This article is compiled from the first issue of “DeFi The World Series AMA”
Theme: “DeFi: When Bitcoin Derivatives Come to ETF”
One of the biggest hotspots in 2019 is undoubtedly DeFi. Its full name is Decentralized Finance, also known as Open Finance, to refer to “decentralized finance” products and services built on the block chain.
But the understanding of DeFi in the domestic community is still shallow. Why do we need DeFi? What is DeFi like? What are the users of DeFi? What is the trend of DeFi?
So with the support of Hydro and DOS Network project, a chain learning and DeFi Lab jointly launched the first interactive community interview column of DeFi thematic series, “DeFi The World thematic series AMA”.
We will select a topic each time, and invite the contributors of excellent DeFi projects at home and abroad. We hope that through the online live broadcasting, we can help people to improve their understanding of DeFi and reduce the information gap and cognitive gap between China and the western market in the DeFi world.
In the first issue, we invited Seth Rubin, co-founder and CEO of MARKET Protocol, and Anton Buenavista, chief eco-engineer of Kyber Network, to talk about DeFi derivatives.
The following is the full content of live broadcasting.
Daishichao: Hello, Seth and Anton. Why don’t you introduce yourself first and how did you get into the block chain industry?
Seth: Thank you, Diane. It’s great to be here and to have the opportunity to talk to you. I am Seth, co-founder and CEO of MARKET Protocol. In the past, I worked as a derivatives trader and market maker for 13 years.
In 2015, I first entered the field of encryption technology as a trader, and it was not until the end of 2016 that I realized how special block chain technology was. Since mid-2017, I have been working full-time on MARKET Protocol.
Anton: Hello, everyone. Nice to be here. I first came into contact with encrypted currency in 2012. Because there’s an article about Bitcoin and the Silk Road website. With a better understanding of block chain technology, I am more interested in other more complex projects, such as Mastercoin and Countparty.
When Ethereum first came out in 2014, I followed it closely and was one of the early members of the Italfang community in Singapore. When I was working at Intel, I worked in the field of encryption in my spare time. In 2018, I joined Kyber to work full-time.
MARKET Protocol: BTC Derivatives Without Explosion
Dai Shichao: Okay, let’s ask Seth to answer a few questions first.
_1. Can you give us a brief introduction about MARKET Protocol and MPX?
Seth: MARKET Protocol allows users to create token derivatives that represent any asset, such as Apple stock, yen or leveraged bitcoins.
Our project is based on the ETF Intelligence Contract, and there is no hand-to-hand risk. Our tokens are ERC20 assets, so users can trade on any ETF exchange.
MPX is a decentralized exchange based on 0x that allows users to trade derivatives.
_2. What are SBTC, LBTC and MKT? How do users buy and participate, and what is its role?
Seth: Our first products, SBTC and LBTC, represent leverage shorting and multi-bit coins, respectively. When the price of Bitcoin falls, the value of SBTC increases, whereas when the price of Bitcoin rises, the value of SBTC decreases.
Our leverage is very flexible, usually providing 2 – 4 times the leverage. Earlier this month, we saw up to 35 times the leverage. All positions are fully mortgaged without additional margin or liquidation.
MKT is our token. With MKT, users can discount the handling fee when they generate LBTC and SBTC. In our second version of the roadmap, we can see that MKT token holders can act as verifiers of the predictor, ensure liquidation, assist in dispute resolution, and have incentives for network fees.
Below is a link to our second edition of the road map:
_3. We know that derivatives trading platforms need to predict the settlement price of assets under the chain when they are delivered. How can MPX obtain the settlement price and what solutions are used?
Seth: At present, our predictor gets the price of Bitcoin from Coincap, which provides the price index platform for the top 60 exchanges. There is a 24-hour settlement window during which settlement prices are validated by smart contracts.
In the future, we will use MKT verification nodes to de-centralize this process, and use third-party predictors as alternatives to resolve disputes.
_4. Last month, Synthetix, a derivatives platform, lost assets because of an attack on a predictor. Can you avoid this problem and have you got a better solution? What would be the solution to a similar problem in V1 when Synthetix Prophet attacks occurred?
Seth: We don’t use the same predictor as Synthetix, and we don’t need to set exchange rates and streaming market data, so the MARKET Protocol won’t have a predictor accident like Synthetix. The prices of SBTC and LBTC are determined not by predictors, but by efficient markets.
