CurveCap & Tokenbrice

About the DeFi Collective

How it works (2:30)

Brice believes that most DeFi projects are "useless" and don't bring about real change, even if they achieve substantial total value locked (TVL).

The DeFi Collective (TDC) aims to support projects that have a meaningful impact in favor of decentralization and resiliency.

Currently, TDC is an association with board members. To ensure that the association is sustainable and can support aligned protocols, the Collective generates yield from its assets and uses that yield to fund its operations and support the growth of the targeted DeFi protocols.

This support can take various forms, such as direct donations or providing liquidity to the protocols.

For example, the Collective created a liquidity pool for the POOL token on Velodrome, effectively bootstrapping liquidity where there was none before.

The Collective operates independently, without seeking permission or funding from external parties. It "self-appoints" itself to support projects based on its own guidelines and criteria for what constitutes a mission-critical DeFi protocol.

Evaluating decentralization (8:00)

Make DeFi Decentralized (Again)

We discuss the challenges of defining decentralization in DeFi, explore the trade-offs when trying to achieve decentralization and propose steps to advance decentralization.

DeFi Collective

They aim to create a framework that can evaluate decentralization in an agnostic way, regardless of the protocol's use case.

One key concept they introduce is the distinction between "essential" and "peripheral" components of a protocol :

• Essential components are critical for the protocol's core functionality
• Peripheral components are non-essential and users can opt-out of them.

Example 1 : Uniswap has a peripheral dependancy with USDC.
USDC is widely used but not essential for the protocol's core functionality (swapping tokens). If USDC failed, Uniswap would still work, though pools involving USDC would be affected.

Exanple 2 : Curve's essential components (swapping, providing liquidity) are immutable and decentralized. However, some peripheral functions like distributing CRV rewards can be modified by the emergency DAO, which is considered a peripheral mechanism.

The goal is to evaluate protocols based on the decentralization and fault-tolerance of their essential, core components, while acknowledging that peripheral dependencies or mechanisms may involve some centralized elements.

About emergency DAOs (12:55)

Brice acknowledges that emergency DAOs can be seen as concerning, as they give a level of control over a protocol to a governing body. However, the implementation and safeguards are crucial to prevent potential abuses.

So there is a concept of "governance minimization" which is a core principle in the DeFi Collective's guidelines : governance should be the last resort solution, not the default, as it can be an attack vector if not properly designed.

Governance minimization has two aspects :

1. Minimizing the reliance on governance by design
2. Protecting the protocol from its own governance mechanisms by bounding their capabilities within certain parameters.

Uniswap V3 is an example of governance minimization, where the protocol's governance can impose a fee on liquidity providers' earnings, but this fee is bounded within a specific range (e.g., 10%-25%).

This bounding of governance capabilities ensures that even if the governance turns adversarial, there is a limit to the potential damage it can cause

No decentralization = no support (17:40)

The Collective categorizes protocols into three statuses :

• Aligned, meeting decentralization criteria)
• Monitoring, not meeting criteria but have a clear path to achieving it)
• Unaligned, clearly not on a path towards decentralization within a reasonable timeline

Protocols that mislead the public about how decentralized they are can't be supported.

While Brice personally values protocols with the potential for massive impact, the Collective is willing to support smaller projects as long as they prioritize resilience and decentralization in their design.

Treasury management (22:15)

The Collective has its own treasury, initially funded by donations from aligned projects. This treasury is used to support mission-critical DeFi protocols by providing liquidity and other forms of support.

The Collective generates substantial revenue from its DeFi activities, with only 20% being spent on operations and the remaining 80% being compounded back into the treasury.

TDC publish detailed reports on their treasury activities, earnings, and expenditures, holding themselves accountable through these public policies :

The DeFi Collective - February 2024 Report

Monthly report for the Collective treasury operations in February 2024. Highlights: a new net-worth ATH & sustained earnings despite increased expenses.

February 2024 ReportDeFi Collective

Although their treasury management is risk-averse, TDC achieves impressive returns that outperform many profit-maximizing entities. In other words, "Ants outperform Apes".

Operations & Principles (26:30)

While some protocols donated to the initial funding of the Collective, it does not automatically mean they qualify for support based on the Collective's decentralization guidelines. Some donated knowing they were unlikely to meet the criteria.

The Collective aims to nudge high standards of decentralization, incentivizing others to prioritize them.

