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To be sure all our Institutional members were able to benefit from the open conversations with strong teams building and investing in the space, we are also sharing transcripts of the official AMAs that are held within our Institutional Members Telegram Channel.

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Delphi Digital Aave Proposal: Towards Aave as a Credit Protocol

Key takeaways:

  • We believe the current design with a single, undifferentiated safety pool is flawed. Firstly, it hampers innovation by increasing the potential costs of failed new product experiments as these can cause contagion and systemic risk.

  • This enables more nimble competitors such as Cream Finance to steal market share, innovating quicker by adding new, riskier products It’s also capital inefficient, bundling different risks together and offering a blended return, appealing to a narrower capital base.

  • Our proposal eliminates the system-wide safety pool and replaces it with sharded safety pools in the form of aaveDAOs (aDAOs). Each aDAO governs its own money markets and underwrites the specific, pre-defined risks associated with those money markets.

  • aDAOs are self-sovereign and governed by $aDAO holders. $aDAO tokens are minted on a bonding curve by locking up $AAVE as the reserve asset. The $AAVE on the bonding curve acts as the safety pool underwiting the risk in that aDAO’s money markets.

  • While the aDAO is self-sovereign, it does not itself control the smart contracts of its money-market Instead, any decision made by the aDAO is sent to the Aave DAO to ratify and execute. This ensures TVL always sits with Aave, maximising the ecosystem-wide network effects.

  • Rather than a single pool of $AAVE holders governing all Aave markets and a single safety pool backstopping all Aave markets as in the first diagram, we now have segregated capital pools governing and backstopping the risk for their own money markets.

  • Crucially, while the aDAOs govern and backstop risk for their own money-markets, the user always interacts with the Aave front-end and smart contracts. This ensures Aave controls the user relationship and TVL, increasing fork-resistance and ecosystem wide network effects.

  • Complexity is abstracted away from end-users and UX is improved as Aave can move faster and offer a greater variety of insured money markets. Risks are siloed and contained among those who are willing to bear them and appropriately rewarded for doing so ($aDAO holders).

  • We believe this proposal advances Aave toward becoming a credit protocol rather than a credit facility. Our goal is for Aave to become the go-to platform for launching, growing and managing money markets, benefitting from Aave’s existing network effects and scale. 

Nexus Mutual Update and Outlook

Key Takeaways:

  • The Capital Pool has experienced an outflow of almost 30k ETH since October 1st. It was initially fueled by the DeFi decline and then exacerbated by the programmatically increasing MCR.

  • Since MCR (measured in ETH) was growing by 1% per day, it was increasing by a gradually larger amount while capital pool inflows were slowing down, eventually turning negative. This created downward pressure on price & disincentivized growth of the capital pool until 130% MCR.

  • The purpose of MCR is to dictate capacity, which is why it was programmatically grown through most of Nexus’ existence. Now that capacity was substantial enough to address current cover demand, continuing to grow it would only serve as a deterrent to capital pool growth.

  • Its impact as a deterrent was especially prominent with DeFi sentiment transitioning from bullish to bearish. As a result, we proposed pausing MCR early last month, a proposal that was successfully passed.

  • As MCR was gradually declining, Degen Spartan put out a thread explaining the dynamic and suggested capital could keep exiting all the way down to MCR of 100%. As expected, this accelerated the decline.

  • While we agree with most of his assumptions, we don’t believe a sizable unlock is to be expected 90 days after the August price spike. Few reasons why:
    • Less than 10% of the supply is actually locked to begin with. The makeup of stakers is mostly those that stake and unstake immediately (to minimize lockup length period while still capturing some rewards) and those that stake for extended periods of time.
    • Tracking inflows to the wallet used for staking also shows that some of the early stakers, that have been sitting in massive unrealized gains for well over 90 days, continue to stake.
    • we think it’s unlikely that MCR hits 100% because it’s a momentum play, and MCR decline has slowed considerably. NXM price sensitivity to inflows and outflows declines with MCR %, which reduces the EV of trying to sell here and buy back lower.

  • As MCR declines, remaining potential sellers are mostly those worried about getting locked in and traders thinking about opportunity cost. It’s tough to quantify them, but seeing the MCR decline trend gradually reverse provides confidence that there’s exhaustion among those sellers.

  • The immediate silver lining is that this situation has virtually no effect on the ability of the protocol to function as intended. Cover capacity remains unchanged from much higher levels of MCR %.

