The $warp magazine edition #03
The #Warparmy Returns
Hey hey, #Warparmy!
The third edition of “the $warp magazine” is here! A lot has happened behind the scenes since we published #02. We also increased efforts on the marketing side, where we held a joint private AMA with Decentralized ETF, on Telegram and recorded the call. We also published the AMA on YouTube (link below) and are working towards collaborating with other like-minded projects — turn on Twitter notifications to learn about our next AMA, which will be very soon!
P.S: Something is cooking with Element Finance… 👀
On the development front… Well, we have an entire section dedicated to the cause, so read on! Before we dive into the Dev Updates section, here are some important links that you should refer to from time to time to enhance your knowledge of the #Warpverse. Remember, 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 #02
- AMA with Decentralized ETF
- Landing page
- New platform
- Old platform
We recommend visiting the Warp v2 Beta platform (link number 8) often, as new isolated lending pair implementations could drop at any time — remember from the last installment, that the early bird gets the juiciest worm!
All said and done, it is time for some development updates.
Featuring the latest development updates:
Chisel Contracts Implementation and Testing
We commenced proper testing of the long-awaited Chisel implementation. Then, we reviewed interest rates and descriptions of parameters and proceeded to create all the necessary administration actions. This was followed by audit preparation and code review. We are negotiating audit details and hope to be able to integrate this crucial piece into our system soon!
Oracle Adapter and Saturation Implementation
Previously, our oracles were reliant on the manual setting of prices or the external Cron Oracle Service. Since publishing the previous edition, we conducted extensive oracles research for the USDC <> ePyvCurve-alUSD pair to ensure stability and that positions would not be unnecessarily liquidatable based on the pricing of the underlying LP token. Finally, we were confident to implement a live VWAP price feed bypassing any intervention. Hence, we implemented a Chainlink Adapter and disabled the above-mentioned Cron Oracle Service, and monitored the outcome for the remaining term.
Additionally, we have been working on an oracle saturation implementation to account for limiting inter-asset pricing, starting with design and documentation.
1-Click Flash Loans Research
One of our most requested functionalities has been leverage looping, which has great potential to bring much higher returns to users. For us to be able to achieve this though, we first need to implement 1-click flash loans, allowing users to execute a subsequent string of operations with a single contract call:
We are also performing testing of a flash loan implementation using our very own Warp vault, rather than paying for an external flash loan provider. While implementation is still in the early stages, we are conducting extensive research and will continue to keep you posted with the latest updates!
We assure you that we have been listening to your feedback regarding our UI! To make the Warp v2 Beta UI function as well as possible, we have been going through all available feedback, creating tickets, and resolving them one by one.
We started with the so-called ‘Getting Stuck on Executing’ bug which could occur in case of speeding up an already running transaction on Metamask. We are pleased to tell you that this should no longer be an issue and in the worst-case scenario, the “Pending Status” will automatically reset after 10 minutes.
Aside from that, we performed several minor fixes and improvements such as adding appropriate logos and URLs to the existing pairs (leading to the corresponding Element Finance page where you can get that specific token) and resolving incorrectly displayed MAX value in case of insufficient funds in your wallet.
We have also been discussing how to provide more information to the user to make using the platform easier. For example, where to purchase the appropriate tokens from and the expected profitability of using Warp to compound the position, including presenting an estimate of resulting APY to the user before confirmation of position. Our goal is to have an intuitive and empowering UX.
“To Da Moon” — Featured art shared by CryptoFielder (Warp.finance member)
Thank you as always for your support, #Warparmy! We received several entries for this edition and chose the three most pressing questions:
Q.1: Is there any update on the return of liquidity mining to the Warp v2 platform? (@davidmullin, Telegram)
Answer: There have been no updates to liquidity mining since this was discussed in the last magazine. The team continues to monitor liquidity requirements closely.
Q.2: The Warp v2 Beta pairs have expired. When will the new pairs be implemented? (Anton, Telegram)
Answer: The initially deployed alUSD and USDC fixed rate pairs have now expired and a new term-locked USDC pair has now been deployed with a 160-day expiry. Element Finance is managed by its DAO which recently passed a vote to implement a new asset onboarding framework that will enable more pairs to be listed. Unfortunately, the high-APY balancer boosted USD pair (aurabb-a-USD) we had wanted to launch was delayed by the proposal of this updated framework, however, we expect a vote to be live soon to onboard this asset. For more information, and to stay up-to-date, keep an eye out for upcoming Element Finance governance proposals.
