Research Summary: A Short Survey on Business Models of Decentralized Finance (DeFi) Protocols

[tomideadeoye]

TLDR

• This paper explains the revenue stream of DeFi protocols to help investors and users understand the growth, sustainability, and security of different protocols.
• The authors discuss the business model of three DeFi protocol domains, abstract the general business model and identify key DeFi actors and actions.
• The authors conclude by asking research questions on subjects such as the valuation of similar governance tokens, the regulatory sustainability of DeFi business models, and more.

Core Research Question

What are the common elements in the business models of DeFi platforms, and how do the protocols make a profit?

Citation

Xu, T. and Xu, J., 2022. A Short Survey on Business Models of Decentralized Finance (DeFi) Protocols. [2202.07742] A Short Survey on Business Models of Decentralized Finance (DeFi) Protocols

Background

• DeFi Protocol: Provides open, non-custodial, permissionless, and composable variations of classical financial services in exchange for fees on asset movements such as borrowing, swapping or investing.
• Composable: Participants can arbitrarily create novel and complex financial services by combining functions and services from multiple existing DeFi protocols.
• Non-custodial: Participants are the custodians of their own assets.
• Permissionless: Participants can interact with services without requiring authorization.
• Total Value Locked (TVL): the general value of all crypto assets in a DeFi protocol or DeFi protocols. It covers assets for transactions, lending, and borrowing. TVL shows a protocol’s current usability based on the number of active users.
• Liquidity Pools: Liquidity pools are a mechanism by which users can pool their assets in a DEX’s smart contracts to provide asset liquidity for traders to swap between currencies.
• Investor: Lenders, liquidity providers, or vault users that undertake the protocol’s underlying risks, such as protocol misbehavior, impermanent loss, or rug-pulls, by depositing his assets for passive income.
• User: Borrowers, buyers, traders, or other active actors using the protocol on the go through borrowing or swapping and pays fees for the movement of assets.
• DeFi Financial Service: Lending pools, liquidity pools, vaults, or other protocols that use smart contracts to let investors and users interact indirectly; it locks investor assets, satisfies user requests, and prevents protocol misuse.

Summary

• Since 2021, DeFi TVL has notably surged. Prospective investors are interested in identifying the business models with steady and constant revenue streams before investing in the underlying project.

• The authors group DeFi protocols into three domains: Protocols for Loanable Funds (PLFs), Decentralized Exchanges (DEXs), and Yield Aggregators.

• Protocols for Loanable Funds / Lending Protocol

  • Protocols like Maker, Aave, and Compound let users lend and borrow digital assets. Lenders deposit assets in the pool and get interest from fees paid by borrowers. Borrowers also deposit collateral before taking the loans; the loans are over-collateralized to encourage payback.
  • Business Model: The PLF’s cash flows depend on the interest rate model, the underlying demand and supply, and the total amount borrowed. The interest rate model can be linear, non-linear, or kinked. The interest is split proportionally among lenders, and the PLF takes a percentage. Some PLFs offer flash loans with fixed or no interest rates to generate more revenues for the protocol.

• DEXs / Liquidity Pools / AMMs

  • These services allow users to trade or swap cryptos through smart contracts called automated market makers (AMMs). The AMM pools funds from investors called Liquidity Providers (LP), who in turn get LP tokens representing their share of ownership of the pool.
  • Business Model: DEXs generally adopt the maker-taker model where fees paid by buyers are split proportionally between liquidity providers, and a percentage goes to the protocol’s treasury. This percentage is the primary income source for DEXs. The Swap fees may be dynamic and set by the users or fixed.

• Yield Aggregators /Yield Optimization Protocols

  • These protocols generate returns measured in annual percentage yields (APY) for investors through strategies that may be too expensive or complex for individual investors. Such strategies include finding the best lending interest rates, borrowing assets, and leveraging another position by exploiting different protocols like Compound and Uniswap.
  • Business Model: The strategy’s performance dictates the protocol’s cash flow. The protocol earns commission fees from the strategy’s profit. YearnFinance v2, for example, applies 20% as a performance fee and an additional 2% as a management fee.

Method

• The researchers surveyed, analyzed, and compared the business models of three major DeFi domains. They identified the common actors and services that access the domains.
• This was then abstracted to create a generalized framework for DeFi business models based on shared attributes, services, and actors in the DeFi domains.

