Introduction

Although the crypto markets had a red month in September, Vesper still managed to achieve strong growth in TVL across all networks. Protocol revenue also grew considerably compared with August, keeping pace with the expansion in deposits and usage. However, the VSP token lost some value, with large sales from several long-time holders contributing to the move.

VSP indicators

VSP traded down during the month and market cap moved in step with price. Importantly, this did not stop TVL growth. If revenue remains solid, that trend could potentiallyturn around once market conditions improve.

VSP locking (esVSP)

Locking activity stayed healthy at around 17.6% of the total VSP supply. Average lock length points to holders committing for longer periods, which reduces the amount of VSP available to trade and aligns incentives over a longer horizon.

TVL by network

In USD terms, TVL increased month over month across all supported networks even though ETH’s price declined. This indicates that the rise came from net deposits. Ethereum mainnet contributed the largest dollar increase because it holds the biggest share of deposits, while Base and Optimism added smaller but solid gains.

TVL by network (ETH)

In ETH terms, deposits also increased across all networks. Viewing TVL this way strips out ETH’s price effects and highlights net inflows. Because ETH fell in September, the month-over-month increases appear slightly larger in this view.

Protocol revenue and token-holder income

Revenue accelerated in September, supported by the larger TVL. Token-holder income also ticked higher.

Treasury allocations

Vesper’s treasury is simple by design. Roughly half sits in Vesper positions that earn yield on Ethereum, Base, Optimism, and Avalanche. These are the same pools visible in the app and include assets like USDC, WETH, msETH, WBTC, and LINK. The other half is held as direct wallet balances, mainly stablecoins and majors, which preserves flexibility for operations and future deployment.

Conclusion

September was a solid month for Vesper. Deposits increased across all networks, and revenue rose. While VSP underperformed the market, locking continued to grow steadily, and TVL momentum carried through the month.

Recently, there’s been some confusion about how Odyssey fits alongside Vesper. Does it compete with it? Will it pull users away? We thought it was important to set the record straight.

First, What is Odyssey?

Odyssey is a DeFi superapp designed to make strategies easier, efficient, and more rewarding. Instead of jumping between multiple protocols, Odyssey exposes the best opportunities around (including Vesper) and enables you to automatically one-click loop into them.

For Vesper users, this is a big win. Odyssey doesn’t replace Vesper, it directly amplifies it. More TVL, more revshare, lower fees inside Odyssey, and a constant flow of new users discovering Vesper strategies for the first time.

Why Odyssey is a Game-Changer for Vesper Users

More TVL

As we have seen recently, Vesper’s TVL has surged to $55M, its highest since 2022. Odyssey has been a major part of this growth, attracting new users and fresh deposits routed directly through Loopr strategies. But, more TVL doesn’t just mean more eyes, it means more revenue flowing back into Vesper’s ecosystem, which powers VSP buybacks and revenue sharing for esVSP lockers.

Higher Yield Opportunities with Lower Fees

Odyssey already has some of the lowest fees and highest yields in DeFi, but Vesper users get an extra advantage:

• Standard Odyssey strategies charge a 10% performance fee on net APY.
• Using Vesper strategies reduces this to 6%.
• Combining Vesper + Metronome strategies drops it further to just 2%.

This structure directly rewards Vesper supporters by enabling you to keep more of what you earn.

Points for esVSP Holders

Odyssey’s points program, Fatstronauts, automatically rewards esVSP holders with calories. You don’t need to deposit, just by holding, you can start earning and consuming. Just make sure to connect the wallet that holds your esVSP to Odyssey (no cost).

If you also deposit into Vesper strategies through Loopr, your rewards stack even faster. You can track your points on FUUL, check out Odyssey’s docs for a quick setup guide.

Expanding Vesper’s Userbase

Odyssey is introducing new users to Vesper. Every time a new depositor enters Odyssey, they’re exposed to Vesper strategies by default, and when yield is high, they are automatically incentivized to deposit there. That means more people experiencing Vesper yields, more long-term users.