For example, we will settle the Bitcoin price on Coincap in 28 days. Buyers and sellers will decide the market price according to these rules. Then, as mentioned earlier, verify the settlement to further ensure data integrity.
_5. With regard to the DeFi market, according to the data of DeFi Pulse and Def. review website, the value of ETH locked in DeFi products is less than $500 million. So, how big do you think the DeFi market is and where are the users?
https:// DeFi pulse.com/
https:// DeFi .dapp.review/
Seth: I don’t think the DeFi market has a ceiling. Speaking of our market, we now see about $5 billion in encrypted assets traded every day, compared with $500 billion in traditional areas.
As we chain more and more assets, encrypted money markets will have tremendous potential. We have the opportunity to improve the way people acquire, trade and preserve these assets that bring value to people around the world.
_6. Why should price floor and cap be set by the project side? This can be set as user-specified parameters in each contract.
Seth: Let’s first explain some simple concepts. Reference assets are assets represented by derivatives. For SBTC and LBTC, reference assets are bitcoins. The price floor and price ceiling are the lowest and highest tradable value of reference assets before the maturity of tokens.
This allows us to define the maximum losses of long and short positions, so that we can eliminate credit risks and guarantee solvency.
This blog gives details about the price:
See this blog for details about settlement and deadline:
At present, we (the project side) set a price floor and a price ceiling. We also expect our users in the second edition to help us set price caps and other governance decisions.
_7. What do you think of UMA Protocol and SET Protocol?
Seth: I think both projects are cool. The ETH moving average cross Trading Robot recently released by SET Protocol project is great! We can chain other assets and allow Bitcoin, EOS, oil or stock indices to adopt the same strategy.
UMA is similar to MARKET Protocol in some respects. But our structure and margin handling, leverage and liquidation are very different.
They are also more focused on predictors and recently released beta products. We had earlier discussed with Allison (co-founder of UMA) and their team the design of their decentralized predictor.
[Part 2] Kyber Network: Cross-Chain Liquidity
Daishichao: Now let’s talk to Anton. I’m sorry to have kept you waiting.~
_1. Can you briefly introduce Kyber and WBTC?
Anton: That’s OK. Kyber is one of the founding members of the WBTC community. It initially helped guide WBTC to improve liquidity, encourage adoption, and help sustain the development of standards.
Kyber is a WBTC merchant that can send requests for coinage and destruction of WBTC tokens in the WBTC DAO. You can learn more about WBTC at https://WBTC.network.
At present, more members are joining the WBTC DAO as merchants. Extended reading:
_2. It is a great honor for DDEX and Hydro to join the WBTC DAO community. The coinage of WBTC is affected by KYC, and the demand exceeds the supply. What is the solution? The problem is that I find it difficult to pass KYC in BitGo.
Anton: We are continuing to serve more businesses. We are working with other WBTC DAO members to explore more ways to rationalize the casting process.
With the increase of demand, such as DeFi project, the supply of WBTC will naturally increase. Over the past few weeks, we have seen an exponential increase in WBTC supply due to market demand.
Now, it’s better to get WBTC through the merchant. Ren (https://renproject.io/) is coming up with a solution that allows users to easily convert BTC to WBTC. If you plan to purchase a large number of WBTC, you can contact us directly, we can provide help!
_3. Kyber is an old friend of the Chinese community. I would like to ask you what your core competitiveness is and what lessons have you learned for so long.
Anton: For the single eater, our core competitiveness comes from the convenience of integration, where we provide a good mobility and good documentation and guidance. Investors are also convinced that as we tap into multiple sources of liquidity, they are earning competitive interest rates.
The ability to have multiple reserves is another of our core strengths. It enables us to work with professional manufacturers, token teams, decentralized mobile pools/services such as Uniswap, DutchX and Eth2Dai. We have an integrated ecosystem map.
As for the lessons learned, liquidity is still very important, so we get as much reserves from as many resources as possible for DeFi applications to use.
_4. Can you share your latest progress? Is there any good news?
Anton: We recently announced a Price-limit order on KyberSwap, which many users have been asking for. The challenge is to make it work in an unmanaged way and to make it as trustworthy as possible. We’re really proud of that, and of course we’re trying to improve it.
We are also actively promoting the Waterloo project, a bridge project between ETF and EOS. We recently had a DAO proposal to transfer a KNC from ETH to EOS as an experiment.
Speaking of DAO, we are currently experimenting with DAOstack #2. We foresee a slow process in which we not only learn and explore platforms with the community, but also find and solve solutions to problems arising from governance in the decentralized chain.