Results

• The authors found that the general models employed in DeFi is similar to the concept of “Two-Sided Markets” in classical finance. In “Two-Sided Markets” the investor provides liquidity to the financial service that peer users can use. The protocol and investors then receive income from fees paid by protocol users.

• Finally, the authors provide a table grouping actors and services in DeFi and showing the differences in naming conventions.

  DeFi Protocol	Smart Contract	Investor	User	Financial Service
  PLFs	Lending Pool	Lender	Borrower	Loan
  DEXs	Liquidity Pool	Liquidity Provider	Buyer/Trader	Exchange
  Yield Aggregators	Vault	Vault User	-	Asset Management

Discussion and Key Takeaways

• The authors provide a general abstract of DeFi business models; this could in later research be used to develop a formal approach to valuing tokens.
• The authors also mention some strategies for generating increased revenue utilized by different protocols. It will be great to see formal research on how specific strategies like facilitating flash loans affect the entire DeFi ecosystem.
• DeFi TVL since the release of the paper has risen and fallen. Investors and builders will highly benefit from research comparing the performance of protocols by the business model adopted.

Implications and Follow-ups

• Value Investing: Does adopting a value investment strategy, which pays off often in classical finance, generate similar or higher returns in crypto-assets?
• Voting Power: Why are similar DAO tokens having the same business models and providing the same services priced differently?
• Regulatory Issues: What DeFi business models are sustainable and economically secure given the different regulatory regimes worldwide?

Applicability

• The study creates a generalized framework of business models adopted by DeFi protocols. This generalized framework encourages further research on the sustainability of different DeFi platforms in divergent economic, technical, and regulatory contexts.
• This research breaks down DeFi’s service business model and helps investors and users understand which protocols have sound fundamentals and reliable cash flows.

[Twan]

Thank you @tomideadeoye for the summary and animations you’re carefully put together.

This is an interesting paper that surveys the business logics of DeFi services we’ve seen so far. Do you think they are fundamentally different from traditional finance (I see PLF, DEX, and Yield Aggregators each loosely corresponding to the iconic images of Banks, Stock Brokers, and Mutual Funds)? What nuances in terms of the contents of the flow chat will be different for traditional finance?

I’m also curious about another thing - for yield aggregators, their job is to invest the locked assets from their clients for a higher profit. Given that they can only invest in DeFi products (otherwise it defeats the purpose of DeFi), they must be turning to the other two types of businesses for opportunities.

This makes it important to scrutinize how the other two business logics operate at first principles. For PLFs, maximizing interest margin is at the core of their profit model. However, in traditional finance, banks lend money to businesses that sell or produce consumable* products and/or services. Do similar businesses like that exist at scale in the DeFi world? If not, how do the users of PLFs justify the interest margin in borrowing?

*consumable as, not for investing

[notthatintodefi]

@tomideadeoye Thanks for this writeup. The animations are great and clearly show the flow of funds in the different protocols.

Following up on your follow up:

Voting Power: Why are similar DAO tokens having the same business models and providing the same services priced differently?

This bring to my mind Uniswap: despite a protocol fee of 0, the UNI token has value greater than 0. This begs the question: what exactly are people paying for when they purchase UNI? I’m guessing that the answer to this question will shed light upon the voting power follow up.

This is also closely related to the Value Investing follow up question which is predicated on the calculation of the “business” value of a DeFi protocol. There has been some work on this topic (some material here) but it is still in its infancy.

@Twan

However, in traditional finance, banks lend money to businesses that sell or produce consumable* products and/or services. Do similar businesses like that exist at scale in the DeFi world?

This is a really interesting question and I wonder how something like that would function in a permissionless setting. In other words, if I’m building a DeFi protocol and I need funds, I might want to take a loan. But in the PLF’s, I need collateral whose value exceeds the value of the loan I’m taking so I’d be better off just using my own money.

If I have a small business and the bank gives me a loan, the collateral is my business itself coupled with the (perceived) strength of my business plan. I wonder if there is some way to create contracts which “incrementally” collateralize a loan, or give the lender some sort of recourse without KYC to recover funds from an undercollateralized position that fails.

[WaterLily]

Regulatory Issues: What DeFi business models are sustainable and economically secure given the different regulatory regimes worldwide

DeFi is here to stay and it certainly has the capacity to finance real-world assets. So far, however, DeFi has little to show in terms of doing any real-world good. Over-collateralized loan pools typically seen in DeFi do not help solve challenges such as financial inclusion, affordable public services and environmental sustainability.