They aim to prioritize supporting protocols where the Collective's resources can have a meaningful impact, rather than larger protocols like Uniswap.

There is no animosity towards any protocols, including those in the Curve ecosystem. As long as a protocol meets the decentralization guidelines, it could potentially be supported, regardless of any past conflicts.

Collective's own path to decentralization (30:15)

While governance mechanisms are not currently in place, the Collective plans to introduce a form of governance over time, allowing members to have their words in decisions, appoint/remove board members, and potentially modify core documents like the guidelines.

For now, the Collective operates in a "trust us" phase, acknowledging the need for a multi-sig and centralized decision-making process to establish initial results and infrastructure.

Also, decision-making on resource allocation currently lies with the three board members.

The Collective is open to contributions from the community, evaluating individuals who demonstrate value alignment and willingness to put in work, as potential future members with governance rights.

Pitfalls of traditional associations (1:02:00)

Brice expresses concern about communities "marrying their bags", which means becoming overly focused on token price appreciation, losing sight of the original purpose.

This reminds him of "Doctors Without Borders", where a significant portion of funds goes towards maintaining the organization's structure rather than the intended charitable work.

To prevent such mission drift, the DeFi Collective has implemented several measures:

• Contributors are limited to part-time roles and must already be involved in DeFi, reducing dependence on the Collective for income.
• Contributor compensations are capped within a narrow range to prevent extreme disparities.
• All expenses, including contributor compensations, are publicly reported to maintain transparency and accountability.

Brice encourages the community to scrutinize the Collective's reports and question any signs of misalignment, such as disproportionately high contributor compensations compared to the Collective's intended purpose of supporting DeFi protocols.

The DeFi Collective's organizational structure (1:07:20)

Brice contrasts the DeFi Collective's transparency measures with traditional non-profits, which often allocate a significant portion of funds towards self-sustaining operations and fundraising rather than their intended purpose.

Regarding the Collective's legal structure, Brice mentions exploring the LexPunk Army model, which involves creating decentralized on-chain entities with appendages for limited real-world interactions. However, he notes this is a longer-term consideration.

Brice's vision (1:12:20)

Brice describes the DeFi Collective as his "ultimate arc" in DeFi, aiming to "weaponize" DeFi towards nudging protocol design to better adhere to core decentralization values.

He draws a parallel between DeFi's current stage and the early, decentralized internet of the 1990s, expressing concern about DeFi following a similar path of corporate capture and "denaturation" seen with today's internet giants.

Brice positions the DeFi Collective as a politically active movement acknowledging the "political nature" of their efforts, aiming to steer DeFi's development towards the betterment of all rather than self-interests.

TDC is providing liquidity (1:24:30)

The Collective currently has the capacity to sustain $15-20 million worth of liquidity across various tokens and pools, despite only holding around $2.4 million in assets.

A significant portion of this comes from their large veVELO (Velodrome governance token) position, which provides liquidity to LUSD and other pools on Velodrome.

The Collective aims to be a "liquidity driving powerhouse" directing liquidity to supported tokens across multiple chains like Ethereum, Optimism, Arbitrum, Polygon, and others.

They're also actively supporting LUSD liquidity, especially on platforms like Blueprint, where LUSD LPs are earning around 50% APR from the Collective's incentives.

There are ideas to engage TDC community using dynamic NFTs, similar to "chicken bonds." For example, providing NFTs to LPs who support certain pools for a given period, with attributes tied to their contribution size. However, this is still a concept and would require proper implementation.

Building decentralized and resilient protocols

Decentralization Day 1 > Path to decentralization ? (33:30)

CurveCap suggests that the credible threat of becoming more decentralized can serve as a protective measure for DeFi protocols, allowing them to potentially "retreat into a decentralized shell" if faced with regulatory or legal challenges, akin to a guerilla warfare strategy.

According to Brice, Most protocols start centralized and aim to become more decentralized over time, but rarely follow through the entire path to complete decentralization.

A possible solution is about building a maximally decentralized & immutable protocol from the start (Ajna, Morpho...)

Immutability is necessary...But difficult (36:30)

Let's suppose we want to create a project that will last 10 years on Aave V3. 10 years later, Aave would probably be at V5 or V6, and there would not be users left on Aave V3 for our project.

So there is a need for "DeFi Primitives", which are protocols that provide a core, unchangeable layer that other protocols can build upon without fear of breaking changes

But this is insanely difficult to build :

• The underlying blockchain itself (Ethereum Virtual Machine in our case) may undergo changes that could potentially impact protocols launched years ago.
• Evolving conditions, such as changing interest rates or new technological advancements also undermine immutability.

