching a token.
- Launching a token requires reaching product-market fit and going through legal processes, which can be expensive and time-consuming.
- Points serve as an interesting growth hacking tool to experiment with user behavior before introducing a token.
- Incorrect allocation of tokens during protocol launches has been observed, making points valuable for experimentation.
- Experimenting with points helps determine where to place incentives and how effective they are before launching a token.
LST Growth, Liquidity, and Order Books vs AMMs
14:11 - 21:02
- Solana DeFi needs more LST growth and liquidity on chain
- 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 be proactive in specifying their desired actions, while AMMs require users to be proactive in preventing unwanted actions
- AMMs can lead to situations like sandwich attacks, where the price is manipulated outside of its true value range
- For everyday users, it doesn't make a difference whether they use an AMM or an order book interface like Jupiter as long as they get the best price
Jupiter Interface and Solana's Brand Evolution
20:35 - 27:06
- Jupiter is a powerful interface for trading on Solana, routing trades to the best price.
- 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 offerings 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 protocols like Arbitrum or blue chip L1/L2 solutions.
High TVL, Capital Efficiency, and Metrics for Assessing Protocols
26:46 - 33:44
- High TVL is a good trust signal and indicates more value to secure
- 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, Risk Management, and DeFi Skepticism
33:23 - 40:13
- Building liquidity on chain is important for executing large trades at a good price.
- 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.
Open Source, Decentralization, and Stablecoins on Solana
39:49 - 46:58
- Be skeptical of misleading numbers in the crypto space, especially when it comes to yield farming and random black box deposits.
- 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 and Attracting Users
46:41 - 54:09
- Solana's risk management perspective enables universal margin between derivatives on different taxes
- 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
- It's important to understand the nuances between EVM and Solana users now, but in the future, users should be focused on consumer-grade applications rather than specific L1s
- Tokenization of off-chain assets could be interesting in the future
DeFi's Potential and Solana's Future
53:51 - 1:01:24
- DeFi's power lies in its composability and the ability to work with existing infrastructure on Ethereum.
- 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.
Expanding Solana's Adoption and Open Source Culture
1:00:59 - 1:07:45
- 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.
- 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 Source Code and Decentralized Stablecoins
1:07:20 - 1:14:37
- Open sourcing code should be an expectation for projects on the mainnet
- Opening source code earlier is less stressful than doing it with a large TVL
- Closed-source protocols can still be exploited, but open source sends a better signal
- Verified code in Etherscan is important for user comfort and adoption
- Freezing programs on Solana can make sense under certain conditions
- Time locks for program upgrades provide transparency but have downsides
- USDC is a great product, but decentralized stablecoins have challenges
- Solana needs a decentralized stablecoin as an alternative to USDC
- Margin will be launching MUSD, a decentralized stablecoin collateralized by LSTs
Decentralized Options and Building a Company
1:14:15 - 1:21:58
- Staking yield, nav capture, and lending yield are discussed as decentralized options.
- USDC is considered a good onboarding mechanism for retail.
- The worst DeFi take mentioned is that LPs are printing money.
- Arbitrage and profitability in DeFi are criticized for their stupidity.
- APYs on AMMs are described as straight up criminal.
- NFTs are seen as having potential but the current profile picture craze is not impressive.
- Art blocks and original crypto-punks PFPs are praised while evolving use cases for NFTs are anticipated.
- Advice to aspiring founders includes focusing on strategy and hiring, surrounding oneself with brilliant people, and going fast.
Building a Company and Solana's Metrics
1:21:33 - 1:23:02
- Finding a good co-founder is important for accountability and bouncing ideas off of.
- 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.