It is not surprising, though, that DeFi has not yet made its mark in much of the real world. The field is still in its infancy, and the ease of use remains a challenge for non-crypto folks. Using DeFi carries significant risk for an individual who is unfamiliar with how it works. And even for those who understand the risks, it can still be a tricky affair given the volatility of many tokens. If you borrow tokens from a loan pool, for instance, regular monitoring of the market is needed to ensure that there is always sufficient collateral against the loan. Failure can result in the loan pool being liquidated and the borrower losing their collateral.

[drllau]

If you read Perez book(s), the take-away is that new technology waves are not (initially) financed by TradFi because, frankly they are too crazy. Hence crypto-anarchists and degens migrated to the most unregulated space with biggest arbitrage opportunity … hence we had the ICOnU boom-bust of 2018 (which generously speaking funded a bunch of public R&D from idiots seeking alpha), the NFTcraze of 2021 (which will be cracked down sooner or later once regulators get their A out of G) and probably a more reasoned ABC - STO in next 5 years as (un)stable coins flee to safe harbors.

So far, however, DeFi has little to show in terms of doing any real-world good.

Well, it’s certainly pushing a lot of R&D into AMMs, out of which we have motivated the black hat sector and counter-reactionary red hat response. If you think of it in evolutionary terms, we’re seeing the rise of parasitic flashbot viruses and emergence of protocol antibodies which are needed to build up more resilient Internet of Value. The hype cycle is slow but empirical evidence is that the progress is real (if erratic). The J-curve below is a myth but the aggregate effect does allow for non-linear take-off effects. However the value accretion is not obvious. For example, there were hundreds of car manufacturers in Detroit but a smart investor would have bet on suburban real-estate as white-flight from inner city slums moved value to city fringes.

[tomideadeoye]

Hey @Twan , the basic service pursued by the user is DeFi is still recognizable and basic TradFi business models could also look like the abstracted DeFi business model. I do not think they are fundamentally different other than the general differences operating a service on a Blockchain creates. However, since DeFi is built around crypto assets and also because innovation in DeFi has not been highly constricted by regulations, there are some difference introduced by concepts like automatic liquidations, keepers, composability and more which can’t exist in traditional banking systems.

How do PLF users justify the margin in borrowing?

That’s a very interesting question. I think a business owner producing consumables could as well deposit crypto assets as collateral and draw up stablecoins for real world investment - if he doesn’t want to liquidate his Eth. The borrower might not need to use the funds for another on-chain transaction. I guess it’d be interesting to know what the average PLF user does with borrowed funds.

[tomideadeoye]

Thanks @notthatintodefi. Could credit protocols be what you are looking for?

[wmflies]

I enjoyed the article and comments. There are a number of DeFi business models that aren’t easily comparable to the traditional finance institutional models, and I personally find those the most interesting.

Consider the Terra ecosystem, which has crashed but was the largest decentralized algorithmic stablecoin ecosystem to date. In theory, one USTerra is pegged to one USD. When demand for USTerra grows, its’ met as an equivalent number of Luna is burned. So Luna operates as a governance token, but also to back the peg. The peg was maintained at higher resolutions by arbitrage. The stablecoin ecosystem crashed but the model is replicated by dozens of other protocols and its’ too early to proclaim the death of the (undercollateralized) decentralized algorithmic stablecoin, IMHO. This is a novel application of DeFi tools that can’t be replicated by non-nation-state actors in a tradfi sense, the product of Terra was a better stablecoin. See also MakerDAO and Celo, both of which issue a collateralized stablecoin which is meant to be “backed” by natural capital assets.