What It Means Going Forward

Vesper is no longer just a standalone yield protocol, it’s now a core part of Odyssey’s engine. That means any new vaults on Vesper will also appear inside Odyssey, creating more opportunities for yield and exposure.

For Vesper holders and strategy users, the takeaway is simple, Odyssey multiplies your advantages. It’s important to remember that Odyssey was designed to significantly upgrade the user experience in DeFi with Vesper continuing to play a vital role in this.

Follow Vesper

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Blockchain and AI both offer unlimited potential, but combined, they could be unstoppable

As we enter the final stretch of 2024, you have probably heard more about AI than anything else this year. Blockchain has likely been in your vocabulary for a while now, especially if you’re keeping tabs on crypto. But you might be wondering, where do AI and blockchain really cross paths? Both have been in the spotlight for some time, each changing industries in powerful ways. But here’s where it gets really interesting, what happens when these two meet?

Now we aren’t just talking about incremental improvements or nice-to-have upgrades. We are talking about the potential to change the way we live, work, and interact. It’s not a stretch to say that combining AI with blockchain could be unstoppable…

Why AI and Blockchain are a Perfect Match (and Why It Matters to You)

AI is incredibly powerful. It can take huge amounts of data, learn from it, and make decisions faster than any human. Whether it’s recommending your next move in crypto, identifying patterns in yield, or even predicting black swan events, AI is constantly working behind the scenes.

But there’s a catch. AI relies on data… (and lots of it). The quality and security of that data determine how effective the AI will be. This is where blockchain can help out. Blockchain is all about security, transparency, and trust. It creates an environment where data can be shared without being tampered with, making it a perfect fit for AI.

This is what it could mean to you…

When AI is powered by blockchain, the decisions and insights it produces are not just fast or smart, they’re reliable, secure, and traceable. You can trust the outcomes because you can track exactly where the data came from and how it was processed. It’s quite an unmatched combo.

The Potential…

Anyone who’s spent time in crypto knows how volatile, risky, and often confusing it can be to navigate. From unpredictable market swings to figuring out dApps, it takes serious effort to get comfortable in the space. But what if AI could change all that? Imagine a future where AI-driven tools are the main way we onboard and learn. Instead of spending weeks or months trying to grasp how DeFi works, AI could walk you through the steps, offering personalized guidance.

One of the biggest challenges in DeFi today is risk management. Let’s face it, DeFi protocols can be a minefield, and the stakes are high. Whether it’s the risk of losing funds to volatile market swings or falling victim to a security breach, it’s a lot for anyone to handle. But with AI, DeFi protocols could take on some of that burden by analyzing vast amounts of data in real time, flagging risks, and even preventing issues before they spiral out of control. For example, AI could monitor on-chain activity and detect any unusual patterns or security vulnerabilities. Maybe a malicious user is attempting a flash loan attack, or there’s an unusual spike in transaction volume, AI can catch these early signs and alert the platform to act before the situation gets out of hand. The power of AI lies in its ability to constantly learn from and adapt to new threats.

Beyond security, AI can make crypto as a whole smarter and more responsive. Think about the way smart contracts work today (they execute predefined actions when specific conditions are met). But what if those contracts could adapt to real-time changes in the market? Imagine a lending protocol where interest rates shift dynamically based on how the market is behaving. If liquidity drops or volatility spikes, AI could automatically adjust the rates, ensuring it remains balanced without any manual tweaking. This kind of responsiveness could make crypto more user-friendly and less intimidating for newcomers.

If you’ve traded on a DEX before, you know how important liquidity is to avoid slippage and get better prices. By integrating AI into AMMs, liquidity pools could become far more efficient. AI could optimize the pools, adjusting the amount of liquidity to match current market conditions. This would lead to tighter spreads, better price accuracy, and fewer headaches for traders. Plus, for those involved in providing liquidity, AI could help make their contributions more profitable by constantly adjusting their positions to potentially maximize returns.

