DeFi on NEAR Debunked.

Open Web Sandbox Part Recap: October

At the end of September the Open Web Sandbox (OWS) hosted their monthly OWS Party: this month it was DeFi on NEAR Debunked. The event was a roundtable with industry experts from the NEAR ecosystem (developers using the NEAR Protocol). The main topic of the event was DeFi on NEAR: what DeFi, what services are available on NEAR, what the future looks like, and various other questions asked by the audience. Check out the YouTube video here.

In this article we will reiterate what questions were asked in the event and how they were answered — expanding a little where needed. This will start with an introduction to DeFi, going through each question as they appear most relevant. Then, we will talk about what investing in the NEAR DeFi ecosystem looks like and end it with a few questions on regulation, NFTs, and social tokens.

First thing’s first.

What is DeFi?

DeFi stands for decentralised finance. In contrast to centralised finance, the kind of finance we are used to in everyday life like banking, exchanges, and financial service providers, which utilise centralised software and servers, DeFi utilises decentralised smart contracts which function on a decentralised blockchain data structure.

Smart contracts provide immutably coded instructions on how the program should run without any intermediary involvement. Additionally, oracles like Flux, Band and Chainlink provide smart contracts access to off-chain, real world data to ensure truthful, smooth operations.

What does DeFi achieve?

DeFi eliminates the requirement of trusting centralised entities with investments and fund custody, allowing a user of DeFi to directly interact with investment tools and services using a simple digital wallet (with minimal to no fees). Users which have funds in these wallets on blockchain networks such as NEAR can use DApps (Decentralised Applications) to invest, trade, lend, borrow, stake, liquid stake, or farm cryptocurrencies. So, let’s begin with the first question asked during the event:

What is the difference between staking, liquid staking, and farming?

• Staking is when a user delegates tokens to a validator node part of a blockchain that uses a Proof of Stake (PoS) protocol, receiving rewards as a return.

• Liquid staking is when a user delegates tokens to a liquid staker which strategically distributes tokens to a selection of validator nodes to maximise returns.

• Farming is when a user delegates tokens to a yield farmer which strategises a maximally profitable scheme amongst different DeFi protocols: such as staking, liquidity pools, lending, and borrowing.

Staking on NEAR (with NEAR Wallet)

NEAR Protocol uses a proof of stake (PoS) consensus algorithm to validate transactions. Validators on the NEAR network earn $NEAR by validating transactions and producing new blocks. To be a validator there is a minimum amount of $NEAR the node must stake, which is deducted if they validate false transactions — similarly to an insurance deposit. Token holders not interested in becoming a validator can delegate their $NEAR to NEAR validators through the NEAR Wallet application. These delegated tokens are used by validators to stake in the network and earn rewards, giving the token holders who contributed to the staking a return on investment directly into their NEAR wallets.

Liquid staking on NEAR (with MetaPool)

A token holder can send an amount of $NEAR to a liquid staking provider such as MetaPool, the provider distributes the tokens to a chosen group of top performing validators, maximising the return on investment. Liquidity stakers can use funds from a liquidity pool to have access to more funds.

What is a liquidity pool and what are the advantages and disadvantages of providing liquidity?

Liquidity pools on NEAR (with Ref.finance)

Markets create a space where supply and demand meet, every market has its own rules to make that happen. One type of market space is an order book, which can be seen as peer-to-peer trading, as trades happen directly between users. Another type of market is composed of a collection of funds locked in smart contracts, called liquidity pools. Pools are most commonly composed of pairs of tokens filled by users. These pools of funds are managed by an automated market maker (AMM) algorithm, which can be seen as creating peer-to-contract trading. The benefit for users of providing funds for liquidity pools is to gain swap fees when the funds are traded. Ref.finance is the first platform that offers access to liquidity pools on NEAR, giving users the ability to provide liquidity and earn swap fee rewards.

Liquidity pools are used to facilitate other DeFi activities that require access to liquidity. Their use-value is varied and complex, and innovative, rewarding applications are common. However, if a user provides liquidity to an AMM, they will be exposed to the risk of impermanent loss.

What is impermanent loss?