Achieving immutability and resilience is an iterative process that involves continuous learning and adaptation.

Liquity V1 was designed with certain assumptions about interest rates (max 5% borrow fee), but the landscape evolved in a way not initially anticipated, and Liquity V2 is needed.

Challenges in market crashes (54:40)

A market crash scenario with low liquidity could cause the price of LSD tokens to plummet rapidly even with little selling pressure, as users rush to exit their positions.

ETH had a small market downturn from $4,000 to $3,600, and Brice mentionned this had impacts on leverage-based protocols, with users needing to buy stablecoins to repay debts, affecting token prices.

Protocol resilience in bull & bear market (57:30)

CurveCap wonders if protocols that survived the bear market have inherently built more resilience into their designs, as that period separated the builders from the hype.

Brice is skeptical that survival alone is a sign of resilience, as well-funded projects from the 2018 ICO era that are still around despite a lack of traction.

On the other hand, bear markets can produce "traumatized builders" who design protocols capable of withstanding significant price volatility and crashes, unlike bull market projects that may make assumptions about stable asset prices.

The human aspect (1:16:10)

While code is essential, the human relations and team dynamics behind a project are equally, if not more, important. The way a team operates, their values, principles, and focus can significantly impact the success of a protocol.

Potential investors or users should assess the teams and founders behind a project, rather than solely relying on technical documentation or protocol details. Observing how the founders think, speak, and conduct themselves can provide valuable insights into the project's potential.

The example of Morpho, a project with a strict "no advisory policy" to ensure the entire team remains dedicated to their core mission, is presented as an admirable approach.

Brice wishes to be invited to discussions or shows where he or his projects are the main topic of conversation. This is seen as a courtesy and an opportunity for him to address any misinformed takes or criticisms directly.

About Liquity

Upcoming Liquity V2 (40:40)

Liquity v2: why user-set interest rates

Liquity V2 had user-defined interest rates, where borrowers can choose the interest rate they want to pay for taking out a loan. Higher interest rates provide more protection against redemption by other borrowers.

Liquity V2 will also allow users to delegate the management of their interest rate to third-parties like the DeFi Collective, which plans to provide a conservative mandate to minimize redemption risk.

Liquid Staking Tokens (LSTs) eligibility (45:05)

CurveCap asks about Brice's thoughts on liquid staking tokens (LST) and their inclusion as collateral types in Liquity V2.

Brice expects the Liquity team to be very conservative in considering LST collateral types, as many LSD tokens suffer from poor liquidity despite having large amounts of capital deposited.

Many LST/LRT (Liquid Restaked Tokens) are focused on maximizing yield farming rewards instead of liquidity, whereas liquidity is crucial for the ability to liquidate positions quickly.

For protocols like Lido (stETH), the redemption mechanism and timeframes are important factors to consider when evaluating LSD tokens as collateral. Long redemption delays could be problematic in DeFi scenarios.

Both agree about having to accept market conditions as they are, even when they defy theoretical expectations.

How to be future-proof (52:00)

CurveCap asks Brice for his perspective on how Liquity should approach governance design for Liquity V2, specifically regarding future-proofing for innovations like LST that may become more prevalent.

One approach could be to have a whitelist of approved collateral types that are not necessarily enabled at launch, but could be added later through a governed process.

The goal would be to strike a balance between flexibility to adapt to future developments like LSTs, while containing the "attack vector" of governance.

But this is a time trial : if you try and actually build out the properly decentralized system, it might take a year to actually do it, and in that time an actually centralized solution is going to pop up and take the market.

DeFi in general

Successful decentralized exchanges (1:20:00)

Velodrome and Aerodrome models are presented as examples of successful decentralized exchanges (DEXes) that the community should study and understand.

While Curve Finance pioneered the incentive model with veCRV, projects like Velo/Aerodrome have taken the formula and improved upon it.

They're also doing a fantastic job in terms of decentralization, as they have an immutable structure and don't have an emergency DAO for potential interventions.

Leviathan News would like to invite Velo/Aerodrome founders to dive deeper into the intricacies of these protocols. This is seen as an opportunity to learn directly from the source and gain a better understanding of their advantages and trade-offs.