Now, we can’t ignore the fact that DeFi protocols are prime targets for exploits. But AI could be the answer to building more secure and robust methodologies. AI models trained on historical on-chain data can quickly spot suspicious activity (like a sudden burst of transactions that don’t fit the usual pattern), and take action to prevent attacks before they happen. Now nothing is foolproof, it never is, but this could very well be a step in the right direction to a more secure web3.

But let’s step back a minute. This isn’t just about making more secure or efficient practices. AI has the potential to change how we think about decentralization as a whole. One of the most exciting ideas is the possibility of decentralized AI marketplaces. Right now, AI models are mostly controlled by big companies, but Ocean Protocol and SingularityNET are working to change that. These protocols picture a future where anyone can contribute, access, or improve AI models in a decentralized ecosystem. It’s a bit like the open-source but for AI. In this future, if you’ve developed a great AI model or dataset, you could tokenize it, trade it on the blockchain, and get rewarded for your contributions.

But what about trading? Crypto moves fast, and missing out on a good opportunity by even a few seconds can be “life-changing”. AI can analyze historical data, market trends, and on-chain activity, to help predict price movements with a higher degree of accuracy. Combine that with blockchain’s transparent, real-time data feeds, and you have the foundation for smarter, more informed trading decisions. Users could automate strategies based on AI-driven insights, enabling them to take advantage without constantly monitoring the market.

Many users are already using AI-powered bots to execute trades, but the integration of AI with blockchain can take this a step further. Bots can execute trades based on real-time data, ensuring that they aren’t just relying on outdated or inaccurate information. And with AI continuously refining its algorithms based on real-time performance, these bots can learn and improve over time, helping traders navigate volatile markets more effectively. AI can also sniff out arbitrage opportunities (those moments when price discrepancies exist between different exchanges or liquidity pools) enabling traders to capitalize on them quickly and efficiently.

The Future

What does that all mean for the future? Not only will the convergence of AI and blockchain improve what we already have, but it’s also going to unlock new possibilities that have not yet been fully explored. Be it smarter DeFi protocols, efficient trading, or decentralized AI models that shift the balance of power, the crossing of these will have an impact on Web3 that we’re just beginning to understand. And if you’re part of this space, this is exactly the kind of innovation you want to keep your eyes on.

The Combination of Blockchain and AI was originally published in Vesper Finance on Medium, where people are continuing the conversation by highlighting and responding to this story.

Ethereum Improvement Proposals play an essential part in growing and developing Ethereum

Overview

• What are EIPs?
• EIP Categories
• ERC Meaning
• Most Recent EIPs
• Summary

What are EIPs?

EIPs, short for Ethereum Improvement Proposals, are critical documents that suggest ways to strengthen the Ethereum blockchain. They’re well-structured, technical proposals that outline potential upgrades or changes to the network’s protocol, design, or architecture.

EIPs are essential because they ensure Ethereum maintains its transparency and democratic nature. They enable anyone to propose changes, which ensures a diverse range of ideas and solutions from the whole community.

For an EIP to move beyond just an idea, it must follow a strict format and process. This includes a thorough review, open community discussion, and iterative refinement, making sure that only the most robust proposals are considered for implementation.

An EIP’s life starts with drafting, followed by community discussion on forums. Then, it enters consensus building, where developers and the community weigh in. If consensus is reached, the EIP is implemented and finally activated on the Ethereum network after testing.

EIP Categories

There are many different types of EIPs, each with their own distinct focus. There are three primary categories:

Standard Track EIPs can potentially change Ethereum’s core functionality, including network operations, block validation, or contract standards. They are especially important because they can significantly alter the chain’s functionality, impacting everything from developer interactions to user experiences.

Meta EIPs deal with Ethereum’s operational and governance structures, offering modifications that don’t directly change the codebase but influence how decisions are made and implemented. They need community consensus because they shape how Ethereum operates as a whole. EIP-1, which defines the EIP process, is a key example.

