Our investments in DeFi

Source: IOSG Ventures

IOSG Ventures investment priorities in DeFi include:

1.Application products that enhanced user experience of UI/UX , middleware third-party tools across different protocols or highly decentralized protocols (MakerDAO, tBTC) that really reduce friction.

2.Derivative projects that create better asset value via creative economic design, and with deep liquidity and moderate risk reward ratio.

3.Lending protocol that optimise capital utilisation, composable new products across different protocols (Kava); project indirectly improve trading efficiency (1inch, Kyber and DDEX).

4.DeFi protocol security Guardian, third party auditor.

We believe the spread of DeFi applications will further develop the underlying infrastructure with increasingly complex and diverse requirements, including low cost and high performance transaction processing, scalability that supports the rapid growth of network effects, and a user-led data economy.

How to resolve impermanent loss

Automated Market Makers emerged as an alternative to order book-based exchanges, providing trading against the smart contracts / liquidity pools rather than searching for a counterparty as in traditional models.

To understand the factors that contributed to the emergence of AMMs on chain, we need to go back to the late 2016. Particularly, in October 2016 Vitalik Buterin proposed building on-chain Constant Product Market Maker to resolve the high spread inherent in trading the coins back in the days. What originally caused the high spread is the inconvenience of market making on-chain due to high gas cost of creating and removing orders.

Namely, running an order book on chain requires gas fee payment anytime any type of order is set, resulting in too costly trading experience. Consequently, on-chain order books struggle to provide enough depth, causing a high spread / illiquidity.

On the other hand, the simple formula proposed by Vitalik guarantees liquidity no matter the price range, enabling users to execute their trades instantaneously. However, the execution quality depends on the depth of liquidity pools, where the more deposited assets imply the better execution quality (i.e. lower slippage).

To ensure the deeper liquidity pools, AMMs have been offering incentives such as “yield farming” that attracted assets worth millions of dollars to AMMs’ pools. Nevertheless, the depositors quickly realized that, often, holding the tokens in their wallets might be more lucrative than providing liquidity to AMMs. This issue has later been coined as Impermanent Loss.

In more detail, AMMs rely on arbitrageurs to adjust the ratio of reserves in the pool so that AMM-given price is aligned with the external market price. However, arbitrage profit goes at the expense of liquidity providers, creating loss for LPs. The loss can disappear only if the prices return to the initial ratio, which is why it is defined as impermanent. However, the volatile nature of crypto assets, generally, makes the loss permanent.

The Bancor has simply explained the impermanent loss using the figure below. They compare LP portfolio and HODLer portfolio ( HODL — hold on for dear life). For simplicity the example assumes there are no transaction fees. Whenever the relative price of deposited tokens changes HODLer position is more favorable than LP position due to the arbitrage effect discussed above. This effect is a problem that CPMM and CMMM in the simplest form cannot resolve.

Impermanent Loss Example; Source: Bancor

a. Focusing on less volatile assets -> marginal chance of impermanent loss

Since impermanent loss is closely connected with asset volatility, the simplest way to resolve it is by ignoring volatile assets. Curve.fi focuses on stablecoin swaps, which is why impermanent loss is much less of a concern for Curve’s LPs. The concern for LPs remains only if one of the coins loses its peg.

b. Leveraging an oracle to achieve “fairer” prices

Rather than relying on arbitrage to coordinate AMM prices with market prices, Bancor utilizes Chainlink oracles. The weights of each asset in the pool is adjusted based on the oracle price update, simultaneously exterminating arbitrage opportunity and protecting the value for liquidity providers.

Bancor v1

Bancor v2

DODO implements a similar solution, however, both DODO and Bancor v2 are still in an early-stage and are yet to prove that constant dependency on oracle could serve as a robust solution. The concern comes from the risk of oracle failure and the arbitrage being faster than the price feed simultaneously generating a substantial loss for LPs. Nevertheless, if these risks are successfully controlled, LPs would find liquidity provision to this type of protocols extremely attractive, potentially making them another DeFi hot topic.

🐱‍🐉Industry

yearn community proposed to bolt a CFAMM facility to the Y pool, in order to minimise governance risk. Read more

GoodGhosting announced its genesis saving pool which will be launched soon. Read more

Ethereum 2.0 updates: Medalla has chugged along quite smoothly, now with 39k active validators and another 12k in the activation queue. Read more

StarkWare Introduces Cairo for Turing Complete L2 Scaling. Read more

Oasis Protocol will release the native token ROSE when the mainnet is launched, with a total limit of 10 billion. Read more

DeFi explosion: Uniswap surpasses Coinbase Pro in daily volume. Read more

Lien Protocol’s first Solid Bond Token (SBT) auction is underway. Read more

SEC’s Hester Peirce on DeFi: ‘I think it’s going to challenge the way we regulate’. Read more

Redis Labs announced that it raised $100 million in Series F funding at a valuation of more than $1 billion. Read more

SPiCE Venture Capital has listed its tokenized blockchain fund (SPiCE VC) on Fusang Exchange. Read more

🐱‍🚀 Our portfolio companies

IoTeX unveiled groundbreaking infrastructure to fuel #DeFIoT — IoT data oracle, cross-chain bridge, DEX and more! Read more

1inch integrates DODO, a decentralized trading platform based on active market maker algorithm, bringing 1inch more liquidity sources, better prices and lower slippage. Read more

WOOTRADE released the Eco-Partnership Program, which aims to recruit outstanding partners from investment institutions, media, communities, KOLs and other backgrounds to jointly build the WOOTRADE ecosystem. Read more

NEAR Protocol will hold an open online hackathon “Hack The Rainbow” on September 15th. Read more

Filecoin officially released the details of the token economic model design. Read more

Nervos announced the integration of the decentralized oracle Band Protocol to aggregate and connect real-world data and APIs to smart contracts. Read more

Ocean Protocol (OCEAN) announced the launch of a new contract and completed the migration of OCEAN tokens. Read more

The decentralized IoT platform IoTeX announced the launch of the cross-chain bridge ioTube, which has realized the two-way bridging of Ethereum ERC 20 assets and IoTeX public chain. Read more

Decentralized transaction aggregation platform 1inch announced the update of gas fee optimization and upgrade plan, which can greatly reduce gas fee costs. Read more

🦄 About IOSG

Founded in 2017, IOSG Ventures is a research and community-driven concept.we are focusing on Open Finance, Web 3.0, and cross-chain industry. We have over 60 investments and been actively involved in various developer & DAO communities. We invest in top teams with innovative ideas, operational excellence, and a robust community, and always supportive to IOSG portfolios to grow local communities in China, the US, and Germany.

If you would like IOSG Ventures to consider your project, please send a summary of your project along with a pitch deck and/or white paper to [email protected]