  • We dive into a few more reasons why we continue to hold $NXM in the full note, but the TLDR is this: Our long term thesis is unchanged. Nexus is still the clear leader in a sector that’s both necessary and difficult to compete with the incumbent in. It remains infeasible to fork because of the capital pool, the existing scale and capacity, and their strong team. 

Polkadot’s DeFi Stack

Key Takeaways:

  • Polkadot’s primary differentiator is its use of on-chain governance one every layer of the network. On-chain governance is experimental, but if proven successful could help Polkadot create a moat.
  • The DeFi stack on Polkadot is attempting to recreate the same functionality and synergy of Ethereum. Having multiple blockchains on Polkadot and native interoperability, however, promises to enhance composability and scalability.
  • Smart contracts aren’t supported on the Polkadot base layer, placing near-term focus on infrastructure focused blockchains building this functionality like Edgeware and Plasm.
  • The Web 3 Foundation has commissioned several bridges to link Polkadot with Cosmos, Bitcoin, and Ethereum. Existing solutions like Ren Protocol are porting to Polkadot too.
  • Overall, the network is nascent and it’s too early to pass judgment on whether Polkadot will emerge as victor in the cutthroat layer one environment. It’s important to watch if developers flock to the network and how it’s burgeoning ecosystem grows over the next year.


The Shift to Layer 2: A Potential Disruption Catalyst for the AMM Ecosystem by Luke

Key Takeaways:

  • Currently all significant AMMs reside on Ethereum layer 1 and life has been relatively simple, albeit expensive.

  • As the number of AMMs grew, liquidity fragmented leading to users interacting instead with aggregators like 1inch and Debank to save themselves the headache of finding best trade execution.

  • However, currently aggregators can aggregate because everything is on the same layer and is highly composable. With any future shift to layer 2s this changes and threatens the importance and value capture potential of order fulfilling aggregators.

  • Layer two solutions such as optimistic and zero-knowledge rollups promise reduced latency and cost, but these present a problem: unless everyone moves or no-one moves, liquidity fragments.

  • Ideally a user executing a swap on the ETH-USDC pool on Unipig (Uniswap fork on the Optimism layer 2) would benefit from the vast liquidity of the mature ETH-USDC pool on Uniswap.

  • Furthermore a user executing a swap on some future aggregator should be able to benefit from the combined liquidity across all layer 1 and layer 2 AMMs.
  • It’s not yet clear if and how this will be possible but in this daily we explore the questions we need to ask as we search for a solution.

  • Will linking AMM pools between layers have tradeoffs such as increased cost and lower latency due to the need to sync state to pool smart contracts on Ethereum? Will rolling up swaps from layer 2 and settling on layer 1 be viable or just lead to unsolveable frontrunning risks?

  • Will existing aggregators be able to make this pivot? Will this become a point of recentralization or are there possible decentralized solutions able to operate across blockchains and layers while maintaining a balance sheet?

  • History has shown us that as technology takes a leap forward, a window of opportunity often opens as new projects and startups with innovative ideas to leverage that technology come forward while the existing leaders fail to innovate and lose market share.

  • For example Thorchain is an AMM with its own chain integrating assets from other chains and as such doesn’t suffer from any liquidity fragmentation problem.

  • In our research over the next months, starting with our upcoming layer 2 thematic, we’ll be diving into these subjects and watching closely as the Ethereum ecosystem adapts to a fragmented new reality.

Bitcoin for Advisors [Presentation]
 by Kevin Kelly

Key Takeaways:

  • COVID-19 is an Accelerant, NOT the Root Cause:
    • Heading into 2020, advanced economies were already saddled with too much debt given their languishing growth outlook and the world was extremely vulnerable to any exogenous event that threatened to disrupt private sector revenue and cash flows.
  • Dearth of Non-Sovereign Safe Havens:
    • At the end of the day, if foreigners lose confidence in US Treasuries, that eliminates (or significantly diminishes) a huge chunk of the world’s most popular safe haven trade. The United States has long served as a dumping ground for the world’s excess savings, so all that money must eventually flow somewhere. It’s my opinion that some of it will find its way into bitcoin and digital assets as the emerging Internet economy attracts a material portion of global savings.
  • Bitcoin’s High Reflexivity:
    • For all the hype and attention it gets, the total market value of bitcoin is still only ~$280 billion. Large institutional investors can’t all possibly take meaningful BTC positions because the market is just too small. However, as BTC appreciates in value, it will “unlock” a larger cohort of investor types, attracting more capital and deepening its liquidity profile. If strong enough, this feedback loop can transition bitcoin into a real investable asset for large capital allocators, sparking more interest and even greater demand.
  • Conventional Asset Class Headwinds:
    • My conversations with traditional investors, especially wealth management professionals (RIAs, FAs), usually start with a macro focus before drilling into the long-term value proposition of Bitcoin. I like to approach this topic from a few different angles, one of which is to flip the entire argument on its head. Rather than explain the absolute bull case for BTC, I give them my long-term outlook for other conventional asset classes. Simply put, if you’re still not convinced that bitcoin is a prudent investment, where else are you allocated? With equities and fixed income leaving lots to be desired, paired with the rising risk of currency debasement and you’ve got the perfect storm for hard, scarce assets like bitcoin and gold to outperform in the coming years. 

