We’re heads down and building through the market’s current uncertainty. We’ve situated our path forward. A few themes in what we’re doing:
- We are focused on helping the fixed rate ecosystem accomplish (or reach) product market fit
- We’d like to help propagate fixed rate instruments as a core part, generally, of the DeFi ecosystem
- We’d like to help support projects built on top of the current protocol and ecosystem
- We’re research-focused and realize it is up to the DAO to choose the direction of the protocol, particularly upgrades to the existing protocol (See "What We Haven't Been Up To")
Our current research and implementation plan is a 9-month timeline. But no matter what, we’re not racing against the clock. Our sense of urgency is the importance of building secure, exceptional products and continuing research in DeFi.
As we’ve pointed out previously, Element Finance decentralized its protocol almost three months ago, following the successful release of its governance token, and various steps in furtherance of decentralization. Control of the Protocol is now in the hands of the community. And as noted HERE, we are intentionally stepping back for a time even further to make sure that we’re not fully participating in governance. It’s important to us, as the former owners of the Protocol, to ensure that the Community itself, and not its legacy stewards, have the direction, vision, and authority over the Protocol itself.
So to reiterate what we said there, we strongly encourage the individuals in the community to engage in governance. Vote. Debate. Participate. Propose, disagree, revise, run for governance positions or promulgate proposals, and help choose the direction of the next steps of the Protocol.
What we’ve outlined in “Bolt-on Features” (Part One) below will not require protocol changes, and it does not implicate decentralization. In fact, it doesn’t require structural change or upgrades to the Protocol at all. And other companies and individuals can (and should!) do exactly what we’re doing — building on features that make use of the Protocol. Like other developers can build, we’re trying to research and build applications and features on top of the Element Protocol.
Let’s dive in on the current endeavors with a brief explanation of each.
Part One: Bolt-On Features
The following encompasses features or research which we are pursuing that will be built on top of the protocol.
V2 UI/Product Revamp:
In order to showcase the features described in this post, it is important to have a UI or product that demonstrates how it is put to use. We’re working on an entire revamp/recreation of app.element.fi that takes into account the protocol features below.
Note also that others can just as easily build their own interfaces; that doesn’t require us; it doesn’t require governance. This is the same as it’s always been.
Automatic Rollovers:
Allows for LP’ers to perpetually rollover and passively play a part in the ecosystem. LP’ers can configure to rollover automatically or for a certain time span, allowing for liquidity to passively move between terms. It accomplishes this via a contract that migrates liquidity between terms.
Umbrella Terms:
With Automatic rollovers, umbrella terms can be unlocked. An umbrella term is a wrapping term comprised of children terms. For example, a 2-year umbrella term on USDC can be comprised of 4 automatic rollovers on 6-month terms. The beauty is the LP’er gets both the yield position APY, the LP trading APY on the child terms, and also on the parent/umbrella terms. Longer terms introduce new use cases, attract different users, give certainty for longer periods of time, and make it easy to lock liquidity in the protocol for a longer period of time.
Optimistic Rewards:
This feature — also built on top of, not within, the Protocol — enables new yield sources. The optimistic rewards framework, described here, follows in the footsteps of optimistic rollups. Complex transactions or calculations can be run on rewards mechanisms, and the DAO acts as the finality layer with a 1 week challenge period. Long story short, new yield sources can be introduced and those yield source’s additional incentives (such as COMP emissions) can be distributed directly to participant’s wallets and does not require action from the Element protocol, such as selling these emissions. It is up to the user. Based on the economics of these systems, the principal token APR will take into account the emissions, and users who lock in a fixed rate get this without exposure to a new token such as COMP.
More Yield Sources:
Lately, yields in DeFi have been decreasing. However, there are still yield positions maintaining a reasonable level. Optimistic rewards situate the protocol to be able to introduce new yield sources easily, without the complexity of having to sell emissions from those positions. This may reduce complexity significantly by introducing new yield positions.
State Machine, Batching Transactions:
Currently, the app.element.fi product requires 5 transactions just to mint and LP on a position. The state machine breaks each action that is possible within the Element protocol into distinct opcodes and acts as a primitive interpreter. The frontend can string these opcodes together and batch all the transactions dynamically, turning the 5 transactions into 1. A proxy contract isn’t needed with the additional complexity of separate audits for each contract. This work builds on top of Weiroll and is currently going through a formal verification process. This can allow frontend products built on the protocol to be significantly more user friendly.
New SDK:
In order to encourage and drive more integrations into the core protocol, a strong SDK with supporting documentation is really important. The work on the SDK will implement the future looking pieces described in this post.
L2 and L1 Implementations:
Currently, the first L2 implementation from Aztec is being released. It not only brings scalability to the protocol but also privacy. It allows for batching on locking in a fixed rate, or even selling principal tokens.
