prologue:

prologue:

Recently, it has been delayed for too long, mainly because the research I have always hoped to do is not a so-called "universal", "information summary" or "data analysis" research report. Instead, I hope to use a certain track, a certain field or a certain phenomenon as an entry point to dig deep into the problem and propose a corresponding solution. The focus of the report is often on the discovery of problems, thinking ideas and final solutions, rather than a certain project itself. Therefore, it takes longer to prepare.

Furthermore, the recent MEME coin, the wanton flying of the metaverse, has not been able to find anything I want to write about. However, some time ago, the project party we have been paying attention to raised a question, which also aroused my thinking a lot, so I will sort out my thoughts here.

The content of this article starts from the existing problems of Polygon, and will discuss the competition of the underlying protocols of the public chain, the structural evolution of DeFi, and the product direction I can provide based on the existing ecology, and finally deduce some solutions I expect.

"Battle is the primary productivity of product managers."

secondary title

What can save you! My Polygon

Let’s start with the title. I believe that the number of times you’ve heard of Polygon has been few and far between. The hottest concepts and public chain protocols in the market are emerging one after another. Solana, Fantom, Avalanche, Terra, and Arbitrum’s protocols have all locked positions Beyond Polygon.

Polygon’s TVL has fallen by more than half from its peak of 10.54B on July 15 to 5.04B today. Among all public chains, layer2 and EVM Fork chains, the ranking has fallen from the highest fourth place to the current eighth place.

Through our exchanges with various project parties that cooperate with Polygon, they generally feedback such a problem-"For new projects, the amount of funds and the number of users of Polygon have shrunk significantly, and the activity of the community has also declined. Both traffic and retail investors’ funds have been attracted by other underlying protocols.”

(1) What is the cause of the problem?

1. Solana, Fantom, Avalanche and other products provide retail investors with more opportunities from 0 to 1.

The high incentive support plan has prompted the repeat of the model that has been popular on other underlying chains such as Polygon on these new public chains. "Hot money" is constantly looking for fresh hype hotspots.

2. The overly aggressive cold start strategy prevented Polygon from incubating its own star projects

Since the launch of the DeFiforAll Fund in the middle of the year, Polygon has chosen a strategy that seems very radical now, and introduced blue-chip projects in the original ETH ecology such as Aave and Curve through $MATIC incentives. This had a very positive impact on both parties in the short term. But in the long run, many problems have emerged.

Based on the data of DeFillama, the top ten TVL projects on the Solana chain are all exclusive to Solana:

And judging from the investment institutions of these projects, most projects have received direct investment from Solana Foundation, Alameda Research and even FTX.

As for Polygon's current top ten projects, only Quickswap and Dinoswap are exclusively on the Polygon chain.

Among them, the top-ranking projects such as Aave, Curve, Sushiswap, and Balancer all come from the DeFIforall plan. Even Aave Dominance has reached an astonishing 40%. The share of this head project is relatively close to Terra, which is relatively closed, and this situation does not exist in other competing public chains.

Judging from the various performances in the later stage, especially the strategy of being too Allin in the early stage, Polygon was unable to provide more help and liquidity guidance for new projects in the face of competition in the later stage, making it impossible for users to participate in the market dominated by Fomo emotions. Polygon continues to discover new investment targets.

This further leads to the loss of traffic and funds.

3. Blindly chasing hot spots, the ever-changing focus of marketing has led to a phased neglect of developers.

After chasing Polygon's official community account and developer official account, you will find a very interesting phenomenon. During the relatively hot period of DeFi summer, Polygon will mainly promote some DeFi project activity rankings and TVL rankings. However, after the market hotspots turn to NFT and GameFi, Polygon's main promotion direction will gradually shift to other fields.

From the perspective of general market competition, this timely strategy seems to be no problem, but due to the existence of the second problem mentioned above. Polygon officials should pay more attention to long-term and stable ecological development than other competing products.

Judging from the feedback we have received, the severe funding Matthew effect and changing support priorities make it difficult for the project party to maintain continuous and stable emergency contact with Polygon officials. This also makes it difficult to co-create exclusive star projects.

Hot spots are constantly changing, and the speed of change is extremely fast. But some basic innovations are still in their early stages. Blindly changing hotspots, DeFi2.0, NFT2.0, GameFi2.0 may not have Polygon's share.