Interestingly, Terra had a high-functioning auto-lending protocol, Anchor Protocol. Anchor allowed the user to bond Luna, collateralize their bLuna and borrow UST up to a portion of the total value of collateral. For extensive time periods, Anchor paid out negative interest as it was rewarding borrowers with allocation of governance tokens - this artificial subsidy is one means that PLF users justify the margin, and @tomideadeoye already mentioned case where post Eth as collateral, for stablecoins to inject into IRL business. Back in Terra Classic, Kujira built a highly efficient liquidation market called Orca. My experience was highly positive, the protocols functioned quickly, cheaply and as-advertised with uncertain long term sustainability. That is, until the stablecoin de-pegged…

Then we have blockchain networks that work, and provide energy, communication and/or computing services in a decentralized fashion, as infrastructure. Perhaps this isn’t pure DeFi, and I’d characterize these types of blockchains as decentralized infrastructure, or perhaps defi for infrastructure. Consider Helium which offers an incentive mechanism to grow its’ IOT mesh network, and 5G mobile telecom network. Imperfect but uniquely web3. Consider Akash, which offers cloud computing, or Render, graphical processors for rendering. These models, generally built on proof of stake governance, provide value beyond the maintenance of the network (proof of work like BitCoin). Arguably, Regen could be considered within this category, as enabling the formation of markets that aren’t achievable without utilizing blockchain, smart contracts and crypto.

@WaterLily poses an interesting question, that is which of the models described in the article, or elsewhere in the forum, are sustainable and economically secure given different regulatory regimes. There is certainly a great deal of risk related to regulatory compliance, and a great amount of uncertainty. I ascribe relatively high levels of risk to the experiential sovereign stablecoins, like Terra, as being a likely target of legislation and agencies. Lesser risk attaches to those blockchain networks that work, Helium or Akash – at least by securities regulators like the SEC, although they may be targeted by monopolistic industry.

Of the DeFi models described in the original post, the lender pool is likely to be regulated, in the US at least. And the auto-aggregators might or might not resemble a security, depending on the utility of the gov token and the courts, among other things.

As a final note, its’ worth noting that the value of a gov token is unlikely to correspond to the success of the protocol’s business model, unless paired with appropriate token economics. This was mentioned by @notthatintodefi. The ability to have a vote and receive staking and LP income may have some value, but the gov tokens are often disconnected partially or fully from the overall success of the business model. This was an attraction of Terra Classic, in that increased demand for the stablecoin product put significant depreciation pressure on Luna’s supply, and drove incredible value appreciation – again, until depegged and broke. Luna built value as demand for the stablecoin grew, and lost value when diminished, and had value beyond governance, to pay fees and provide liquidity (assuming success of its’ stablecoin).

[zube.paul]

Thanks for the post and analysis.

I’m particularly interested in your assessment that:

@wmflies

The stablecoin ecosystem crashed but the model is replicated by dozens of other protocols and its’ too early to proclaim the death of the (undercollateralized) decentralized algorithmic stablecoin

There are certainly replicated models out there, but is there evidence that they would scale and be robust in ways that Luna wasn’t? My concern here is that there are several replications of the model which means there could be potentially several replications ready to fail.

That seems to be the position that Ryan Clements takes in a piece written for the Wake Forest Law Review. The piece is primarily focused on proposing/advocating for regulatory frameworks being applied to stablecoins, but also makes a three part critique of the inherent problem with algorithmic stablecoins. In brief (and from the abstract):

• Requires a support level of demand to maintain operational stability.
• Relies on independent actors with incentives to perform price-stabilizing arbitrage.
• Requires reliable price information at all times.

The argument then continues that: “None of these factors are certain, and all of them have proven to be historically tenuous in the context of financial crises or periods of extreme volatility.” (also in the abstract).

Is there reason to believe that other projects are addressing these in innovative ways or are they inherent to algorithmic stablecoins? Or, are the concerns raised by Dr. Clements missing the point of stablecoins? It certainly might be too early to give up on algorithmic stablecoins, but it does seem like revisiting their designs is warranted.

[wmflies]

Yes I dislike that article for a number of reasons. There are very few articles in law reviews, policy journals regarding decentralized algorithmic stablecoins, this one of the most prominent and its conclusory. IMHO the real reason they born to fail is due the perceived threat posed to those who benefit from having some control over supply, demand, access to $.

I’d suggest that terra classic scaled well, and is/was robust. Shoot there are ongoing attempts to corral lunaC supply and re-establish the peg, Do Kwon been isolated and not active in classic community. But the stablecoin isnt functioning, i’m not a total Lunatic ;)

I think we need an unbiased post-mortem. What ultimately killed USTerra and is it an inherent failure of the model, or something that can be avoided?