Empty Set Dollar: A Game Theoretical Approach to Elastic Stablecoins by Ashwath

Crypto trading volumes have seen a momentous shift towards stablecoins. The rise of DeFi further augmented this phenomenon, with over $245 billion of blockchain transactions settling via stablecoins in H1 2020.

While designs vary amongst different coins, one notable project, Ampleforth, attempted to change what it means to be a “stablecoin” all together. Its token, AMPL, is an algorithmic cryptocurrency that introduced the concept of rebasing. Simply put, a rebase is a mechanism where tokens are printed and issued by the protocol when the price of the token is above a certain threshold (i.e. if X-price > $1 then increase X-supply). For all intents and purposes, AMPL is not a true stablecoin despite having an explicit price target.

Before AMPL, however, the pioneer of the elastic token concept was Basis. In late 2018, Basis was shut down by the SEC for having too many security-like instruments. Basis had 3 tokens: a stablecoin whose supply was elastic, share tokens that played an equity-like role in the ecosystem, and bond tokens that represented a future claim on Basis’ stablecoin.

Empty Set Dollar (ESD) is an attempt to build an algorithmic stablecoin, borrowing a few concepts from projects like Basis. ESD has an elastic supply; new tokens are minted when the token is trading above $1.

But unlike AMPL it doesn’t mindlessly print money for token holders…

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Major Foreign US Treasury Holdings vs. World Gold Reserves, ETF Growth

There’s much debate over the impact of >$3.5T in net new Treasury issuance in 2020 alone. While that may seem like a lot (and it is), it isn’t necessarily a huge concern…yet. Global bond markets outstanding value was estimated to be ~$105 trillion at the end of 2019 with US Treasury debt held by the public making up roughly 20% of that figure. But not all bonds are created (or valued) equally. In times of duress, investors tend to flee for those deemed as “safe havens”, most notably US government securities.

Bond yields have remained relatively subdued for the better part of this year in large part because of elevated demand for safety and liquidity in the face of growing uncertainty. Policymakers are also trying to counteract strong deflationary forces, especially in the short-term, so demand for US Treasuries has held strong; with at least $16 trillion of negative-yielding sovereign debt outstanding, few places look more attractive to park your money.

Yet, the long-term risks to mounting public debts is palpable and has only worsened recently with accelerated debt issuance. Not only are we facing extremely low rates, price appreciation on US Treasuries is largely capped unless US rates go deeply negative. Tack on the increased risk of currency debasement and the logic for holding large proportions of one’s capital in government bonds starts to crack.

At the end of the day, if foreigners lose confidence in US Treasuries, that eliminates (or significantly diminishes) a huge chunk of the world’s most popular safe haven trade. The United States has long served as a dumping ground for the world’s excess savings, so all that money must eventually flow somewhere. It’s Kevin’s opinion that some of it will find its way into bitcoin and digital assets as the emerging Internet economy attracts a material portion of global savings.

Bitcoin vs Gold – Example Return Scenario

Bitcoin doesn’t have to eat the rest of the world for it to be a successful investment. Referencing a previous Delphi Daily titled, “Bitcoin Doesn’t Have to Win the War”, Kevin maps out a potential – and realistic – scenario in which gold attracts more capital than bitcoin over the next decade.

In summary, if the total market value of gold and bitcoin rise by $6 trillion and $1 trillion over the next 10 years, respectively, the annualized return for BTC would be almost 4x higher than its precious metal counterpart. The big takeaway here is starting points matter, and nowhere is that more apparent than in the art of investing.


Jamie Burke: Accelerating the Emergence of the Metaverse
Crucible: Blueprints for the Open Metaverse

As mentioned, we will continue to iterate on the design of our Delphi Debrief based on your feedback—so please let us know which section you enjoy the most and what else you’d like to see!

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