(2) How to solve

1. Reuse of DeFi2.0 interest-bearing assets

Before discussing the solution, we need to understand such a stable currency project—Abracadabra (Spell). For the convenience of writing, all have been replaced by Spell.

Spell also released a version on ETH MainNet, where the capital Matthew effect is heavy. The total number of agreements on it exceeds 276, but the TVL of the top ten products accounts for more than 80%.

At the same time, most of these projects have been released for more than two years. In the DeFi metaverse of ETH MainNet, it is almost difficult for the new over-collateralized stablecoin protocol to attract new funds to lock up.

In order to solve this problem in product design, Spell made a bold decision to use interest-bearing assets as protocol collateral.

These interest-bearing assets include yvAsset and CvxAsset, etc. It even includes yvcrvAsset, a combination of interest-bearing assets with higher risks. The main logic of this is shown in the figure:

Users deposit native tokens, USDT, ETH, etc. on platforms such as yearn finance that can generate interest-bearing assets. And get interest-bearing assets such as yvUSDT. Then use yvUSDT and other interest-bearing assets as collateral to mint out Spell's stable currency MIM. And MIM can be converted into other stable currency assets through Curve's MIM3POOL.

The advantage of this is that the user's original assets can not only obtain the income provided by platforms such as yearn finance, but also expand the leverage through Spell again, and repeat the operation to obtain more income.

Currently, Spell supports amplifying the leverage of a single mortgage through the form of flash loans. Essentially, this greatly improves the capital efficiency of stock funds.

In addition, another advantage of this is that it is very conducive to the cold start of the project party. At present, the total contract TVL of Spell has exceeded 4 billion US dollars. Much of it actually came from such interest-bearing assets.

Then through Spell, we can find that stimulating the creation and reuse of interest-bearing assets may be a feasible solution to Polygon's dilemma.

2. What should the Polygon ecological project do?

The Polygon ecological project itself should start trying to reuse the stock assets of blue-chip top projects. For example, the aToken of Aave, the largest DeFi project on Polygon. This is an interest-bearing asset. Users can deposit any supported assets such as ETH, USDT, and DAI into Aave's deposit contract. Aave will provide the corresponding aToken, and aToken will calculate the user's principal + interest income. After we default that Aave has no significant contract risk, we can even think that aToken has less risk than native assets such as ETH, because the ever-increasing interest is also constantly hedging the price fluctuation risk of native assets.

However, the interest-bearing assets provided by different products are different in calculation methods, quotation models, deposits and launch mechanisms. This has led to difficulties for new project parties in the process of reusing these stock assets, and may even be forced to modify the contract or be upwardly compatible. This is inherently problematic.

Still taking aToken as an example, the number of aTokens obtained by users is not anchored at 1:1 (to be honest, this is bad from the perspective of composability), but keeps increasing, and the interest income you get will be directly withdrawn to the aToken The quantity is calculated in currency standard.

For example: Deposit 1ETH to get 1aETH. As the interest continues to increase, you will find that your 1 aETH slowly becomes 1.1 1.2 1.3. When you decide to quit, 1.3 aETH can be exchanged for 1.3 ETH. Among them, 0.3 ETH is the interest income during this period.

Although, from the user's point of view, this makes sense. However, if assets such as aToken are to be reused, problems will arise.

Such as when borrowing other assets as collateral. In general, the amount of collateral is constant while the price is variable. However, the number of aToken is constantly increasing, which leads to variables in mint and burn collateral.

Taking Curve again as an example, the Polygon version of Curve provides a 3crv token of the interest-bearing token aave. Its form is:

As shown in the figure, the LP token provided by curve here is also a type of interest-bearing asset, but this type of interest-bearing asset includes the deposit interest of aToken and the fee income of LP.

And the LP token provided by Curve is a token that provides quotations and does not change in quantity. This type of token basically meets all the conditions to be a general collateral.

But the problem is that the Polygon version of Curve is more focused on the large exchange of stable assets. Therefore, there are not many interest-bearing assets available.

And, here comes the most serious problem, LP tokens need to be mortgaged again to get the Matic liquidity incentive officially issued by CRV and Polygon. Damn it! ! If a project wishes to use such LP tokens as collateral, it means that the liquidity incentives it provides must be greater than the liquidity incentives jointly provided by curve and Polygon to be eligible to attract users.

Convex supports staking the LP tokens of the curve pool to obtain income including LP pool income, CRV, and CVX incentives, but again, convex is currently only deployed on the Ethereum mainnet, and its cvxLPtoken cannot be effectively used on polygon .