Another successful DEX is Ramses. Ramses has an interesting reward distribution mechanism where liquidity providers (LPs) are paid with "oTokens" called xRAM instead of the native RAM token.

The conditions for redeeming xRAM to RAM depend on how aligned the LPs are with the long-term goals of Ramses. If they lock their xRAM for a year, they get a better redemption rate, but dumping it for other tokens incurs a discount/penalty, creating a revenue stream for the Ramses treasury.

Decentralization of Rollups (1:31:25)

Even though some Layer 2 solutions like Arbitrum and Optimism are among the top in terms of total value locked (TVL), they may not be the most decentralized.

We can imagine a future where the Collective would nudge existing Layer 2 solutions like Optimism and Arbitrum towards greater decentralization, as they already have significant usage and adoption.

However, Brice noticed that he will not lead this topic, as his expertise lies more in the application layer of DeFi rather than the protocol layer.

CurveCap did a suggestion about pooling resources to launch a truly decentralized Layer 2 solution, potentially attracting decentralized protocols.

Brice thinks this is too early, as the trend seems to be more focused on leveraging brand recognition, with protocols launching their own Layer 2 chains primarily to "milk" their existing userbase, rather than prioritizing decentralization.

Furthermore, Optimism and Arbitrum have dedicated resources towards advancing decentralization.

Abmis (TDC contributor) mentionned in the chat that Optimism is about to ship permissionless fraud proofs to testnet and production

So launching a decentralized Layer 2 would be overkill.

Aligning liquidity structures and incentives are important (1:35:30)

Brice mentions that he had previously given a presentation comparing different DEX models and their impact on market structures :

In the presentation, Brice introduces the concept of decoupling a DEX into two main components :

1. The liquidity structure
2. The incentive model

It is essential to have synergy between the liquidity structure and the incentive model. The presentation explores how various DEXes like Uniswap, Curve, Velodrome, and others combine these two components in different ways.

Brice suggests that Curve's initial success stemmed from both components being aligned in optimizing for total value locked (TVL), particularly with stable swaps.

However, he notes that recent tensions around Curve may arise from a misalignment between the incentive model and the liquidity structure as the protocol evolves.

Psychology behind liquidity movements (1:41:10)

While incentives can influence liquidity, people's behavior doesn't always perfectly align with the incentives. There are complex psychological factors that shape how liquidity is moved around.

Brice suggests the need for a new field called "Behavioral DeFi" to study the actual human behavior and psychology behind liquidity movements in DeFi, which often deviates from the assumptions of rational, optimizing behavior in traditional economic models.

Some concepts of behavioral DeFi :

• Liquidity Delay : the time it takes for new incentives to attract liquidity and "revert to the mean." Surprisingly, during the bull market, this delay increased, contrary to expectations of people quickly chasing yield opportunities.
• Liquidity Inertia : Similar to liquidity delay, Brice mentions the concept of "liquidity inertia," which is the time it takes for liquidity providers (LPs) to withdraw from a pool when incentives are reduced or removed. This inertia also increased during the bull market, contrary to expectations.

In Bulk

TDC is hiring ! (1:11:30)

The DeFi Collective is hiring a Community Manager & a Content Strategist

The Collective is looking for 2 people to join as contributor and help grow its social media presence and community engagement. Job description & how to apply in the post.

DeFi Collective

Being in Serbia (1:36:05)

Brice moved to Serbia, where he feels more aligned with the overall vibe compared to France.

Curvecap jokingly asked which country, Serbia or the United States, scores better on freedom.

Brice found the question inappropriate, as US influence caused damage to Serbia ("The weight of chains" documentary is very enlightening about it)

Complexity of user onboarding (1:45:50)

Brice shared his experience of onboarding a "total normie" to DeFi. Just to farm a money market on Starknet, we have to understand :

• How wallet works
• How to bridge tokens
• How Money markets work
• How to spot farm opportunities

The information overload is a significant barrier to mainstream adoption.

Moreover, we lack frameworks for evaluating and making sense of the growing ecosystem. That said, efforts are made with the stablecoin rating agency bluechip.org that evaluates different stablecoin models based on economic factors.

Centralized services like Coinbase can play a role in onboarding users to DeFi, as they may provide a more streamlined experience by hosting private keys and abstracting away complexities. However, this is not decentralized.

Future Appearances (1:49:10)

Brice plans to attend various Ethereum and DeFi events in Europe this year, including EthCC in Paris and potentially the Stable Summit in Brussels if it coincides with EthCC.