Full compensation to Fuse hack victims, Euler discussing listing USDT as collateral, $50m TVL in Sifu's freshly launched lending platform, an interview with Rari's Jack Longarzo and more...
Issue #8 of The State of DeFi Lending newsletter
The rise of the panda. The Merge is completed. Now what…?
Welcome to issue #8 of The State of DeFi Lending, a newsletter covering the highlights of lending markets in DeFi.
In this issue we cover
Tribe DAO approves and distributes full compensation to Fuse hack victims
Euler in discussions to list USDT as collateral
Sifu launches a new lending platform. Funds with Sifu?
An interview with Jack Longarzo, Rari Capital team leader, as he shares some of the lessons he learned and thoughts on the future of DeFi lending.
Read below for more…
News
Tribe DAO executes full compensation plan for Rari’s Fuse hack victims
It’s been nearly 5 months since Rari Capital’s Fuse lending platform got hacked for $80m, and more than a handful of governance votes, but last week the Tribe DAO approved and executed full repayment for the hack victims.
Unfortunately, this will also be one of the last actions to be made by the dissolving Tribe DAO, the firstling (and only) DAO of the biggest DAO2DAO “M&A” in history to date, between Rari Capital and Fei Protocol.
Hack victims can check their status and claim their refund through the designated interface built by the Tribe DAO -
https://fusehacksettlement.com/
Welcome to read more about the insights on this from someone who has seen it from the inside, as we interview Jack Longarzo on this issue’s 5Qs 👇
Euler discussing USDT listing as collateral - wise or foolish?
USDT is the leading stablecoin with over $67b in market cap, yet no major DeFi lending platform lets you borrow against it. Euler is discussing the option to enable USDT as collateral, with similar risk factors to USDC
With USDT being a very liquid asset on both Curve, Uniswap, and CEXes, and its redemption mechanism similar to USDC, the main concern remains around what (and if…) it is backed by. In this regard, some believe Tether has not managed its business in good faith and is still lacking transparency, although making some steps recently to improve it (some enforced by regulators). Concerns were made that making it into a collateral tier on Euler may expose the entire platform users to potential risk.
You can read the full discussion on Euler’s gov forum, and maybe you will be able to tell who is the mysterious proposal writer, who hasn't introduced himself or his group though being asked twice about it…
https://forum.euler.finance/t/eip20-promote-usdt-to-collateral-tier/387
UwU Lend - a new lending platform on Ethereum from the hot pot of Sifu
Only 4 days after launching, the new lending platform from the think tank of Sifu has attracted over $50m in TVL - and almost triple that in borrowing...!
Is it the new design that drives users to the freshly launched platform, or the fact that incentives are skyrocketing for both lenders and borrowers, as folding seems to be the main use case for this new brainchild of Sifu? DYOR!
Announcements and short news
Compound Treasury enables accredited institutions to borrow against their BTC, ETH, and a list of ERC-20 tokens with 6% fixed rate.
A short deep dive into MakerDAO’s Emergency Shutdown Module by Kurt Barry, Maker's head of Smart Contract Core Unit.
5Qs (+1)
For our #8 issue, we are talking with Jack Longarzo, team leader at Rari Capital, in the week that the Rari compensation plan was approved by the Tribe DAO, and the platform is getting dissolved.
Q1: Rari came to life with the promise to allow anyone to launch her own lending market, with assets of her choice. What is the vision behind that goal? For example, token projects often aim for higher trading liquidity, should they also aim to be listed in a lending market?
I wasn’t around when Fuse was first conceived and launched, but my understanding is that the Rari founders were frustrated with being unable to list assets on some of the larger lending markets. They created Fuse as a way for any collateral in DeFi to be supported in a lending market. It is really quite challenging to list a token on one of the larger lending platforms. They are understandably very risk averse and listing a new token introduces a new set of risks to the entire market. This becomes increasingly problematic for long tail assets and token derivatives.
Q2: At the peak of the bull market, Rari and Tribe announced the first ever big scale DAO merge. How is a DAO merge process different from companies merge process? And what are the lessons learned from that process?
A DAO merge is really quite different from a company merge. One of the things company mergers are very capable of is structuring the agreement to retain talent. There are so many ways to do this well when two companies merge. For DAOs, it is very different because the relationship between contributing entities and major contributors is not as well defined as it is with a company. When an agreement is bound by code instead of a contract, the human element of the respective communities can much more easily be left behind. This is a pretty gray line for DAOs even in the absence of mergers. I think incentivizing contributors and entities over a long timeline is going to be a challenge.
Q3: After the tribe DAO dissolved, a full compensation plan was approved to the hack victims. But on a general scope, a promise (or understanding) for full compensation could eventually put burdens on projects, and prevent them from ever recovering. What is your view on the matter? Should projects aim for full compensation also on the expense of shutting down?
This is definitely a really tough question. I think that in these situations you have to do your best to help all of the stakeholders in the project. I certainly don’t think anyone wins if the project gets thrown into a debt it can never pay off and think that is one of the worst outcomes. My advice to DeFi projects out there is to prepare in advance for situations like these even if you think they are extremely unlikely. Having a predetermined course of action will make these types of situations much easier to navigate and less painful for everyone involved.
Q4: Do you think DeFi lending will eventually become a “winner takes all” market with one big (segregated?) platform having 99% of the market?
My short answer is no, I’d be very shocked if DeFi lending was a winner take all market or anything close to it. The traditional financial system has so many ways to lend and borrow, and so many parties foster these transactions. There are undercollateralized loans, overcollateralized loans, and more complicated systems like prime brokerages. I think it's unlikely but possible one party could build out the technical infrastructure to foster all of this activity but I think there inevitably must be a vast group of underwriters piloting software.
Q5: In the traditional world, most of the lending market is fixed rate lendings. Why isn’t that the case in DeFi? And do you expect fixed rate lending to become more dominant in DeFi over time?
Variable rates are interesting because the lenders are not subject to interest rate movements in the economy like they are with bonds. I think it's a really interesting innovation and I don’t think it’s going anywhere soon. My biggest issue is that the model is innately inefficient as a portion of assets are not actually being lent out. Morpho is one project looking to solve this, what they have built is really quite useful.
I’d have to predict that a larger portion of DeFi rates will become fixed over time as the industry grows to mirror more of the traditional financial ecosystem and becomes more efficient.
Q6: Though DeFi as an ecosystem grew significantly since Rari Capital launched, what do you see as the main building blocks or practices that are still missing to bring DeFi to the crowds? What do you think builders should aim to onboard first - whales or institutions? Who will bring more user adoption?
Well, I’m sure there’s plenty to be built in DeFi in general. I’d have to guess we haven’t even touched the surface of what can be enabled in DeFI. When it comes to lending and borrowing I think we’re missing a lot. Undercollateralized, general purpose credit is one of the most important functions of the economy and we’re still in the early stages of figuring out how to do this on-chain. There is a ton of research going into combating some of the friction with the undercollateralized model like technology helping to maintain anonymity while also reducing counterparty risk.
We’re also lacking in the development of more robust trading infrastructure like the prime brokerage. Some projects are taking a crack at this but I’m just not that impressed yet.