_5 and ERC20 are no longer exciting. What do you think of DEX’s acquisition of high current assets without a perfect solution across the chain?
Anton: It’s still in its early stages, but we’re definitely working on a great cross-chain solution. We announced the Waterloo Relay Bridge links to Etherfang and EOS. We believe that different digital currencies will appear in different block chains.
In the long run, these relay bridges will be used to transmit cipher packets between different block chains in order to make use of their unique advantages and conduct transactions across block chains.
For example, the EOS chain has a higher transaction rate per second, so it has the advantage of achieving higher frequency transactions. The Ethernet chain is considered safer by the vast encrypted community and currently provides more advanced financial primitives, such as the DeFi project.
ERC20 is a practical standard. Interestingly, different projects are built on it, as we now see in the current field. I think ERC20 has more unique uses, or other standards derived from it.
_6. What do you think of liquidity sharing? We think this is not a technical problem, but a business problem. Because if liquidity is the core competitiveness of a project, why should people share it with others?
Anton: There are many ways to provide liquidity. For example, for on-chain liquidity, there is a Uniswap model that provides liquidity by making smart contracts using on-chain automation markets. DeutschX of Gnosis provides liquidity through Dutch auctions.
Maker has a huge algorithmic ecosystem, casting and destroying Dai, pegged to the dollar. There are more projects providing chain liquidity.
Finally, Kyber not only helps to provide liquidity through its reserve model, but also aggregates these different liquidity into a pool of aggregated liquidity that any user can access. So I think everyone can provide liquidity in their own unique way.
_7. How big do you think the DeFi market is and where are the users?
Anton: Users first need to be familiar with encryption before using these applications, so this is an additional barrier to use. However, we believe that it will take many years for encryption technology to become as popular as French currency. Therefore, we hope that users will grow over time.
So essentially, as Seth just said, I don’t think the DeFi market has a ceiling. As more and more users enter the field of encryption, our market will naturally grow.
[Part 3] DeFi can’t just wait for ETF 2.0
Daishichao: Thank you Seth and Anton. Next, I’ll ask you some common questions that you all care about.
_1. How did your project tokens capture value?
Seth: Our tokens offer discounts to anyone who “digs” on the platform. In version 2, participants can execute services on the network by mortgage MKT, which in turn shares the costs incurred by applications on the network. MKT tokens establish links between the network (resolution, dispute resolution, governance) and participants.
Anton: Kyber takes 0.25% of the value charged from KNC into the reserve for each transaction. Most of these costs have been destroyed. So far, we have destroyed 170,000 tokens. Therefore, KNC is a deflationary asset that should increase over time.
At the same time, we are continually exploring other use cases of our tokens, such as chain governance and discounts on products we are building, such as Price-Limiting order functions, where users can get discounts on transaction fees based on the number of KNC tokens they hold.
_2. What do you think DeFi lacks from large-scale applications? How should we solve it?
Seth: I think the biggest problem right now is user experience and users. Some user experience problems are addressed through technology scaling, but overall, using DeFi and wider block chain applications remains a challenge.
We’ve seen a lot of great work to make DeFi applications more usable, and we’re on the right track; but we still have a long way to go to make it comfortable for the average person to use.
At present, most people in this field are amateurs and professionals. It takes time and desire to learn new things to use the products we need to use successfully.
Anton: To supplement Seth’s answer, another question is what obstacles must be addressed before the encrypted currency/block chain can be adopted on a large scale? The market value of the entire encryption market is $300 billion. The U.S. stock market is about $30 trillion.
Compared with traditional markets, encrypted currencies are still very small. If other parts of traditional finance adopt and participate in encrypted currency/block chains, then natural DeFi will also be heavily used.
At the same time, the DeFi project will continue to build solutions in the form of physical assets, cross-chain transactions, extensions and more operations. Always be transparent and as decentralized as possible.
_3, DeFi projects can be divided into two categories of transactions and assets. The essence of DeFi is intelligent contracts, which are interoperable. So what about DeFi interoperability?
Seth: I think it’s important for DeFi and the whole block chain area. This means that the project can focus on solving specific problems and take advantage of the work of other projects. It allows us to develop our entire field. But there are also problems, including increased complexity, backward compatibility and potential security vulnerabilities.
Anton: I think the current DeFi area is very cooperative. What we see is a succession of DeFi projects. For example, the Jain brothers created InstaDapp and DeFi Saver, enabling users to create new CDPs to obtain DAI, and then immediately put DAI into Compound for interest.