In the long term, it is important users can lock in a fixed rate or multiply their exposure to variable rates without having to pay high gas fees. Currently, users need to deposit larger amounts in the protocol to compensate for the gas fees spent. With lower gas fees, there are other potential benefits such as better arbitrage activity, bot participation and wrapper products.
Compound & AAVE fixed rate borrowing adaptor:
Compound and AAVE can be transformed into a stable borrowing product, similar to a fixed rate borrow, by wrapping Element on top of the lending position. When taking out a borrow position on Compound, a user can hedge by purchasing yield tokens on the lending side. If the borrow rate increases, the yield tokens will also increase in the yield they collect.
We’ll release more research soon, but if this is counteracted with principal tokens as collateral on these same protocols or on protocols like Maker, it turns the fixed rate market into the intermediate liquidity source between these protocols. The potential impact is astounding, although it will clearly involve some more research. A preview of this concept can be found in this tweet thread:
Unlike current fixed rate lending markets, the Element protocol powered fixed rates are additive to compound/aave and don’t require any changes to loans on those platforms.
V2 Incentives and Emissions, a better CRV model:
veCRV dynamics recently became the popular choice in the market. It definitely leveled up the incentive and emissions discussions, however, we have research on a new primitive we’ll be releasing soon. We consider it to be a significant improvement on the CRV model and serves as a product for other DAOs in the space immensely. It’s also something that doesn’t affect the Protocol itself. I know we’re being general here, so please just stay tuned. However, this in tandem with something as described in this thread, https://twitter.com/wjvill/status/1527680960866705408, can introduce better sustainability for a DAO’s value.
Part Two: Research on Iterations
Next-Gen AMM:
This is the only piece in this list which discusses upgrades to the existing protocol and we suggest the DAO consider. Of course, we can’t implement any protocol change ourselves, even if we wanted to. But here, we’re not proposing a specific change, or even a general one ; we’re not endorsing a view or set of views; and we’re not going to release any proposals or lobby for one during this nascent stage of governance. These are simply matters and concerns that we’ve found interesting, and wanted to highlight for others to consider.
Some current issues or problems in the existing AMM design are as follows:
- Users don’t get the full yield of the position they are wrapping, since 1/2 of the supplied liquidity sits as a base asset, let’s say USDC or stETH instead of the growth asset of the yield position.
- Pricing on fixed rate assets in the AMM are currently impossible to get in a safe way, since an efficient oracle has not been introduced yet and it is pivotal for principal tokens and fixed rate assets to propagate as collateral in the market. Principal tokens as collateral across the DeFi ecosystem introduces powerful applications. This post dives into some of the early benefits. The hypothesis is that with more and more integrations, the use of the protocol will be significantly enhanced, driving stronger fixed rates and a better APY for LPers.
- Accounting is overly burdensome, especially since a lot of it could be included as part of the AMM. Yield token compounding, yield token purchases and more lack efficiency since they are not integrated or taken into account within the AMM.
- The current LP process lacks capital efficiency as most of the capital sits stagnant while rates only diverge by a small % delta over the term duration.
Some existing research on the problems above:
- Yieldspace has tackled the capital efficiency problem and looked at including an AMM with dual-sided yield bearing assets, they are finalizing new research here - https://hackmd.io/lRZ4mgdrRgOpxZQXqKYlFw
- Regarding the oracle problem, similar research has been accomplished from Yieldspace and can be referenced here:
- https://github.com/yieldprotocol/yieldspace-tv
- Sensespace V2 pool utilized yieldspace with yielding shares instead of the underlying. The yielding shares are priced using their initial price at pool deployment time and includes an oracle implementation
- Pendle’s Weighted balancer pool in which the price of the yield tokens approaches zero as they are expected to constantly have their interest claimed.
- Timeless Uni V3 no fixed AMM price curve. Note these perpetual bonds have quite different pricing properties than other examples.
- We’ve been pursuing research to solve some of these issues as well, but it is current ongoing research. Others may also have research that we haven’t yet seen or reviewed. And of course, we hope that others will do just that because this is a team sport.
Some other accounting issues and auto yield token compounding are greenfields and worth exploring and researching.
With the advent of a strong V2 AMM, it would make more sense to go through Element and a next generation AMM as an LP vs. go directly to the yield sources. This is because yield would always be higher through this approach vs. going direct, and it would position Element as the place to go for not only fixed yield in the space but also variable yield.
Conclusion
To reiterate: Part One describes certain projects built on top of the Protocol that we’re working on (and others may be too), but that doesn’t impact the core Protocol in any way. For Part Two, because we’re currently staying back from governance, we’re just highlighting some interesting concerns and issues that may be worthy of further research and analysis. But these are not proposals, and we are not endorsing or offering any solutions.
These are just some of the current endeavors we’re pursuing and we currently have specced out to complete over the next 9-ish months. We have 25 people, with really strong experience, pursuing these efforts in parallel. We’re excited for the next few months and to include everyone on this journey.