Impermanent loss is the negative difference in dollar value of a token a user has put in a liquidity pool compared to its dollar value if they had simply HODLed it. Because a user most commonly provides liquidity in pairs of tokens, the larger the difference in volatility between the tokens is, the larger the difference in dollar value can become. So, impermanent loss is most likely for pairs that are more volatile themselves, or against each other. The important thing to remember is that if the funds are not withdrawn from the pool, the loss is impermanent, and permanent if they are withdrawn.

If you are not a pro, should you just choose the most stable pair?

Because a liquidity provider can have an inventory to manage with potentially very volatile tokens, a way to mitigate that is to provide liquidity to an AMM with less volatile tokens. For example, if a user provides DAI with USDT, then they wont have this volatility problem to manage in their inventory. So, if they want to provide liquidity but can only do minimum risk monitoring, then a stable pair of tokens is the less risky choice. Some liquidity pools such as Bancor have bypassed this risk by offering impermanent loss (IL) protection: liquidity providers are protected from realising a permanent loss on their initial investment.

Bancor protocol has IL protection, is this planned for Ref.finance?

Bancor is one of the most innovative AMMs within the industry. Currently there is no defined plan for Ref.finance to get IL protection, but it is planning to do so once it is more established amongst its competitors.

Does Ref.finance plan to integrate NarWallets on its platform?

Ref.finance will have a feature called InstantSwap which will allow users to swap tokens using its platform all within the NEAR Wallet, so you wont have to deposit on Ref.finance, swap and then withdraw. Apart from that, it currently has no plan to integrate NarWallets on its platform.

Farming on NEAR (with Cheddar Farm)

Yield farming aims to maximise a rate of return on capital by leveraging different DeFi protocols using complex strategies. Yield farmers try to chase the highest yield by switching between multiple strategies dynamically. Being flexible amongst different DeFi protocols (such as staking, liquidity pools, lending and borrowing) is central to obtain the most profitable strategy. Apart from the farms offered on Ref.finance, Cheddar farm is an up and coming yield farming service on NEAR.

Can Cheddar be used to farm $STNEAR

$STNEAR is the liquid $NEAR users on MetaPool receive for staking $NEAR (which can be exchanged at any time). Cheddar wont be used to farm $STNEAR but you will be able to farm $Cheddar with $STNEAR.

Yield aggregators: do they make yield farms safer or riskier?

Yield aggregators are an important part of the ecosystem. They utilise automated protocols to strategise and implement the most profitable yield farming technique across DeFi protocols. Because they are a layer 2 solution, it does add complexity and increase fallibility; they are managing risk and a user must put trust in them to manage it.

Risks/reward for DeFi

DeFi gives individuals the opportunity to access financial tools and applications that have not been typically available to the public — as they are usually mediated by banks and exchanges. This shifts the power completely to the individual. Due to this, there can be a high level of risk in self-governed DeFi. Correct management of funds is important and is not easy for all DeFi investment options. Because of this, The Wizard Guild in the NEAR ecosystem exists to guide users into the self-management of all NEAR DeFi services.

The risk of using financial services with no intermediaries is that there is limited insurance from hacks, smart contract errors, user errors, unbalanced pools, and depreciative token values. So, centralised finance is in some sense safer, but returns on investments are mostly lower. On the other hand, DeFi allows users to control their funds, disabling the ability of intermediaries to freeze or close accounts, and be secretive about the technical structure of their services.

If a user feels comfortable in the NEAR DeFi space, what are some options to getting started?

Investing in the NEAR DeFi ecosystem

Where and how should someone start investing in the NEAR DeFi ecosystem?

As always, this article exists to provide financial information, not advice. Financial information describes the state of a financial system, such as DeFi on NEAR in this case, whereas advice is when an article tells you how to behave within that financial system, which is in no way the aim of this piece. As we have mentioned, DeFi is complex and takes time to learn. Getting involved in DeFi on NEAR should be done after appropriate research. On a positive note, it is still early, and getting in early can be rewarding. Joining NEAR guilds communication channels like Merchants of NEAR (and their Telegram), and becoming a part of Twitter communities such as NEAR Week and NEAR Daily will set you up to learn and stay up to date with the ecosystem (Oh, and keep an eye out for non-english guilds like NEAR Hispano coming up in the near future). So, once you feel comfortable, what investment options are there and where would one start?