It seems to have gone in a circle and returned to the embarrassing situation of stock fighting.

However, this situation does not occur on the ETH chain, because income aggregators such as Yearn Finance will repackage all the aforementioned liquidity and provide interest-bearing assets such as yvAsset. It also includes token incentives for liquidity mining.

From the perspective of the interest-bearing model, we can divide interest-bearing assets into the following categories:

So the solution to the problem seems to come into being: if Yearn Finance or similar products can get greater adoption, it may increase the activity of stock funds. Further promote the development of new projects.

Judging from the data of defillama, Polygon’s largest Yearn product is Beefy.finance. However, the overall TVL is only 150 million, and it is still concentrated in strategic pools such as Curve, quick, and sushi.

So what kind of product is the most suitable for the Polygon ecology? This leads to another thought of mine - giving ecological products a layer according to demand.

secondary title

Maslow's Hierarchy of Needs in DeFi Ecology

As we all know, Maslow divided human needs into five levels in psychology, namely physiological, safety, social, esteem and self-actualization.

The first four levels of these are called deficiency needs, while the highest level is called growth needs. One of the most important points is that the low-level needs must be satisfied before the high-level needs can appear.

From the mapping of the demand classification theory of psychology to the demand level of DeFi products, we will find an obvious phenomenon. Users' demand for DeFi products also presents a relatively obvious demand hierarchy.

Let's illustrate this point with an architectural diagram:

The above figure simply classifies various DeFi products according to actual needs. According to the architecture diagram, we will find that when only the underlying protocol appears, the blockchain cannot produce too many variations in essence. This stage can be regarded as the stage of Bitcoin and altcoins.

When ETH appeared, programmable assets appeared on the chain, which could be used to create smart contracts with complex logic. Therefore, various DEXs emerged as the times require.

And when the liquidity on the chain is sufficient to provide stable oracle prices, or there are users of professional oracle quotation agreements like chainlink, the collateral can be priced, so lending agreements such as makerdao, compound, and aave began to appear.

The only controversial part here is insurance. In the traditional financial system, insurance has always played a very important role in infrastructure. However, due to the decentralized production relationship, insurance has not yet played its role as a basic agreement. However, the idea of ​​insurance is that various The basis of futures, options and other derivatives agreements, so I still put it in the first-level demand.

So from the perspective of combinatorial innovation, we can also express it in a tree form.

According to such a logical process, it is not difficult to find that the development of the DeFi ecology is also evolving in strict accordance with the demand layering theory. And the emergence of high-level needs basically occurs when the low-level needs are satisfied.

So what is the best product solution as I understand it?

secondary title

Ideal asset management tool

(1) Standardized primary and secondary demand function integration

No matter in any ecology, the basic primary and secondary requirements are the prerequisite for ecological explosion, because the primary and secondary requirements provide the basis for liquidity and protocol combination.

However, in the actual operation process, users will also encounter difficulties in information retrieval, difficulties in separate authorization, and certain learning thresholds.

Therefore, better asset management tools should first be able to standardize the integration of primary and secondary demand agreements. Instadapp is a great example of this.

Instadapp provides standardized functional integration of multiple basic protocols, and provides a unified account management system and rich developer support.

This greatly reduces the various operations and learning costs for users when converting between different needs, and provides many targeted functions for changes in different protocols, such as the debt transfer function of Maker~Compound, Sai~Dai debt update

But this is not perfect yet, instadapp also released the Polygon version, but the currently supported protocol is only Aave. And Instadapp only considers the needs of users, and does not provide further asset management functions.

(2) Enriching strategies and having clear risk rating income aggregation asset management functions

As we mentioned above, the Matthew effect of capital can expand leverage and provide capital efficiency by supporting interest-bearing assets according to the idea of ​​spell.

This can actually free up funds sunk in Tier 1 needs. Therefore, an ideal asset management tool must have the function of income aggregation, so that users can pass funds through the product first, and then deposit them in the first-level demand product. While enjoying basic income, get standardized interest-bearing assets.

(3) Standard interest-bearing assets

However, there are also problems. The risk of interest-bearing assets is actually closely related to the risk of the strategy itself.