The Warp team has also been busy discussing and working with other protocols to implement other unique high-yielding assets from across DeFi, as well as the option to migrate collateral assets from the Warp v1 dApp.
Q.3: Could Warp release a simplified guide on how to earn high APY with or without leverage? Many of us do not have yield farming experience and would appreciate it. (Shiba Master, Telegram)
Answer: While we remain in Beta mode, we encourage only experienced degens to use the platform. However, we are currently actively working on UX improvements such that even the most novice users can earn significant and transparent yield with our 1-click leverage.
Furthermore, as will be discussed below, we recommend that novice or risk-averse users should instead supply USDC to Chisel to achieve an automatic risk-adjusted position while receiving majority exposure to the yield of underlying positions, dynamically with real-time risk weight adjustment by the collective wisdom of DeFi’s most advanced users.
The Alpha Bat-Bird is back, once again. What Alpha do you have for us this time around, Stiive?
Chisel — the Ultimate Yield Aggregator of DeFi
In the last edition, we covered the potential to achieve massive APY for leveraging yield-bearing positions on Warp which we believe will be the driving force for adoption. To achieve this goal, the team thoughtfully devised every element of the Warp platform to mitigate risk which is the key that allows us to offer leverage on a range of bespoke long-tail, yield-generating assets without compounding systemic platform risk.
A crucial aspect of these choices includes the design choice to only lend out exogenous stables and combined with isolating each pair means that the struggle to attract this counterparty capital is compounded by the inherent fragmentation of liquidity. However, we believe our unique solution to this challenge, also represents one of our greatest strengths and value propositions.
Enter Chisel — our dynamic liquidity aggregator pool.
As explored in my Warp vision twitter thread back in June, each of our lending pairs’ assets can be viewed as a DeFi farming strategy, drawing from yield opportunities throughout DeFi and concentrating the yield with Warp. We are therefore less like your traditional money market and more like a DeFi-wide yield extractor. Each yield strategy in DeFi comes with its own dynamic risk versus reward profile and therefore risks and yield need to be continually monitored and evaluated.
For example, often the more “degen” type strategies have high-yielding positions but may carry greater perceived risk (for example, due to smart contract risk) when compared to more blue-chip yield positions. This is because “blue-chip” yield strategies with perceived lower risk are often saturated, while the absolute yield is finite, therefore yield is diluted amongst more participants leading to low APY. In all cases, yield strategies are safe until proven otherwise and all such DeFi strategies require constant monitoring such that funds can be recovered as soon as possible in the event of a crisis. In the case of Warp, therefore, the borrowers are responsible for managing the risk of the position and are rewarded by being able to farm the positions using someone else’s money.
That said, why should a user supply USDC to the Chisel liquidity pool rather than engage in these high-yield APY opportunities themselves? We believe this holds for several reasons:
-> Lower Risk to Capital: Suppliers to Chisel effectively gain senior stock rights on the underlying position. If something were to go wrong, the position is immediately liquidated and the supplier is always paid first. Therefore, the borrower is incentivized to manage the risk to unwind the position before the position is in danger, and is therefore responsible for continually evaluating and managing the risk of the position on behalf of the supplier.
Furthermore, due to the advancement of all pairs being isolated, the risk exposure to any one collateral asset to Chisel suppliers is maximally limited proportionally to the weighting assigned by veWARP holders. For example, 10 discrete lending pairs could all be assigned a maximum of 10% of the capital supplied to Chisel, and therefore a Chisel supplier has a maximum 10% exposure to any given yield strategy in the unlikely event it encounters a 100% loss of funds.
This represents the maximum possible risk exposure, as the borrowers need not utilize the entire fund allocation, especially if the market in aggregate believes the position to be risky. In contrast, a borrower could potentially lose all of their funds if they take the risk and their position is liquidated, where their minimum incurred loss is the liquidation fee and the maximum loss is 100% of their upfront collateral.
-> Lower Risk of Yield: The goal of Warp is to enable borrowers to loop farming positions to achieve a profit, however, this is only in the case where the average underlying yield is greater than the interest rate being charged by the suppliers. Warp interest rate models are carefully set up such that the maximum interest rate payable to suppliers is always slightly higher than the yielding position and therefore provide a market force to ensure there is sufficient liquidity for suppliers to systematically withdraw. In such cases, a distracted borrower could leave a position open where the interest rate is higher than the yield and thus be losing money on the position if not actively managed.