Informational EIPs provide guidelines and advice, helping to align the community around best practices and shared knowledge. While they don’t introduce mandatory changes, they play a crucial role in educating and offering a reference point for developers and users.

ERC Meaning

ERC, short for Ethereum Request for Comment, takes a leaf from the internet’s RFCs, documents that have been shaping internet standards since 1969. In Ethereum, ERCs are the outline for token and application standards, which is crucial for ensuring they work well together.

Some key ERC examples include:

ERC-20

This is the go-to standard for fungible tokens on Ethereum, laying out essential rules they need to follow. It covers how tokens can be transferred, how you can check token balances, and how to get details on the token supply. Since ERC-20 tokens are fungible, each one is just like another, making them perfect for creating standardized assets or currencies.

ERC-721

This standard sets the stage for non-fungible tokens (NFTs), which are all about being unique. Every ERC-721 token is distinct and is ideal for representing one-of-a-kind items such as digital art or collectibles (like Bored Apes or Doodles). It includes ways to keep track of who owns what and how owners can transfer their assets.

ERC-1155

Taking things up a notch, ERC-1155 enables both fungible and non-fungible tokens to coexist in a single contract. It can be quite efficient, supporting batch transfers to ease transaction loads and mix different asset types, like in games or DeFi platforms, where you might juggle various tokenized items.

Most Recent EIPs

EIP-4844, known as the Dencun upgrade, introduced “Proto-Danksharding” to improve how rollups handle data in Ethereum blocks. Traditional rollups use “calldata” for transactions, which is costly because it’s stored on-chain permanently, even though rollups only need it temporarily. Proto-Danksharding introduces “blobs,” which are temporary data storages in blocks, not accessible by the EVM, and are deleted after about 18 days. This method makes data handling by rollups more cost-effective, reducing transaction fees for users.

While full Danksharding is still years away, Proto-Danksharding marks a significant step towards lowering Layer 2 transaction costs and boosting Ethereum’s transaction capacity to over 100,000 TPS. Learn more here.

Summary

In summary, Ethereum Improvement Proposals (EIPs) are the outline for refining Ethereum, enabling anyone to have a voice in its evolution. They range from Standard Track EIPs, changing core functions, to Meta and Informational EIPs, shaping governance and providing guidance.

ERCs, like ERC-20 and ERC-721, set standards for token interoperability. The latest, EIP-4844, introduces Proto-Danksharding, a game-changer for rollup data management, setting the stage for Ethereum’s future scalability.

What are EIPs? was originally published in Vesper Finance on Medium, where people are continuing the conversation by highlighting and responding to this story.

DeFi has continually evolved over the years, but the challenge of fragmentation still remains

Overview

• What is Liquidity in DeFi?
• What is the Fragmentation Problem?
• What are the Causes?
• How Does this Affect Users?
• Summary

What is Liquidity in DeFi?

Within DeFi, liquidity is fundamental and is essential for the smooth exchange or trading of assets. It’s the lifeblood of the ecosystem, underpinning the functionality of decentralized protocols that depend on it to operate.

Consider DEXes as a prime example. These dApps utilize smart contracts to create liquidity pools that facilitate token swapping. The liquidity in these pools is determined by the amount of tokens users deposit. For example, in a liquidity pool with ETH and DAI, the balance of these assets impact transaction dynamics. If the pool has more of one asset, users might experience slippage, meaning they could receive fewer tokens than anticipated due to the pool’s asset ratio influencing token price points.

Additionally, liquidity is crucial for lending protocols like Compound, which need sufficient liquidity to provide loans to users. Without adequate liquidity, these protocols can’t fulfill their core purpose.

What is the Fragmentation Problem?

Crypto is populated by a large number of blockchains, from Layer 1s like Ethereum and Solana to Layer 2s such as Optimism and Arbitrum. While their end goals are usually the same, their underlying technologies may be significantly different. Ethereum utilizes Solidity, whereas Solana uses Rust, leading to changes in hashing techniques, block sizes, and other technical characteristics.