The bigger question to my mind is, what ramifications to the nation-state, particularly the US Fed which is accustomed to being the only actor that controls monetary supply. A dollar is taken out of circulation when USDT USDC are minted, the same wasnt true of USTerra or similar. Shade on SCRT for example, poses this and other issues; its a sovereign decentralized algorithmic stable ecosystem, $silk pegged fiat and maybe indexed, that is private by default (cant be audited without consent of keyholder). Instead of having these conversations, we get articles saying cant be done bc everyone that tries fails but subtext is, cant let people keep trying.

[Henry]

Hi @tomideadeoye ,gratitude for the examination rundown, I truly need to remark on the administrative issues of Decentralized finance (Defi) protocols, everything being equal, Decentralized finance is continually advancing. It is unregulated and its biological system is loaded with infrastructural accidents, hacks, and tricks.

I think a few Current regulations were made in light of discrete monetary wards, each with its own arrangement of regulations and rules. DeFi’s borderless exchange capacity presents fundamental inquiries for this kind of guideline.

What are these inquiry?

1. Who is responsible for investigating monetary wrongdoing that happens across boundaries, conventions, and DeFi applications?

2. Who might authorize the guidelines, and how might they implement them?

I figure one more worry to consider incorporates; framework security, energy prerequisites, carbon impression, framework redesigns, framework upkeep, and equipment disappointments.

What is your view on this?

[notthatintodefi]

@wmflies

I’d suggest that terra classic scaled well, and is/was robust.

Can you elaborate here? Recent history suggests that it may have scaled well but is/was far from robust.

@wmflies

I think we need an unbiased post-mortem. What ultimately killed USTerra and is it an inherent failure of the model, or something that can be avoided?

Wholeheartedly agree. My off-the-cuff thoughts are that the primary problem was that both the stablecoin and “collateral” token were issued by the same entity which caused a negative feedback loop in a loss-of-faith scenario. This is in contrast to DAI or LUSD which are backed by ETH or other tokens that are not distributed by the stablecoin entity. Do Kwon would have done well to read Weiner’s Cybernetics.

[wmflies]

So I wouldn’t argue that the Terra classic stablecoin is robust now - was till it wasn’t. The world has flipped, radical conservatism rules todays’ markets and the hottest thing of 2021 is the 2022’s pariah - undercollateralized decentralized algorithmic stablecoins.
Terra maintained the peg from inception Nov 2020 (per coinmarketcap) to May, 2022, when the apparatchik meant to maintain the peg broke - leave how/why for another day. The “big” crash of May 2021 saw Bitcoin leave its’ ATH of $65k to sub 30k, a trillion dollar loss. There was panic, extreme fear and UST(classic) pegged varied a little bit, down to .98 or so. But it and the dapps handled everything like they were supposed to. US Tether had a significant depeg event, Terra handled it just fine.

And then Kujira came along, which enabled marketplace for “bad” debt on AnchorProtocol. That helped ensure liquidity of Terra’s fundamental savings/lending protocol, and it worked very well. My Lunatic pals were greatly anticipating the launch of White Whale which offered a decentralized arbitrage platform, to take advantage of peg fluctuations - and beta worked, and was meant to shore up the stablecoin peg (fine-tune 1:1 via arbitrage) but didn’t grow enough to make difference come May 2022. I think had Terra had just a few more months, it would’ve been too big to fail, but that we’ll never know (and I don’t know that that would have been a good thing). There was some effort by terra foundation (? can’t recall the name) which was meant to advocate for the stablecoin ecosystem and help support the peg, and acquired gobs of bitcoin to do just that. There is good bit of uncertainty about what happened in the month or so leading up to the de-pegging, and I don’t know that an effective response would’ve helped to preserve the peg but an effective response didn’t happen. I don’t know why either.

Those who kept faith and held onto their Luna, UST lost bunch of value. Hodlers would still have those old classic tokens, worth 1 nickel today, and gotten the Luna2 airdrop, and the evmost rektdrop (Loop, Halo, others?). As a rough guess, the tokens attributable to Terra Classic holdings might be worth 10-20% of what it was before the depeg. Thats bad, but its’ a good bit better than nothing - and its’ about how many of my other non-Terra positions have performed.

The same arrogance and ideology that allowed Terra to flourish cemented its’ demise. Do Kwon and TFL knew they pissed powerful actors off and announced a kill-switch remedy. Any attempt to take hostages, kidnap, assassinate and TFL would hit the kill switch and permanently, irreversibly relinquish their wealth and eradicate their special privileges. They thought they were immune to attack, but were looking in wrong directly.