This is not the case for the supplier, who will always be paid a positive yield while someone is borrowing the pools. Therefore, the borrowers in aggregate will effectively actively price the risk versus reward through the utilization of the pool (TVL), and thus determine the resulting interest rate within the bounds of 0%, to beyond the maximum yield of the underlying position. Furthermore, Chisel yield is derived from all supply-weighted averages of all the different strategies and is auto-compounding in the same currency as supplied, with the value of a user’s share of the vault increasing as the interest of borrowers is paid back into it.
-> Lion’s Share of Underlying Yield: Due to the cost of capital, we believe market forces will drive the APY of the supplier side near the limit of the yield of the underlying position. This is because, in most circumstances, the borrower needs only a small net yield (yield-interest) to achieve massive APY after leverage looping.
For example, in the previous edition, we explored a potential bb-a-USD Element Finance position with a fixed ~7.5% APY. In this case, the suppliers could take up to 7% APY of this, leaving only a net of 0.5% APY for the borrower to loop. At a 96% LTV and 180-day term, the borrower could theoretically net up to 118% APY on their upfront capital, with no risk of liquidation due to peg fluctuations (AUSDC is 1:1 redeemable for USDC).
This is very attractive, however, the borrower’s net APY is highly volatile depending on the ratio between yield and interest rates (point 2) where even a small change (for example, 0.5%) to either rate makes a big difference. On the other hand, the bulk of the yield is likely to always be consistently paid to the supplier with low perceived volatility.
-> Market Led R:R Exposure: We expect that suppliers will receive the bulk of the yield for each of the underlying strategies (point 3) while taking on limited capital risk (point 1) and outsourcing the management of the position to borrowers (point 2). Therefore, supplying to Chisel becomes like an actively managed “ETF” or “mutual fund” to a basket of risk-adjusted, yield-bearing assets, managed by the borrowers in aggregate.
This “ETF” or “mutual fund” can be viewed as having a dynamically assigned “management fee”, paid to the borrowers, being the delta or spread between the underlying yield and the interest rate. In this way, capital added to Chisel can be viewed as “lazy capital”, and requires little to no management while receiving a high yield from a market-led aggregation of yielding assets.
-> Regulation: Some users such as institutional investors may not be able to have exposure to some of the more “degen” assets. Even without regulation, compliance officers of large corporations need to vet each asset holding, which limits the assets those users can explicitly hold. In contrast, supplying to Chisel only requires holding one asset, for example, USDC, while earning the bulk of the yield opportunities (point 3) of each of the underlying “degen” strategies.
Therefore, we wish to attract such institutional clients to be able to use Warp to lend this regulated capital to earn yield throughout DeFi, and over time we intend to work to ensure that our platform is compliant as a money market.
-> 24/7 Decentralized Compute: So we learned that Chisel effectively can be viewed as a pseudo limited liability DeFi yield mutual fund, with active market-led risk weightings managed in aggregate by the borrowers. How is this superior to other DeFi yield aggregators or even Farming-as-a-Service models? Well, in other models, a centralized authority, or a DAO is responsible for determining the farming strategy. This authority must be responsible for all the considerations such as: how much capital to allocate, when to enter or exit a position, will the collateral price go up or down, will the yield maintain, what are the risks, etc.
The world of DeFi moves fast and there are millions of factors and exploit vectors to consider which can catch even the most knowledgeable central authority off-guard and everyone needs to rest. The centralizing authority also brings key person risk and also breaks the inherent trustless nature of blockchain. Likewise, Defi moves too fast to be managed by a DAO with the embedded latency of consensus, and where any move also brings risks of being front-run or exploited as a DAO needs to publicly announce its intentions before making them.
This has led traditional centralized and decentralized yield aggregation strategies to remain stagnant with poor performance, often relegated to well-established blue-chip yield opportunities, leading most users to bypass the aggregator altogether due to a lack of added value.
On the other hand, we believe Chisel represents a revolutionary highly reflexive and decentralized market-led yield aggregator. The expected many hundreds or thousands of borrowers are rewarded for actively opening/closing their positions, which in aggregate provides an up-to-date 24/7 snapshot of the perceived risk versus return of each strategy. Therefore, it can be said that the borrowers in aggregate represent a distributed computing system of no latency, with the power of n^(users), with sole responsibility to find and dynamically allocate capital to the best risk-adjusted yield positions.
Borrowers effectively vote on each position by posting their capital upfront as a bond (1-LTV), to be given the privilege to direct capital from the suppliers and earn a performance/management fee in exchange for onboarding the risk. We can assume that the bandwidth of distribution of rational actors far exceeds the capacity of a centralized model in its capacity to identify opportunities and accurately assess risk. Therefore, we can expect that such a distributed compute model will significantly outperform any centralized model of existing yield aggregators, by embracing and mimicking the free market principles in which DeFi exists.
