With the roll out of SMART Alpha, we have completed, for the most part, what was set out in the BarnBridge whitepaper. It’s been a long ride and I’d love to spend time looking back on the past year, or even two, and talk about how we got here and everything that happened along the way. However, I think it’s more productive to take a future facing approach.
In other words, where do we go from here?
To start, we thought about writing a new whitepaper, but I think that would ultimately be what the specs are on future products. So instead of putting out another 30 page thesis on why fixed income will be a major factor in decentralized finance, I think it’s better to paint broad strokes as the past two weeks and next two weeks have been when we decided to really formalize agreement around what we should be building next.
This previous lack of alignment was more due to a wide array of things to build vs. a lack of ideas. I have seen people say recently on Twitter that Defi simply isn’t innovating as fast as it was last summer. With SMART Alpha and Tokemak, along with the explosion of use cases that come with Layer 2s, it’s very hard for me to agree with that.
When I look around, I see more things that need to be built than I do established primitives in place.
“Everything that can be Invented has been Invented” — An Idiot in 1899.
- These are my personal thoughts. This is not a roadmap.
- Not everything I write will be 100% of how the community and core team direct these efforts, but I’ve spent months thinking about this and wanted to get these thoughts down on paper since I don’t spend as much time in Discord as I used to simply because of me having a hard time following all of the threads I also am building a ton of things simultaneously. Something had to give and it, unfortunately, was my front facing Discord activity. I also felt that my Discord activity was just leading to alpha from people who don’t raise their hands to build WITH us and just go build competing products to my long winded Discord posts and Tweet storms.
- This article is going to be a long winded doozy . Anyone who thinks I’m not spending the majority of my waking hours working on and thinking about BarnBridge is mistaken, I’m just not as open about ideas as I used to be having seen little marginal utility from sharing vs. shutting up and building. So this is the result of months of Slack discussions, Discord discussions I lurked, and team calls for brainstorming. Literally months of it so it’s a Kain length mind dump where hard specs will come later as they always do.
So SMART Alpha is great, if I do say so myself. But most of the people I mentioned earlier who are complaining about the lack of innovation in defi haven’t been playing around with Layer 2s.
The Synthetix ecosystem (along with Lyra and Thales) and Uniswap are still full bore building to Optimism. You can go play with their applications and it’s hard to not get bullish about what is happening there.
Similarly, we’ve seen an explosion on Solana. I think I’m less interested in looking at this right now but it’s something we should monitor as a community.
There’s also Arbitrum who, I guess you could say, beat Optimism to market. It’s extremely fast, & inexpensive to use. Troy has been playing with it and loves it.
Then there is our trusted Polygon who we already built to for SMART Yield who just bought a ZK-Rollup project. I continue to agree with Vitalik that ZK-Rollups are likely the end game but Solidity developers who know Cairo aren’t growing on trees.
So a natural drawback of Ethereum’s Layer 1 for the average user of defi is fees. While SMART Alpha is more capital efficient than SMART Yield because it’s a base layer primitive, it still needs Layer 2 compatibility for a wide array of use cases we want to build into it long term.
So I think step 1 is build to Polygon. Then we should probably look at building to BOTH Optimism & Arbitrum. Bear in mind, it took me two sentences to say that, it will take much longer to build.
Plus Layer 2 compatibility is only so exciting. That isn’t worth a long form post vs. a tweet “We are building to Layer 2s.”
So are we retiring after that? Or forever looking for more scalability?
Okay so I’ll get into that.
Native Lending Market (SMART Leverage)
This isn’t something we started thinking about as a result of what happened with AAVE. We still love AAVE & aren’t planning on building a direct competitor as a source of revenge. I’ll get into the details before anyone tweets out that we are going to war with anyone.
Jai from Rari has tweeted before that all of defi will become competitive downstream due to capital efficiencies. While I don’t agree with that statement head on for a variety of reasons, there is still a lining of truth in that far reaching statement. However, I don’t think it will happen in quite the same way he insinuates albeit I respect him & his opinion.
