the $warp magazine edition #04
The #Warparmy Strikes Back!
The fourth edition of “the $warp magazine” has arrived! Development is progressing steadily and we are working towards accomplishing milestones on the Warp roadmap! Talking about roadmaps… visit the warp.finance website at your convenience as a short-term roadmap (till the end of the year) has been included towards the bottom of the homepage, with insights into predicted Chisel and veWARP launch dates! 👀
Roadmap sneak peek. Head over to the website to unravel the hidden timeline!
Marketing activity is on the rise as indicated in the last edition. Talks are ongoing with Element Finance and we hope to deliver great news at the earliest! Before we explore the Dev Updates section, below are the important links that you should regularly refer to, to better your understanding of the #Warpverse and where we are currently at. As always, the $warp magazine serves as your one-stop destination for all things Warp (of course, you must follow our socials for juicy, daily snippets 😜)!
- Warp v2 Beta run-through explainer video
- Warp v2 Beta run-through explainer script
- AMA outlining the platform & addressing questions
- Deconstructing the Warp vision
- The $warp magazine edition #03
- Landing page
- New platform
- Old platform
Without further ado, here are some juicy development updates!
Featuring the latest development updates:
New Lending Pair Deployment
We recently deployed a new lending pair — USDC <> ePyvUSDC — since other pairs on the Warp v2 Beta platform had expired. We are actively conversing with Element Finance regarding addition pair implementation as has been highlighted in previous editions and expect to launch the new pairs as soon as they become available.
Snapshot Tally Service
As part of our plan for the Chisel TVL drive, which was leaked in the previous edition, we intend on launching a competition and reward winners with a TVL-boosting NFT. To be able to do this fairly though, we need to be able to easily keep track of Cumulative Deposited Value for every user, being incremented daily. For that purpose, we started developing a simple service which we call “Snapshot Tally Service”. Most of the work has been completed and at this point, we are waiting for the contracts to be redeployed on Goerli, to test it properly since we will need to query those deposits on chain (most likely with the use of subgraph).
In the previous edition, we highlighted that we have been working on implementing some of the user feedback that we have been receiving regarding the Warp v2 Beta UI. While addressing these queries, we are continuing to make further improvements to the UI, such as:
- Ordering lending pairs based on the expiration date.
- It is now more clear that the lending pair tokens on the “Markets” page are clickable
- Fixing some display values (for example, the “MAX” allowed amount to repay should take into consideration a user’s current balance as well, not just how much he is in debt). This has not yet been deployed and is in review.
- Adding some tooltips for better navigation. This has not yet been deployed and is in review.
- Adding additional support for wallets, such as Coinbase Wallet and Portis. This has not yet been deployed and is in review.
“DeFi Pulse” — Featured art shared by Dipps3000 (Warp.finance member)
Thank you as always for your support, #Warparmy! We received numerous entries for this edition and selected the highest-priority questions:
Q.1: When could we expect a TVL drive for Warp Finance? (@AverageDudeTrades, Telegram)
Answer: As per the last edition, we leaked details regarding an NFT-based TVL drive for the Chisel launch. The Chisel launch phase will also be accompanied by promotional efforts.
Q.2: Could we have an update on the status of the 1-click flash loan implementation? Could the process of using an interim third-party solution for leverage looping be explained? (@Scott_YYC, Telegram)
Answer: The team is still working on the development of 1-click looping. However, an advanced user can create a contract to do this themselves.
For example, for ePyvUSDC pairs, a user could create a contract call aggregator to first flash loan a USDC amount from any flash loan provider (for example, Aave), use that amount to purchase ePyvUSDC collateral from Element Finance (or via the corresponding Balancer AMM pool), add the ePyvUSDC collateral purchased to Warp, borrow USDC from the Warp lending pair, and finally use the USDC borrowed to repay the flash loan.
The calls need to be aggregated via a contract, because the flash loan borrow and repay need to be conducted within a single block, or else the transaction will fail and revert.
Q.3: The newly-released, short-term roadmap is insightful. That said, when could we realistically expect the Chisel and veWARP implementations? (@PhoenixFund, Telegram)
Answer: The plan is to release Chisel first, while we continue to work on veWARP. We aim to release veWARP by the end of the year (Q4) and Chisel well before that. Refer to the “Monday Blues” section for more information about Chisel development.
The Alpha Bat-Bird is back, soaring high in his ocean of knowledge (paradox much?). What Alpha do you have for us, ser?
In the previous edition, we discussed how Chisel operates as a yield aggregator fund for DeFi. Importantly, the operation of this fund is decentralized, with the weighting of the yield being controlled by the many borrowers opening and closing positions. This provides a 24/7 active management of positions, with the many borrowers in aggregate constantly assessing the market and dynamically pricing the risk versus reward of yield opportunities.
In short, it can be viewed that suppliers to Chisel effectively pay these borrowers a percentage of the underlying yield as a management fee, in return for the borrowers to direct and manage their capital to the highest risk-adjusted yield opportunities.
But this raises a further question;
Why Lend When You Can Mint?