• The first investment option is to set up a NEAR wallet, which can be used to deposit or purchase $NEAR. Once a user has $NEAR in their wallet (or any wallet or exchange), their funds are subject to market price fluctuations. This is the simplest way to invest in the NEAR ecosystem and is a requirement for all other investment options.
• Once a user holds $NEAR, staking their tokens through a validator is another option. This involves delegating your tokens to a validator on the network — all done through the NEAR Wallet application (under ‘staking’). See this article for more detailed instructions. Picking a validator will be subject to one’s own research, as different validators have different returns for different reasons.
• If a token holder wants to go to the next level, delegating their tokens to a staking provider like MetaPool will increase returns by letting the provider delegate to a group of best performing validators.
• Another, more difficult option which increases returns is to delegate tokens to a yield farmer such as Cheddar Farm, or any farm found on Ref.finance — letting them deal with strategising and fund management.
• The most advanced (and most difficult) way to invest in the NEAR DeFI ecosystem is providing liquidity for liquidity pools — as can be done on Ref.finance.

DeFi on NEAR offers various options for investment. It is the responsibility of the user to make their own decisions, and such decisions should always follow thorough research and rational hesitation. With innovative financial systems comes novel regulation. How should a DeFi user integrate regulation into their activity?

What about regulation on DeFi?

As a community we need to take what is best from regulation — as regulation plays a positive role, not only a negative one. Regulation can be split into two different forms. The first is taxation, which has to a large part already been implemented. It is central to independently research the tax regulation of ones residence and act accordingly to what is specified. The second is a blockchain company’s compliance to legal requirements. An example of this is how some blockchain companies have complied with KYC requirements for anti money laundering and traceability efforts. There is an opportunity for the industry to stay ahead of both the positives and negatives of regulation, attend and contribute to their legal development and technological application, and take the opportunity to understand the fundamental (not its politicised) use-value of regulation: protecting the users. As a minimum standard, it is reasonable for anyone in the space to align with these conditions: how do we protect users, how do we create awareness for the users so they are aware of what product they are using, and what are the risks for the users individually and as part of a community?

Once DeFi projects migrate from Ethereum to NEAR using Aurora, what is the strategy to manage competition?

First of all, competition can be seen as a validation point that the ecosystem is taking off. The native DApps will have an advantage due to ecosystem and community support and sustained use-value provided to NEAR users. However, competition is healthy. DeFi projects on NEAR look forward to the push competition will bring to existing native projects. If projects cannot sustain use-value under competitive pressure, then other projects will rightly be in a better position to do so.

What are the use cases for DeFi when it comes to NFTs?

Within the NEAR ecosystem, the Wizard Guild is planning to make NFTs on Paras for beginner spells (tips on how to use DeFi on NEAR) and advanced spells, which will offer information on how to better leverage funds on different platforms to maximise returns. Other non-NEAR ways to use NFTs is if there is a deposit fee for liquidity pools, NFTs can be used to reduce it. Similarly, they can be used to boost farming rewards. Also, farms can be gamified, so you can stake NFTs for farming rewards or various other in-game features that involve tokens.

Why would someone create their own social tokens and what is the role of DeFi in this?

Tokens should have utility or they wont hold value for long. If a NEAR project wants to have gated content restricted for members of its community, then social tokens are a method to structure this access for users. DeFi has a role in this if the social tokens are used in the peripheral DeFi space or if the project that uses them also uses DeFi protocols.

The ‘OWS Party: Defi on NEAR Debunked’ held by the Open Web Sandbox on behalf of the NEAR team aimed to give an overview of DeFi on NEAR. This article outlined the event and discussed the questions asked by the audience. The OWS team hopes the event answered everyones questions and is looking forward to more engagement within the NEAR ecosystem.

Stay updated for future events by following us on Twitter and don’t hesitate to ask questions on our Discord. If you miss any of our events, watch them anytime on our YouTube channel.