_4. What are the advantages and disadvantages of DeFi in ETF? Will ETH 2.0 solve these problems? Will DeFi have a better smart contract platform and public chain environment?
Seth: Now, Ethernet is the most meaningful place for us and most people. I’m very hopeful about ETH 2.0. If this is meaningful in the future, we will switch to a different platform or chain, but now it is difficult enough for ETF to get users and use them, let alone another chain.
Anton: The advantage of ethernet: It is the most popular and active intelligent contract platform at present. Disadvantage: Scalability issues need to be addressed. I don’t think ETH 2.0 is a panacea for the current problem. There are still many issues to consider (for example, migrating current smart contracts from 1.0 to 2.0, and how they work in fragmentation).
Of course, there are other platforms that have good attraction and development activities, such as EOS, Cosmos and Polkadot. We may see some aggregation of platforms, but to be honest, only time will prove it.
_5. Ecology needs more high-quality assets. What are the key difficulties in introducing BTC and cross-chain assets into DeFi market?
Seth: In this case, we need to give people an opportunity to make more money (leverage, new assets, acquisition), protect the funds they own (de-centralized trusteeship, short), and then start building liquidity. The value of opportunity must exceed any potential user experience or educational speed in order to truly achieve mobility.
Anton: The key question to answer is how to prove the value of assets in the chain if they are linked to assets outside the chain in a way that is trusted, transparent and decentralized. Tether is one of the simplest solutions for linking the dollar to digital currencies. But it is totally centralized and its dollar reserves are not transparent.
The WBTC plan is transparent because anyone can check the reserves on the chain. Although it is managed by a DAO, it is not completely decentralized because the BTC reserves are held by a trustee. Therefore, we need to address some challenges if we want to bring more assets down the chain in a way that does not have a single point of failure.
_6. What is your most commonly used DeFi product? If you were to predict the killer application of DeFi, what would you think it might be?
Seth: I probably have the most uniswap. It’s easy to use. The killer DeFi application is clear, intuitive, and completely abstracts its DeFi features. It’s built with DeFi because it allows previously impossible things to happen. It is trustworthy and borderless. But I can’t predict what it does.
Anton: We’ve tried a lot of DeFi products, especially those that integrate Kyber protocol, to see what they can do. I tested the Composite/Setup Protocol/Reducer/InstaDapp/Betoken to list a few.
But there are many DeFi projects, and that’s great! (For example, we tried Compound / Set Protocol / DeFi Saver / InstaDapp / Betoken) but some DeFi projects are really great! It’s hard to guess what DeFi’s killer app looks like, but I think it’s mainly about user experience and threshold issues.
Part 4 Questions and Answers for Community Users
_1. Will the technical implementation of WBTC be further modified/updated? Or are you busy with EOS Bridge recently?
Anton: WBTC is a community-driven project, so it’s up to DAO members to decide whether any upgrades are needed. So far, tokens have been fairly stable. DAO itself can also work properly.
We are more concerned about our cross-chain work, such as Waterloo and deploying Kyber protocol on other smart contract platforms. We are also improving our Price-Limiting order function.
_2. How to treat uniswap as kyber’s largest reserve pool? If it continues to dominate, can kyber still derive value from uniswap? Is it possible that cooperation in DeFi space will change someday? If so, why?
Anton: I think this area will continue to be collaborative, because each project is solving specific problems, and other projects can use these solutions as well. As for Uniswap, its trading volume is actually not the largest. You can view the storage in our tracker: https://tracker.kyber.network…
Therefore, for some tokens, some reserves are quite competitive in quantity. On Kyber, our interest is to accumulate liquidity, so if the amount of these reserves increases, it’s still a good thing for us!
Thank Seth and Anton, as well as Desmond Ho, for sharing your thoughts and insights in the Chinese community.
If you want to participate in the next “DeFi The World Project Series AMA” activities, you can add a piece of Miss Jessie (ID: yikuailianxi), reply to “AMA”, then you can learn in groups!
On DOS NETWORK
DOS Network is a scalable two-tier network that implements decentralized predictors, providing data up-link services and computing power for mainstream block chains. It links the intelligent contract of block chain with real-world data and events, and provides verifiable computing power for block chain, so that more application scenarios can be implemented in block chain. It can support various mainstream block chains, such as Ethereum, EOS, TRON, ThunderCore, Ultrain, QuarkChain, etc.