As stated previously, Warp pioneered the ability to borrow against primary service yield-bearing assets like liquidity position (LP) receipts back in 2020. Since then, other platforms have copied the strategy of borrowing against yielding positions with varying success. One of the more successful platforms of the last bull-run was Abracadabra Spell, in its peak lending out $4.5B in their native stablecoin “MIM”.
Abracadabra works similarly to Maker DAI, by accepting collateral and using it as redeemable (or liquidatable) value backing a newly minted stablecoin token. In this way, the underlying value of MIM is supported by all of the collateral on the platform. However, this means if any one of the collateral is compromised, the underlying backing value of MIM is threatened. As more yield-bearing opportunities are added to try to expand the protocol, the risk of such an event increases. This adds to counterparty risk, but who is that?
Since Abracadabra mints its stablecoin, a SPELL user does not directly need a willing counterparty to open a collateral position and receive MIM. In such cases, the protocol itself is the counterparty and will always issue debt within the allowable bounds. However, the value of the newly minted MIM is not able to be realized unless a further counterparty is willing to hold and convert the liability into another asset. To ensure there is always a willing party to instantly trade MIM for another asset requires there to be a permanent liquidity pool. The main market making for MIM is provided via Curve Finance AMM. The SPELL protocol, therefore, needs to reward these liquidity providers for their service of upholding the MIM peg and accepting the full counterparty risk.
0xHamz provided a great breakdown thread (here) of Spell’s total profitability (or lack thereof) of incentivizing enough market-making liquidity around its peak TVL in January. As per the below table, we can see he estimated it was costing the protocol a net loss of $139M to attract sufficient liquidity to defend the peg of MIM. This was not sustainable.
0xHamz writes that the only way to get SPELL to become profitable and sustainable is to get the MIM borrow rate to exceed the cost of the peg. Although the figures are now out-of-date, in the table above we can see that the cost of the peg was roughly 3.7x higher than the borrow rate at the time.
Maker DAI’s model works because the core stablecoin liquidity pool of Curve, 3pool, directly benefits Maker by providing market making and peg of DAI at no cost to the protocol.
Below we can see the rapid rise and fall of MIM total market cap.
In short, the protocol minting its stablecoin is not “free” and must be paid for by other means. Further, a third counterparty is still needed but is shifted outside of the protocol, while being rewarded by the protocol and thus draining value from the platform. Balancing the counterparty is via a long feedback loop outside of the direct control of the protocol and thus is difficult to maintain optimum and efficient balance. This limits how fast the protocol can grow, while the resulting necessary export of value is borne by the protocol and its stakeholders.
In contrast to this, Warp’s method explicitly outsources the cost of maintaining a peg of debt via a “supplier” of an exogenous asset (e.g. USDC). Warp, therefore, brings the role of the counterparty internally onto the platform, while eliminating the protocol’s role of counterparty and thus accrual of systemic risk. This design decision also allowed us at Warp to isolate counterparty risk to each pair since there need be no common linkage between the different collateral or debt markets offered. Therefore, the risk is more transparent and controlled for the counterparty than holding the liability of a centrally issued debt token such as MIM.
Furthermore, by focusing purely on yield-bearing collateral, the result is that the supplier is not needed to be rewarded by protocol, but indirectly by the yield of the underlying collateral. As explored in the last edition, the lion’s share of underlying yield is transferred to the supplier via the market demand of borrowers.
In this way, both the cost of the peg and the cost of rewarding the counterparty, are now borne by third parties. Therefore, all profit of the platform can be captured and distributed back to stakeholders (for example, veWARP holders), thus allowing Warp to overcome the limitations of platforms that mint their stablecoins.
Finally, the ability to lend trusted assets (like USDC) may provide significant value when compared to minting a newly collateralized stablecoin. That is, rather than the protocol poaching value from the collateral to underpin its value, the protocol can direct new value to the collateral. This theory forms part of our long-term goal and will be addressed in detail in future installments. Stay tuned!
The Latest Internal News! 🤫
Post disruption of our initial audit plans, we are pleased to have secured an audit slot with Stela Labs for our Chisel contracts, which aggregate liquidity within our Blacksmith vaults. Followers of the project will know that previous audits of the Blacksmith contracts were conducted by Trail of Bits.
More details of audit progress will be delivered as soon as they become available. The audit procedure will ensure every possible outcome is evaluated to reduce the attack surface and eliminate potential risks. This will include review and testing of the code, in the quest to find potential bugs and vulnerabilities.
Chisel-related work is taking place in the background, including the definition of Chisel Admin UI aspects and staking options review:
- With regards to the Chisel Admin UI, we are streamlining the interface for admin or operator direction, to allocate and direct funds to different lending pairs through Chisel. We want to achieve maximum efficiency for such processes.
- One of the additional incentives for users to use Chisel is the ability to stake Chisel receipt tokens, which are obtained by supplying funds to Chisel for lending pairs. By staking receipt tokens, users will receive $WARP tokens or other rewards. We are in the process of designing this solution for additional user incentives.
Although the current global macroeconomic outlook remains on edge, the Warp team continues to build out our pioneering vision of what a next-generation money market should be. We have carefully curated all decisions to be aligned with the requirements of the future of finance.
Join one or more of our social platforms to follow our journey! We are creating DeFi’s first isolated lending protocol that optimizes yield-bearing receipt tokens, and much more!