Welcome to Decentral Park’s new research sub-newsletter: In The Weeds.
This weekly instalment will focus solely on key technical developments and themes within Web3, keeping you ahead of the game on upcoming trends.
Let’s get stuck into this week’s key highlights.
1: Blend by Blur
What is it? Blur launched in December 2022 as a challenger NFT marketplace to established players such as Opensea. Blur positioned itself as the fastest NFT marketplace available, boasting 10x faster speeds, with 0% marketplace fees. Since its inception, Blur has grown to boast a gross merchandise volume (i.e. the total value of goods sold across the platform) of $1.4b, with 146,823 total users.
Blur recently introduced its new product, Blend. Blend, short for Blur Lend, is a peer-to-peer perpetual lending primitive that unlocks liquidity for NFTs.
Blend was built on the belief that while tokens are taking over the market of fungible assets, NFTs are taking over the trillion-dollar market of non-fungible assets. To scale this market, NFTs need financialization, just like any other trillion-dollar market. By this, Blur is referring to a suite of financial products, though focuses specifically on borrowing in their blend product.
As it stands, most buyers pay the full price of NFTs up front, increasing the difficulty for users to afford them. In traditional non-fungible markets, borrowing markets typically exist to enable users to borrow to afford assets, i.e. the mortgage market. NFT lending by Blend is a primitive that aims to make NFT lending intuitive for borrowers and safe and flexible for lenders.
There are two features of the Blend product upon launch. The first is the ability to borrow an NFT by posting collateral, and the second is to purchase an NFT and pay later, essentially a repayment loan as opposed to interest only. Blend is launching with three collections: Punks, Azukis and Miladys.
As with the original Blur marketplace, Blend has zero fees associated with borrowers and lenders at inception. This can be changed after 180 days by $BLUR token holders through their governance process. The Blend code is licensed under BSL, in a similar manner to Uniswap V3. For protocols to be granted use of the code base, they must pass the $BLUR governance process.
The Blend product was built in collaboration with Dan Robinson, one of the inventors of Uniswap V3, and Transmissions11, a researcher at Paradigm.
Blend has no fees for borrowers and lenders, and its fees are controlled by $BLUR holders. It is launching with three collections at three different price points to start: Punks, Azukis, and Miladys, with more coming soon.
Should you wish to dive deeper into the mechanics of the Blend protocol, I’d highly recommend reading the whitepaper.
Why is it important? Blend represents a financial primitive in which the financial instruments we have come to rely on in our traditional societies are being introduced to the web3 world of assets.
We must first disassociate NFTs with 10k PFP collections, and instead consider them as digital representations of ownership of non-fungible assets in general, as I believe they should be considered with a long enough time horizon. The introduction of financial instruments for NFTs is crucial to the ultimate adoption of NFTs in their endgame form, i.e. all non-fungible ownership moves onchain.
While Blend is merely a first step in what I believe will be a long line of NFT financial instrument development and innovation, it must not be downplayed as a crucial step towards general NFT adoption.
Where does it go from here? Blend in its current form is considered vanilla, and will expand to encompass TradFi financial instruments, as well as DeFi native primitives based on the flexibility and modularity of the infrastructure.
For example, I expect the development of further leverage, potentially cross-asset, modular collateral postings such as those seen in Voltz V2.
In the near term, it is expected that Blend will continue to add NFTs to its limited whitelist, until ultimately the protocol becomes permissionless, in a similar fashion to Uniswap etc.
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2: Aave V3 Boosted Pools
What is it? Balancer, considered by many to be a DeFi OG, is a DeFi liquidity protocol boasting $1.32b in liquidity (measured as total value locked) and $302m in average seven-day trading volume. It recently announced, in collaboration with Aave, the largest DeFi lending protocol, boosted Aave V3 pools.
The motivation behind the product is that as it stands liquidity within DeFi is currently underutilised. When liquidity is provided to pools, typically no more than ~20% is utilised. This means there’s ~80% of tokens in a pool not generating fees, making the liquidity provision severely inefficient.
Leveraging Balancer as a baselayer liquidity protocol, boosted Aave V3 pools act to wrap these idle tokens and deposit these wrapped tokens into another yield-generating protocol, essentially rehypothecating unused liquidity, and in doing so adding a layer of a fee (yield) generation.
In this case, the unused liquidity is deposited to Aave V3 lending markets, and from there lent to users seeking exposure on Aave. This means yield-seekers no longer have to choose between providing liquidity to pools or lending their assets, they can gain exposure to both markets and in doing so earn a higher yield.