Or this picture:

Different interest-bearing asset strategies represent different return risks. For example, interest-bearing assets such as stablecoin deposit interest have the least price fluctuations of original assets, and deposit interest basically does not change negatively. Therefore, it can be considered that this type of asset is the lowest risk. And some more complex strategies, such as

The user stores USDT in this strategy pool of yearn, and yearn stores assets in the aave pool provided by curve, and gets aToken interest + curve fee + crv+matic. Yearn will realize all the income obtained in a certain place and calculate it as yvUSDT income and distribute it to users.

In this process, three main agreements have been experienced, and active transactions have appeared. The probability of a risk occurring is much greater.

For example, protocol loopholes, oracle quote hijacking, etc. The risk rating for such assets is definitely lower. When used as collateral, the required minimum mortgage rate should be higher.

So I think: If our purpose is to improve the capital efficiency of the overall ecology and improve the composability within the ecology.

1: The first thing to do is that the product’s interest-bearing assets have a credible risk rating mechanism

2: Second, the key indicators of interest-bearing assets must also be more standardized

Such as constant quantity, stable offer, transferable, unlimited withdrawal, etc.

3: Ownership of earnings can be marked

This is a point worth discussing, assuming such a scenario: If a synthetic asset product is expected to support a certain interest-bearing asset as collateral, without any targeted improvement, two conditions must be met.

a) No change in quantity, stable offer, transferable, unlimited withdrawal

The reason why this condition needs to be met is that if the interest-bearing asset contract does not provide a stable quotation, and the synthetic asset agreement needs to calculate the value according to the interest-bearing rules of the asset, so as to avoid the liquidation value when the interest-bearing asset is liquidated less than the actual value of the property.

However, there is also a risk of hijacking the quotations provided. For example, the theft of the Yearn-based protocol Cream some time ago was due to the fact that Cream directly obtained the quotations provided by Yearn when using yvASSET as collateral, and Cream directly revolving loans of lightning loans, Hackers used flash loans to control the quotations provided by Yearn, thereby emptying Cream's fund pool.

So is there any other way?

b) Interest-bearing assets that can mark the ownership of income

When users deposit interest-bearing assets into synthetic asset A as collateral, the synthetic asset protocol does not need to consider the impact of interest income on the overall collateral value. Because when depositing into the contract, the income right can still belong to the user, and only when the collateral is liquidated, the income will be settled and the principal will be auctioned to the liquidator.

In this process, the synthetic asset platform does not need to treat the interest-bearing assets specially, and only needs to return them completely when they burn, or trigger income settlement when they are liquidated.

And as an asset management platform, there is no need to take the initiative to exchange some low-liquidity platform token income into some high-liquidity tokens. This eliminates the need for quotes from asset management platforms.

This form of interest-bearing assets has something like a combination of tokens and NFTs, which can be regarded as a new type of token that can mark ownership and can be split.

For this idea, we have also thought about submitting a new EIP-token protocol standard. But this scheme also has some limitations.

However, consistent with the aforementioned risk rating strategy, more choices mean improved portfolio, which I think is worth doing.

secondary title

Asset Management Middleware——asset management middleware

In conclusion

The idea of ​​this product is more like creating a middleware for the assets in the ecosystem according to the requirements layered from the first and second requirements to the fourth and fifth requirements.

Users can have a one-stop basic demand function site, and it is safe and reliable to obtain basic income for funds. And through this middleware, standard interest-bearing asset certificates with risk ratings are obtained to further improve capital efficiency.

Fourth and fifth-level demand projects can obtain more abundant liquid asset choices, and no longer need to be caught in the struggle with the capital stock of top projects.

SeerLabs (Prophet Labs) is a leading institution in Asia that focuses on blockchain market incubation. We have global cutting-edge marketing concepts and growth hackers, and are committed to helping project parties and startups achieve lightning-fast growth. Successfully participated in the incubation of 30+ projects such as Ploygon (MATIC), HoDooi.com, DIA, Paralink, Swingby, XEND Finance, BOSON, etc.

About SeerLabs:

SeerLabs (Prophet Labs) is a leading institution in Asia that focuses on blockchain market incubation. We have global cutting-edge marketing concepts and growth hackers, and are committed to helping project parties and startups achieve lightning-fast growth. Successfully participated in the incubation of 30+ projects such as Ploygon (MATIC), HoDooi.com, DIA, Paralink, Swingby, XEND Finance, BOSON, etc.

Risk warning: Digital assets are a high-risk investment target. The general public is requested to view the blockchain rationally, raise risk awareness, and establish correct currency concepts and investment concepts.