From App to Infra : is this how DeFi Scales ?

Traditionally, DeFi protocols were designed as user-facing applications, where end-users could directly interact with the protocol.

But the actual talk highlights a shift towards building DeFi protocols as infrastructure, rather than just applications. The idea is to create more modular and composable systems, where developers can build their own applications on top of these infrastructures.

This approach has several benefits:

1. Separation of security concerns : By separating the core protocol from the user-facing applications, developers can focus on building innovative solutions without worrying about the underlying infrastructure's security
2. Developer Empowerment : Developers can build directly into the protocol as first-class citizens, leveraging its distribution and user base without needing to attract users independently.
3. Scalability and Specialization : The transition to a more infrastructure-like model enables scalability by allowing different sub-protocols or sub-DAOs to specialize in different areas. For example, focus on DeFi lending integrations, while others concentrate on traditional finance assets. This specialization and redundancy foster competition and enable the overall protocol to scale more effectively.
4. Composability : By providing a robust infrastructure layer, developers can compose and build innovative applications on top of these protocols. This composability unlocks new possibilities for financial products and services
5. Governance decentralization : The shift towards infrastructure-like protocols also aligns with the principles of community governance. By enabling specialized sub-protocols, decision-making becomes distributed across different stakeholders.

Examples (6:05)

Devin's point of view : Currently, to innovate on Automated Market Maker (AMM) designs, developers have to create entirely new AMMs, which is an expensive and risky process involving auditing, bootstrapping liquidity, and more.

With Uniswap V4, the introduction of "hooks" allows developers to easily integrate their innovations directly into the existing protocol. Several innovations could be enabled through hooks :

• Suave from Flashbots
• Zero Knowledge coprocessors

Paul's ppoint of view : Building everything within a single application (like Uniswap V3) introduces more smart contract and economic risks, as well as lower efficiency in tackling multiple use cases simultaneously.

With the infrastructure model, the core protocol can focus on providing a simple, secure, and efficient primitive, while allowing permissionless innovation and building on top of that infrastructure.

By aggregating liquidity and state into a single core protocol, all applications built on top can benefit from this shared liquidity and efficiency, potentially reaching levels that surpass traditional finance systems at scale.

Improvements for End Users (11:00)

Improving the user experience DeFi still lags behind centralized exchanges in terms of user experience. By improving the underlying infrastructure and allowing for customized apps and experiences to be built on top, DeFi can catch up and potentially surpass the user experience of centralized exchanges :

• New features will lead to better execution of trades and transactions for all users
• Allowing customized experiences to be built for specific use cases, users, or jurisdictions
• Boosting profitability for liquidity providers by lending out their unused liquidity.
• The most powerful feature of DeFi is composability. As the backend infrastructure like Ethereum scaling improves and the underlying DeFi infrastructure matures, the ability for different protocols and apps to interact and build on top of each other will potentially surpass the UX (user experience) of centralized exchanges

Specialization & Separation (15:00)

In traditional lending protocols like Aave or Compound, multiple functions like lending, borrowing, risk management, and asset aggregation are combined into a single protocol.

However, Morpho separates the risk management layer from the base protocol layer. This allows for specialization, where the base protocol can remain simple, while separate "risk managers" or lending protocols can build their own customized vaults and experiences on top of that base layer.

The announcement about Gauntlet, a prominent risk management firm, joining Morpho as a "risk vault" creator is used as an example.

Instead of acting as consultants for lending protocols like Aave, they can now directly offer their risk management services as a separate application or vault on top of Morpho's infrastructure.

Opening up risk management to a marketplace of providers is important for innovation and improvement

Hooks from Uniswap V4 also opens up competition and innovation for AMMs : The uniswaphooks.com website shows over 100 hooks that have already been built, demonstrating the potential for innovation in this area.

Furthermore, Uniswap core team was already in talks with over 20 teams considering developing protocols embedded within hooks themselves, ranging from order flow auctions to other novel primitives.

Current state of DeFi = Early days of the internet (19:30)

Just like the internet has base protocols like SMTP and HTTP, with different layers and applications built on top, DeFi is rebuilding finance in a similar manner.

The base protocols like Uniswap and Morpho provide the network effects, while separate layers for risk management, products, and applications are built on top, each with competitive and open markets.

This abstraction does not necessarily conflict with the strong brand identities of protocols like MakerDAO, Uniswap, and Morpho. Just as email clients provide different user experiences on top of SMTP, DeFi applications can offer different front-ends and features while utilizing the same underlying protocols.

However, there is a tension between abstraction and the potential for scams or non-compliant activities, as protocols like Uniswap and Morpho allow listing any asset or creating any market.

There will be a need for user education to distinguish between the underlying protocols and the risk decisions made by the front-end applications or interfaces.

Users will need to understand that the protocols themselves are not risk-free, and the applications built on top must manage risk and compliance appropriately.