One pool of particular interest is the Balancer Boosted Aave V3 USD pool, allowing protocols and treasuries to gain exposure to deep stablecoin liquidity in which they can swap between USDC, DAI, USDT and WETH.
Why is it important? As I’ve mentioned before in this newsletter, liquidity is king across DeFi. This is true whether you consider it from the point of view of an individual protocol, a sub-sector such as LSTs, or DeFi as a complete ecosystem.
Liquidity enables larger volumes to flow through the financial innovations that are being built upon blockchains, thus strengthening the value proposition of DeFi as a whole. As these DeFi primitives continue to evolve, and the ecosystem becomes more efficient, it places marginal gains on the additional units of liquidity deployed to the ecosystem in the future.
Where does it go from here? An obvious path for Balancer Boosted Aave V3 pools is to offer exposure to additional pools, beyond the three (STG, WstETH and USD) offered upon launch. Boosted pools are currently in their initial launch phase, and as core developers become more comfortable with the code, no doubt additional pools will be added. Perhaps ultimately this will become available in a permissionless manner, though I believe onchain proof of volumes and liquidity for pools being boosted would be required.
Beyond this, I’d expect Balancer to expand their baselayer Boosted Pools coverage beyond Aave V3, and into additional markets (i.e. beyond just Ethereum, pushing out to L2s etc.) and additional lending protocols.
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3: Private Accounts by Nocturne
What is it? Sticking with the theme of products that add to the utility of DeFi, be that NFTs or fungible digital assets, we’ll now turn our attention to user-specific privacy-based solutions.
As it currently stands, privacy is a concept that the industry knows must be integrated to attract further user types, such as large financial institutions. In this sense, DeFi is converging on the traditional financial system, while still leveraging the efficiencies born of blockchain technology and smart contracts.
While there have been many different approaches to privacy in DeFi, today we’ll focus on Nocturne, a protocol aiming to solve this problem by leveraging account abstraction. Account abstraction is a hot topic in the Ethereum ecosystem, so if you’re unfamiliar with account abstraction, I highly recommend reading a previous edition of ‘In the Weeds’ in which I explain what it is, why it’s important, and how it could be leveraged in the future.
Nocturne is introducing a DeFi primitive that they’re coining ‘private accounts’. By leveraging both account abstraction and zero-knowledge proofs, Nocturne has built a new wallet experience in which they’ve integrated this private account layer. This layer allows users to send, receive and transact funds without exposing their wallet address.
Nocturne has quoted two paths to privacy adoption, accounting for both with private accounts. The first is building separate products for privacy-conscious users, they’ve likened this to a ProtonMail-esque service. The second is a privacy solution integrated into existing products, i.e. a Venmo private pay-esque product.
So, how do these private accounts work? When opening a wallet with Nocturne, users essentially open a vault that allows them to privately store their assets. This vault becomes your custody wallet, in which you can hold assets, both in their resting state and yield-baring, though is entirely unassociated with a particular entity, with assets essentially hidden from the public. Should a user then wish to transact using their assets, burner wallets are generated. What this provides is a complete solution to DeFi activity on Ethereum in an anonymous manner.
While a few readers may be sceptical of the safety of funds deposited in such a vault, I fear the term may have done Nocturne a disservice. These vaults are entirely permissionless once funds are deposited, and structured essentially as wallet accounts. Of course, thorough auditing is still required. For customer protection, address screening and rate limits have been implemented at deposit for compliance.
Why is it important? Privacy is an essential next step for DeFi, particularly should it wish to become the rails for all financial systems in the long term. Nocturne’s solution enables privacy in a DeFi native manner while offering the flexibility to interact with the DeFi ecosystem as a user wishes. This is as opposed to a walled protocol etc.
Solutions will evolve, though the success of Nocturne could pave the way for additional experimentation in the privacy sub-sector.
Where does it go from here? The Nocturne testnet is set to be launched soon, with the protocol aiming to deploy to Ethereum mainnet in the coming months. Based on typical protocol testnet development times, I would expect this to take longer than the team is predicting, with an anticipated mainnet deployment before EOY.
Looking further afield, Nocturne has cited a few potential developments on its path to full-scale privacy adoption. This includes a privacy payments SDK, essentially a single-click opt-in payment privacy feature. This would materially enhance the UX associated with the product, and drive further adoption.
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