It’s been well discussed in our community that one of the reasons that SMART Yield & SMART Exposure haven’t seen broad uptick in market receptance has to do with the lack of ability to access leverage or secondary products.
Maybe SMART Alpha will have the same issues.
So yes, we have talked to AAVE, we have talked to Compound, we have talked to CREAM, we have talked with Rari. And we will continue to work with them.
In fact, part of building this SMART Leverage product should include integrating into Rari’s FUSE pools because those kids have been gems to work with and we should return the favor.
However, BarnBridge’s products are extremely complex. AAVE and Compound listing our SMART Yield assets poses risk to their own systems. They’re essentially lending against something they already lent against if you think hard enough about how it works. So we made the mistaken assumption that if we turned off the borrowing power at the smart contract level that they could read the code and be comfortable with it. As Robert from Compound pointed out, their governance is different than ours, & we could introduce a product via our governance that their community doesn’t see. In that scenario it may be turned back on and you could drain liquidity from their system. To him, it made far more sense for us to allow end users to access the borrowing power they already have access to.
So that’s a big part of what we are doing here. Allowing users to leverage what capital markets are already able to give them access to from their deposit. So no, this isn’t a hyper competitive attack on them, it’s further integration into them.
Another factor to consider is SMART Yield senior tranche positions are NFTs. They don’t have oracles. There aren’t many current capital markets that provide utility for these types of products. They are also unique in other ways that makes it hard to see this getting passed through governance on the protocols that are building leverage functionality or capital markets for NFTs. Most of those are being built to provide collateralization to crypto punks.. not our senior tranches.
Further, there are other products that we have released that also will be hard to get passed through governance as collateral. SMART Exposure for instance, how would the rebalances affect liquidations and loan to value? Who’s writing that code? Who’s DAO will benefit from the fees generated from that code? The natural extrapolation of those questions made me start thinking that we would need to build our own.
What’s cooler, is if we do build something that let you have a rebalancing pair sitting on top of a native lending market, you can sit in 40% BTC & 60% ETH and still access leverage to that portfolio balance. If we build that for SMART Exposure, it opens opportunities for Uniswap V3 tokens & Balancer pools downstream.
Then enter SMART Alpha.
The opportunity for the collateralization of SMART Alpha Senior positions is actually mind blowing when you start to think about it. We started to discuss this when we discussed how DAO treasuries would be prime target users of SA Seniors. Then we started to extrapolate that thought & realized, after discussion with large VCs looking to learn to use SMART Alpha, many large VC firms don’t have access to leverage for A TON of the tokens on their balance sheet. Since long tail lending markets for early stage products is an easy invisible rug vector for early founders (lend $BOND, borrow USDC & never pay it back), most of what I have seen in the long tail capital market space has been inelegant. Moreso, if you deposit another asset, say USDC on a capital market, you aren’t just taking the counterparty risk of that asset. On AAVE, you are also taking Decentraland risk & on Compound you’re taking Augur. I’m not dunking on those projects, I am stating that they’re some of the riskier products on those platforms. As the tails become longer this inherently makes protocols less secure, so getting long tail senior tranche positions are not going to be easy to pass on any major capital market.
But SA Seniors fix some of the long tail asset risk given the downside volatility protection. This opens up A TON of capital that is sitting idle.
However, it rebalances each week. And you have to monitor it. And it’s never the same. And there aren’t oracles for the senior and junior positions.
And maybe I don’t want to take counterparty risk for SA Sen REN but would for SA Sen SNX. I will credit Tyler Reynolds with that final point as I think what he is building at Silo Finance will be powerful.
But solving all those “ands” is not going to be easy.
In other words, a native lending market built into BarnBridge is going to be extremely complex to build. And we cannot expect AAVE and Compound to learn our products so well that they can do it for us. We have to do it ourselves.
It’s also going to take MONTHS to build as we will likely need to change aspects of SMART Yield & SMART Exposure in order for it to work properly.
It’s a big lift.