I agree with you about being inward looking, backing its’ value with itself being a problem. It was a problem TFL recognized, which is why they were acquiring so much bitcoin (Korean government trying recover 3300 btc or something left over from meltdown). I thought that was weird and self-sabotaging, either the mint UST burn Luna mechanism works or it doesn’t, what role bitcoin? In hindsight I think the role was psychological/political, an attempt to show that the stables are “backed” by something else and not merely illusory.

Frankly a good bit of the LUSD documentation you shared looks like Terra’s, the recovery mode reminds me of Anchor docs. The fact that the stable might be backed by Eth or DAI or whatever isn’t significant by itself, that value needs to be hugely accessible and liquid to withstand an attack. As an aside, this issue of liquidity poses great challenge to attempts to “back” stables with natural capital assets (Maker, Celo…)

The odds of 1UST equaling 1$ are low but not impossible. If it were to recover peg, is that indicative of resilience or is fact that depeg happened enough to make repeg not matter? I’m not sure on this one myself. See Terra Classic Core Developer Proposes To Run Both USTC Re-peg Proposals In Parallel

Finally another super interesting experiment that didn’t happen was EcoRise. They took their whitepaper down (advertised parallels to Terra tokenomics) but it was the most sophisticated tokenomics schema that I’ve seen in the natural capital real world asset space. There’s was an attempt to “back” stables by various real world assets and I wonder what might have happened here. Their launch was the same week of Terra’s demise, they had to delay then cancel bc so much changed. We’ll never know… See tokenomics overview at https://trustswap.com/blog/ecorise-announces-rise-token-offering-may-10th-on-trustswap-launchpad/

[Austin_jul]

Introduction

The rise of financial institutions made it possible for people to do business with each other in a way that was open, safe, and reliable for everyone. On the other hand, as banks and other financial institutions have become more powerful over the course of history, they have taken advantage of their monopolies by charging huge fees for even the most basic financial services and making financial instruments that are hard to understand.
The excessive power that banks held in the financial system contributed to the collapse of the global economy that took place in 2008.

DeFi

The goal of decentralized finance is to provide the same benefits as traditional ways of handling money but to do so without using any middlemen. Because DeFi uses the smart contract technology of the blockchain network, which eliminates the need for human intervention and reduces the chance of mistakes, the financial system can be more efficient overall.
Most DeFi projects have made their original source code available to the public for free. Clarity and transparency are both increased as a result of this.

Let’s say you currently have 100 DAI in your wallet; MetaMask or another online exchange. DAI holders who deposit their coins into the “reserve pool” of DeFi protocols like Aave will earn interest on their holdings.

Instead of giving Aave access to your private crypto, you are putting your faith in the security of the smart contracts they’ve developed, where you will be given tokens. Those tokens stand in for the deposited cryptocurrency. These tokens are similar to bonds in that they are backed by a program that promises to pay interest and return the initial investment if and when the tokens are redeemed. You can put them in the “reserve pool” of DeFi protocols like Aave and be able to accrue interest on your holdings.

The resources of depositors are pooled together to enhance the size of a lending pool, which is then used by borrowers to draw loans. The only prerequisite for prospective borrowers in these pools is the provision of collateral. To meet the over-collateralization criteria, you have to put up more cryptocurrencies as collateral.

As Per DeFi’s Limits

One of the main problems with Defi is that it can be hard for new users and the general public to use decentralized products because the user experience and interface are so complicated. Any long-term business strategy needs to deal with this problem because a growing number of users is essential to the success of the strategy. It is quite improbable that the average person who uses financial services will be concerned with phrases like “layer one” and “layer two.” This does nothing but make it more difficult for the user to switch to DeFi.

There is no doubt that DeFi is expanding at a lightning-fast pace. The total market value that has been locked up (TVL) keeps increasing. Yet, an issue for DeFi is that many of its assets are not being used as well as they could be. There are a lot of lenders but a much smaller number of borrowers. The Defi Protocol utilization rate is low.
What can be done to increase the number of borrowers in relation to the lenders?

Is the over-collateralization model hindering the rate at which people borrow? If that’s the case, this is an example of a situation where the Soulbound token could be helpful. With SBTs, collateralization may not be necessary because each user can be digitally identified.

Discussion Post: Are Soulbound Tokens the best way to create a trusted layer on the blockchain?

