A crypto-economy needs diversity to flourish. I would like to describe several DeFi products we can build to add some new flavours into DeFi. I believe this suite of products as a whole can boost the health of the entire ecosystem that it resides on. I’m writing primarily with the Arbitrum ecosystem in mind, but the products and ideas are chain-agnostic.

What will you do to help usher in the Future of France, Anon?

Just a heads up: This post is building advice, if you think you can build or fork any of these, I’d love to talk with you. However, this post is not financial advice. I’m currently doing some paid work for Umami Finance, and I may hold some of the tokens mentioned in this article.

Money markets

Lending and borrowing is the cornerstone of DeFi, since it enables use cases such as saving, margin trading, leverage trading, etc. Without borrowing, the only things that’d be left in DeFi are just spot dexes.

Idea: We still don’t have many lending platforms on Arbitrum and Optimism. Useful protocols to fork would be Aave, Compound, Geist.

One thing I’ve noticed is the relatively thin liquidity of stablecoin pools on Arbitrum. I suspect that Arbitrum is primarily denominated in ETH, and there are few use cases for stablecoins. Once we introduce lending platforms, stablecoin volume should quickly ramp up, since borrowing stablecoins is the most popular way to get leverage. Also, if we ever want normies to come and “live” in the Arbitrum ecosystem, there must be better stablecoin yield so they can grow their “life savings” here.

Interest rate arbitrage

On most lending platforms, there are token incentives to deposit and to borrow. Sometimes we can “fold” our deposits by looping our deposits and borrowing against them multiple times, and earn extra tokens through each loop.

Intra-platform

Idea: Given an asset that can be both deposited and borrowed, we need to determine the optimal leverage required to generate max APY. We need to harvest the rewards periodically and compound our deposit. We also need to monitor the borrowing rate closely; if the rate rises and turns net APY negative, we should deleverage until we find a new optimal leverage. There is no liquidation risk (in theory), since we always use the same asset on both the deposit and borrow sides.

Inter-platform

Idea: Given two lending platforms that use the same asset, we need to determine if we can borrow at a low rate and deposit at a higher rate in a different platform. We might need to involve a second asset as collateral on the platform we are borrowing from. We might need to use flash-loans to unwind our positions when the borrowing rate becomes unfavourable. There is liquidation risk if the prices are volatile and chain becomes congested.

Leveraged Farming protocol

Allows depositors to deposit single assets and earn interest. Farmers can borrow two assets and LP them together and farm rewards. In general, there is more rewards with higher leverage, but only up to a point. See Impermax on Arbitrum and Tarot on Fantom.

Smart leverage monitor

Idea: Most applicable to leverage farming with pegged (or similar) assets pairs, like two stablecoins or two different wrapped versions of the same asset, so there is low/no risk of impermanent loss and liquidation. We need to monitor how much leverage produces optimal yield, and deleverage when the borrow rates are too high. We high even stop LP-ing all together and do single sided deposits if the deposit interests are favourable.

Farming as a Service

The most sustainable way to generate revenue is to provide a service for a fee. Yield management products are one of the most popular products in the DeFi space, as well as having sustainable revenue (see Beefy, Yearn).

Whoever controls the flow of token emission also shapes the flow of liquidity in the entire ecosystem.

Simple Autocompounder

• Example: Farm gOHM/ETH in Sushiswap, sell SUSHI rewards back into the gOHM/ETH pool

These are your "standard" autocompounders, not very interesting, and bad for health of ecosystem, since they generate constant sell pressure of the farm token.

Directed autocompounder

• Type 1 (LP -> single): Farm DPX/ETH on Dopex, keep DPX rewards and stake single-sided
• Type 2 (single -> LP): Single stake DPX, sell DPX rewards for staked DPX/ETH LP
• Type 3 (LP -> LP): Farm DPX/ETH on Dopex, sell DPX rewards for staked rDPX/ETH LP
• Type 4 (single -> single): Stake DPX, sell rewards for staked rDPX

Directed autocompounders are not common, Beluga on FTM is one of the few examples (uses Type 2 and 3). These autocompounders are very useful to users, because it allows for more customizability, and promotes risk diversification (we are compounding into new pools vs back into the same pool).

Idea: Type 1 (LP -> single) is benefits protocol token price the most, since we are nudging the default behaviour to encourage “staking” instead of “selling”. Skipping over Type 2/3/4 because these will be have to be customized for each possible use case.

Arbitrum Yield bearing Index

A weighted Arbitrum Yield Bearing Index. See Cook.finance on Avalanche for an example of “Avax Yield Bearing Index”.

An Arbitrum index might be composed of:

• Staked GMX
• Staked BADGER
• Staked JONES
• Staked MAGIC
• Staked DPX
• Staked UMAMI
• Etc

Idea: This benefits the health of the entire Arbitrum ecosystem, since overall we are encouraging staking over selling. This benefits users, as it is an easy way to buy into Arbitrum ecosystem, and gives exposure to purely yielding assets. This benefits projects in the ecosystem, as they could all be exposed to each other’s success by holding a portion of their treasury in this index, and incentivizing collaboration among protocols.

Idea: Index tokens are generally less volatile than any one individual token, and this is a desirable quality for a good collateral asset. So it’d be nice if we could borrow against this index token.

Idea: We can use the Directed Autocompounders to direct yield from LP farms into the Arbitrum Yield-bearing Index token. This allows investors to use only yield from any source to generate exposure to the entire Arbitrum ecosystem.

Idea (as well as a personal wish): we could have a portion of yield from index go towards an Arbitrum ecosystem development fund, public good funding (e.g. Gitcoin, Ethereum Foundation), subsidizing the gas fees for the entire rollup/chain, and/or profit-sharing back with the protocols in the index.

I’m in! What can I do?

My frens over at Umami would love to get some help in building out these pieces of infrastructure over on Arbitrum. Please join the discord and we can discuss how we can help each other. Possibilities include joining as a team member or paid contributor, and if you are launching, then we would love to talk about being early investors and bespoke partnerships.

If you are interested in building any of these on any other chains, we are experimenting with a community-run degen project incubator over at Aogiri Tree. We have a wide range of talent from thinkooors, buildooors, hustlooors, and most importantly, we’re all fun-loving sh!tpostooors. You can contact me on twitter and we will be spinning up a discord for discussions.

As we all know, it takes all types of skills and folks to produce a top quality product, so please don’t be shy even if you are not a dev.

Of course, you are totally welcome to take any of the ideas and build it out yourself! Competition adds flavour to life, and ultimately, the winners are the ecosystem and its users, and that’s what we are all about.

A secret, for those who made it to the end

A little known secret, is that this article only contains half the magic. The other half of the magic needs to come from you, dear reader! I just know that we would have a blast when our ideas collide! Come @ me on twitter. Would love to see it!