summary
DeFi’s initial values ​​were about financial inclusion and openness. But as the price of gas rises, DeFi slowly becomes a game for giant whales.
L1 pools (such as YFI’s Smart Pool) are cheap and simple to effectively scale DeFi.
Still, depositing, withdrawing, and adjusting funds on L1’s pools is expensive.
StarkEx solves this problem. The solution is DeFi Pooling, which splits bills on L1 and provides positions on L2 to rebalance.
StarkEx 3.0 supports a new building block required to enable this feature: L1 limit orders.
background
DeFi aims to improve financial inclusion thanks to its composable and permissionless nature. However, when gas is too expensive, only whales can afford it.
If DeFi is to remain inclusive and benefit tens of millions of additional users, it is imperative to address scalability issues and keep transaction costs low.
In Yield Optimizer we have seen a trend towards scalability. Projects such as YFI and Harvest allow retail investors to participate in advanced and expensive trading strategies. Take the YFI USDt curve strategy as an example.
As an ordinary trader, optimizing Curve’s lending yield is quite complicated. It is necessary to deposit money in a specific pool, deposit LP tokens into the Curve savings pool, set a lock-up period to increase CRV rewards, and vote on the chain to choose the proportion of rewards allocated to the pool.
With YFI, the above steps are abstracted. Just make one deposit on YFI USDt yVault, and the protocol will take care of the rest. In return, the agreement charges a 20% management fee on profits.
This 20% fee saves not only the hassle of deploying strategies in person, but also transaction fees for most traders.
Furthermore, by aggregating the voting power of YFI customers, YFI acts like an investment fund and influences Curve to benefit all these stakeholders such as YFI traders and token holders.
Nonetheless, YFI is not optimal in terms of gas, as withdrawing and rebalancing funds from the pool still operates on L1. As a result, these steps are often prohibitively expensive.
The DeFi aggregation pool is here to solve this problem: it can transfer operations such as deposits, withdrawals, and rebalancing to scalable and low-cost L2!
What is a DeFi Aggregation Pool?
This new mechanism makes it easier for users to use L2 accounts to trade without gas fees: borrow on Aave and Compound, invest in YFI or Harvest, or provide trading liquidity on Uniswap, Balancer or Curve.
step by step process
Here we take a simple DeFi operation step as an example: Invest in USDt yVault.
Participants are:
Trader / User / End User
Users A, B, and C have funds to trade on L2.
off-chain
Operates the node and the StarkEx system that serves it.
on-chain
DeFi target contracts (e.g. yUSDt pool)
StarkEx Smart Contract
Proxy Pool: A “new” on-chain smart contract to coordinate StarkEx contract requirements, manage pool ownership, and interact with DeFi target contracts.
In the above example, User A and User B want to deposit into YFI, while User C wants to withdraw from YFI. Therefore, the needs of user A and user B exactly match that of user C, and only the remaining difference needs to be traded on the chain.
From the perspectives of A and B, DeFi aggregation pools operate in two steps:
Exchange USDt for shares minted by StarkEx operators from the proxy pool (e.g. syUSDt)
Convert syUSDt to yUSDt
Step 1: Demand Aggregation
The proxy contract mints the proxy pool’s share (e.g. syUSDt)
The proxy contract sells shares to traders through L1 limit orders (see below)
StarkEx settles the sale on-chain
Step 2: Pool activation
The proxy contract withdraws funds from the pool from the StarkEx smart contract
The proxy contract deposits the funds into a DeFi pool (e.g. yVault)
The proxy contract receives the deposit certificate (LP token, e.g. yUSDt)
The proxy contract creates an on-chain price order that gives the price of the certificate of deposit for a pool share (eg syUSDt).
Step 3: L2 traders receive LP tokens
Traders on L2 exchange shares (e.g. syUSDt) for certificates of deposit (e.g. yUSDt)
Proxy contract burns shares
Step 4: Rebalance and you’re done!
One might notice that token matching transactions can be done off-chain. For rebalancing such as exchanging yUSDt for yETH, you only need to find the other side of the transaction, and there is no need to pay gas in the transaction process.
What is missing? L1 Limit Order
The DeFi aggregator on StarkEx has one more component to explain: L1 limit orders. There are three basic types of operations on StarkEx: transfers, conditional transfers, and L2 limit transactions. The next version (StarkEx V3) will support L1 limit orders, and smart contracts on L1 will be able to send transactions on L2. This is the final component that supports DeFi aggregation pools.
in conclusion
If DeFi finance is to be popularized, we need to provide larger-scale transaction processing and cheaper transaction costs. The DeFi aggregation pool is a solution, which is equivalent to replacing private jets with commercial jets. If DeFi wants to attract tens of millions of trading users, this is the best choice.