For a great explanation of the fundamental difference between a standard centralized yield aggregator strategy and Warp’s unique distributed market-led system, watch this video.
Therefore, we see Chisel becoming a low-risk, high-yield, actively managed distributed mutual fund / ETF. Just deposit your stablecoins and earn the lion’s share of Defi’s best-performing yield assets, actively managed with auto-compounding. It is that simple.
With the above vision in mind, our community should understand the emphasis we have placed on getting Chisel ready over the past months. We believe what we are building out is a novel concept, uniquely enabled by the three technology pillars of WARP. The isolated pairs combined with Chisel will represent ⅔ of the pillars to unlock the master vision.
The last piece of the puzzle will be veWARP governance. veWARP holders are responsible for the management of the “mutual fund”, by voting to add/remove new yield strategies, dynamically allocating the capital/risk percentages, changing gauge weights for rewards, and the like. By rebalancing the capital amongst the strategies, veWARP holders can force the rebalancing of borrowers to be more in line with the interest of the suppliers.
Assigning more capital to certain pairs reduces the utilization and thus the interest rate, making it more profitable for borrowers to leverage that position until a new equilibrium is found. Likewise, removing capital from certain pairs will reduce or eliminate its profitability for borrowers, and cause them to unwind TVL from that farming strategy. In all cases, veWARP holders will try to manage to allocate capital towards strategies which are delivering the highest yields for the lowest risk such that borrowers and suppliers are happy, leading to a healthy TVL.
Furthermore, much like other vote escrowed implementations, holding veWARP will provide a boost to Chisel users’ yield. This will have the effect of incentivizing the suppliers with skin in the game to also be involved in governance to manage risks and safeguard the valuable liquidity pool. We believe the use case for veWARP is significant and will drive significant value towards the WARP token as we covered in edition #01 “Designing the Ultimate Incentive Mechanism” and will be covered in more detail in the future.
We are getting close to having all these pieces in place, so please hang on tight!
The Latest Internal News! 🤫
Internal Leak: NFT TVL-Drive?
From the above section, it can be seen that the Chisel liquidity pool will be the heart of the Warp ecosystem, from which all external value can be derived. Therefore, once it is launched, it will be of utmost importance to attract significant liquidity to this pool to kickstart the ecosystem.
With this in mind, what leak do we see here?
True Warp OGs will remember that Warp was a fair launch token. When the protocol launched, you could not buy the token — you had to earn $WARP by using the protocol. Warp pioneered a custom liquidity rush game where teams who provided the highest TVL in aggregate won a reward-boosting NFT to boost their share of the initial distribution of WARP tokens.
1.5 years later and all of the initially designated WARP tokens have been allocated to the most loyal supporters of WARP.
@korpi87 recaps the events well:
The “TVL boost” NFTs were very powerful and enabled any holders of the NFT to boost their WARP rewards by up to 150%, just by holding the NFT in their wallet. The game caught on and was highly successful until a flash-loan exploit occurred (this was during the pioneering days of “DeFi Summer of 2020” when flash loans were new and Warp was not the last to be exploited by such tactics). Warp ended up recovering a significant portion of the stolen funds and issuing IOU tokens for the remaining and many users continued to use and support the platform.
With the protocol saved, these NFTs went on to be quite lucrative over the past ~1.5years for anyone who owned one and supplied significant capital to Warp v1.
Although the NFTs had to be won, the NFTs were transferable and therefore also fetched a high price on the secondary market. “Legendary” NFTs have sold as much as 10E in the past, with an all-time sales volume of the collection of 49ETH (~US$70k NPV). This 49ETH value therefore accrued to the few who earned them, in addition to the extra WARP distribution they would have earned along the way.
Given the success of the previous NFT TVL drive, the team has decided to replicate this system to attract Chisel liquidity to create the liquidity pool for the next generation of lending pairs. Users who win or buy one of the new v2 NFTs (auto-find) will receive higher WARP rewards for each dollar supplied to Chisel compared to those without an NFT until we transition to veWARP boost.
We intend to launch this competition in conjunction with Chisel once its audit is finalized and ready for release. More details of the competition will be announced soon.
We believe that Chisel is a unique value proposition to Warp and the ability for it to act as a market-led, DeFi-wide, yield aggregator with distributed management, is enabled only through our complete vision of Warp’s three core pillars.
Please join us as we systematically deploy all the features to make this novel vision a reality.
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!