To provide a brief overview, soul-bound tokens are a form of token that can retain a record of a person’s life and actions. These tokens are used to digitally identify persons in a manner that is decentralized (academic, social, personal, etc.). Individuals are able to represent not just themselves but also their unique traits and the communities in which they participate as they earn SBTs that serve as symbols of their connections, memberships, and qualifications. Souls have the ability to cu…

[Amazingdez]

Thanks @tomideadeoye this summary was very helpful in understanding the Decentralized Finance Protocols… my questions are:
To what extent can this DeFi run for(sustainability)
In the process/act of swapping between currencies, how does the liquidity pools actually work(more insight on this)
For movement of asset by users, is there no way it can be pushed or grown to the extent it has no charged fees(free)

[wmflies]

I thought these good questions, took run at them:

To what extent can this DeFi run for(sustainability) Who knows, the most likely near term constraints are likely to be imposed by political, legal actors. If you mean sustainably in environmental sense, the modern POS blockchains are not power intensive like is POW bitcoin mining or even pre-merge Eth and many are confidently carbon neutral - or claim such, by purchasing NCT from regen, toucan or other.
In the process/act of swapping between currencies, how does the liquidity pools actually work(more insight on this) depends on the DEX. I like osmosis though admit imperfections, see for instance Providing Liquidity - Osmosis Labs
For movement of asset by users, is there no way it can be pushed or grown to the extent it has no charged fees(free) free, I don’t think so. The gas costs of many chains is tremendously inexpensive though. For examples I’d again point to osmosis, stars, regen, juno where even the highest recommended gas costs less than $0.01 (but always some nominal sum). There are reasons for this, prevents cheap/easy DNS attacks for example.

[Amazingdez]

I just checked that link u sent there’s something on LP tokens that struck me…

Users receive the proportion of liquidity that their LP tokens stand for back when they remove their liquidity from the pool… Why do they remove their liquidity from the pool, is it a Pay back period act?
Users are extremely unlikely to withdraw the same quantity of each token that they first placed since buying and selling from the pool alters the quantities of assets inside a pool. Based on the transactions made from the pool, they normally get more of one and less of another… why don’t they just get an equal amount of both, instead of getting one more than the other?. Or is there a reward or reason why one should normally get more of one and less of another?

[Yeoriton56]

Hi @tomideadeoye. This is a very interesting topic because most users and Web 3 folks came to the space first to make some cash.

@tomideadeoye

Some PLFs offer flash loans with fixed or no interest rates to generate more revenues for the protocol.

I have a question that needs clarification. If flash loans given out by some Defi protocols don’t have an interest rate, how then does it generate revenue for the protocol?

[Freakytainment]

@Yeoriton56

If flash loans given out by some Defi protocols don’t have an interest rate, how then does it generate revenue for the protocol?

Firstly we’ve got to know some important things

What is a DeFi Flashloan?

Flash loans are unsecured, no-borrowing-limit loans in which a user borrows money and then immediately returns it. A smart contract stops the transaction and returns the money to the lender if the user is unable to pay back the loan before it is finished.

What purpose do DeFi loans serve?

DeFi loans enable you to make money by lending borrowers your crypto assets. Banks have always made the most of this choice. Anyone may now be a lender thanks to DeFi. As a result, you can lend money to others and make money from the interest.

Do Flash loans have interest?

Typically, 0.09% of the profit from a flash loan is taken as a fee. The terms of the flash loan smart contract aren’t met if the borrower doesn’t pay back the capital or the trade doesn’t yield a profit, in which case the transaction is reversed as if it never happened and the lender receives their money back.

DeFi creates interest in what way?

Users can utilize defi loans to lend their cryptocurrency to others and receive interest on the loan. Banks have consistently made the most of this service. Nowadays, anyone can become a lender in the Defi industry. A lender may lend out their assets to third parties while earning interest on the loan.

So @Yeoriton56 If this answers your question let me know, and if it doesn’t, I’d be happy to bring in more clarifications in simple terms.

[Yeoriton56]

@freakytainment, I appreciate your response, but it doesn’t exactly answer my question.

@tomideadeoye

Some PLFs offer flash loans with fixed or no interest rates to generate more revenues for the protocol.

@tomideadeoye stated that a DeFi protocol generates revenue from flash loans with or without an interest.

So I’m now asking, if a DeFi protocol doesn’t take an interest for a flash loan issued out, how then does it generate the revenue?