TLDR

Now that Liquid Staking Derivatives have been formalized as more concrete assets in the Ethereum ecosystem, it is time that Trading Pairs and other trading pool assets are recognized by the expanded use of decentralized stable coins.

Whats wrong with Decentralized Finance?

Centralized Finance & Capitalism is likely one of the largest feats of of modern society. Assets can become more and more solid over time and locked into the economy. It is important to recognize where these assets are in general.

Liquid Staking Derivatives & Tokens have become the most important things in DeFi all of a sudden and it is because the native asset is Ether. The Ether on Beacon is working & the value of the LSD is representing that working capital.

While this is some 18 Billion dollars staked to the beacon chain it is permitted to go to other places in DeFi as a Liquid Staking Derivative. Assets are able to be borrowed and leverage is allowed into the system as the debt of these assets.

The use of the Liquid Staking Derivative makes the native Ethereum a concrete asset, and over time the use of the derivative will become no different than the use of the native asset in the mind of the user.

The issue here is that DeFi has not evolved a way to increased the prevalence of concrete assets the same way that centralized finance has. Bonds are the basis of all finance and upon them all life is built. People borrow against bonds to buy real estate then borrow against real estate to buy stocks and then borrow against stocks to by collectible cars.

This is the nature of human behavior & economics. This is completely fine. Developing safe ways to harden assets is the next important step in decentralized finance.

The Next Frontier

Decentralized Exchanges have very beautifully found their niche in the world but there is still much work to do for them. Assets inside of trading pools are working, much like the Ether on the Beacon chain. These assets also could benefit from hardening.

Having a predictable and consistent Total Value Locked will act to reduce slippage volatility and likely improve trading for all members involved. Hardening these assets will likely benefit DAOs in the long run.

Currently DeFi is built like the following:

Assets deposited into a trading are there and earning. If liquidity is needed by the user the assets must be removed and taken to a borrowing / lending pool like AAVE to get liquidity and solve issues. If a user wanted to buy an non-fungible token or ape into a new token, the position has to be liquidated.

Rates are high because they are someone’s savings. There is much economic thought to determine the value of someone’s savings versus another’s desire to engage in leverage. If the desired rate of interest of the saver is too high, less risk will be taken by the borrower.

Furthermore, every stable coin is an asset on the balance sheet of either Tether or Circle, both of whom make billions annually on the interest of these assets. The scarcity of these assets adds to their interest rates, as they are considered extremely safe even though we cannot verify their backing on the blockchain.

Trustless Stable Coins

DeFi has to go in a single direction and it ends with each and every liquidity pool having their own stable coin which will reduce the dependence on the centralized assets.

The protocol or app does not want to see liquidity leave, so to disincentivize these actions Liquidity Tokens deemed reputable by the app can be permitted to enter a borrowing smart contract agreement. In this contract, users are able to mint stable coins up to the liquidation threshold seen fit by the DAO. Similarly, interest rates are charged at rates seen fit by the DAO.

If anyone can find a Velodrome Liquidity Position valuable, it is Velodrome themselves. The same can be said for Rubicon, GMX, Uniswap and many other unnamed projects of interest. The idea of liquidation is not a risk because these DAOs would be owners of the liquidity pools they built & earn interest.

Interest, in the event that the loan is maintained, is paid to the DAO for the use of their stable coin or promissory note. Many apps may not consider these stable coins valuable on fear that they are unproven & new, so for this reason I believe collaboration with other dapps to create liquidity to stabilize these assets is important.

The stable coin will be viewable from the blockchain. Rather than trusting bank deposits, we can look on chain and see the Wrapped Ether / Optimism pool token has produced some 1.5% of the debt issued in the token supply.

Fear & Innovation

I have tossed this idea into the air with a friend of mine who reminds me regularly that the Securities and Exchange Commission is a concern to the innovations of decentralized finance. I applaud AAVE & Curve for pioneering into this field without concern for the regulators.

In the older United States, there was no singular currency. Each bank, each state had their own currency. This was not a great idea for a growing nation state looking to grow the central authority, but it might be a great idea for a block chain or an ecosystem.

The use of a plethora of stable coins, backed by DeFi’s second most prevalent asset (trading pool tokens), creating concrete asset pools. So long as these assets do not become as native as USDT, USDC & DAI we do not have to concern with the SEC because those are the only assets we can spend with a card.