This diversity ultimately results in networks that operate in isolation. Without inherent interoperability, these chains exist in silos, unable to communicate or transfer assets between one another. Therefore, users looking to interact across these chains must resort to bridging assets, costing time and money.

Liquidity fragmentation in the space manifests in two primary forms. The first type, single-chain fragmentation, occurs when liquidity is spread across multiple protocols within the same blockchain. This scenario often leads to dominant protocols like Uniswap accumulating a significant portion of the chain’s liquidity, while smaller protocols struggle with much less. This uneven distribution can impact the efficiency of the overall ecosystem on a single chain.

The second form is cross-chain fragmentation, where liquidity is scattered across protocols living on different chains, such as Solana and Ethereum. In this case, dApps developed on newer chains come across challenges in tapping into the vast pools of liquidity available on more established networks like Ethereum. Although solutions like LayerZero exist to facilitate cross-chain liquidity, the process can be extremely complex, and certainly not as user-friendly as it could be. Currently, there’s no straightforward method for native inter-chain communication, which remains a significant obstacle that the space is battling to overcome.

What are the Causes?

The surge in new blockchains over the past few years has led to a spread of assets, causing liquidity fragmentation. This creates isolated pools of liquidity on each chain, which isn’t exactly ideal for scalability. Each chain comes with its unique setup, from the algorithms to consensus rules, preventing them from easily communicating with each other. To move assets across these chains, users often have to resort to using bridges or similar tools.

So why can’t these blockchains just naturally work together? It all comes down to their designs and objectives. Each blockchain is built with a specific purpose in mind, influencing everything from its governance structure to its technical architecture. For example, Ethereum leans heavily into decentralization and security, while Solana aims for high scalability, even if it means being a bit more centralized.

How Does this Affect Users?

Navigating multiple protocols across various blockchains can lead to a frustrating user experience, often resulting in significant time and financial costs. Users may find themselves spending excessive amounts of time just figuring out how to operate within this fragmented landscape. While aggregation protocols offer some solutions, this problem at a fundamental level persists.

Liquidity fragmentation also brings about market fragmentation, where even modest trades can substantially affect asset prices in smaller liquidity pools, leading to slippage. Additionally, the price discrepancies across different protocols and blockchains can create arbitrage opportunities, typically favoring traders who have more knowledge or resources. This imbalance can make the DeFi space challenging for average users to navigate and benefit from equally.

Summary

Liquidity is crucial in DeFi, enabling smooth asset exchanges and powering protocols such as DEXes and lending platforms. However, the landscape is tainted by liquidity fragmentation due to the multitude of unique, isolated chains, complicating asset transfers, and user interaction.

This fragmentation occurs both within single chains, where dominant protocols hoard liquidity, and across chains, limiting access to liquidity pools. While solutions like LayerZero aim to bridge these gaps, true inter-chain communication remains a complex challenge.

This fragmentation not only affects market dynamics, leading to issues like slippage but also significantly reduces the user experience, making navigation extremely time-consuming. These areas must be addressed to ensure scalability and user accessibility.

What exactly does cross-chain mean and why is it so important in DeFi?

Overview

• Introduction
• Interoperability Issues
• Understanding Cross-Chain Transactions
• The Advantages of Cross-Chain Protocols
• Summary

Introduction

As DeFi has evolved, it has continually been plagued with interoperability issues. In the earlier days, blockchains operated more in isolation, creating siloed ecosystems with limited interaction. This fragmentation presented significant challenges, particularly in DeFi, where the ability to seamlessly move assets and information across different blockchains is crucial. However, the landscape has been adapting and changing for years, thanks to cross-chain protocols.

Interoperability Issues

Within blockchain, each network operates under its distinct set of rules and logic, creating a scenario where direct interoperability between chains, like Bitcoin and Ethereum, is inherently non-existent. This design means that while each blockchain offers unique advantages, they also exist independently from one another. This limitation significantly reduces the fluidity with which users can utilize their assets across platforms, constraining them to the confines of a single chain’s capabilities.

Despite this challenge, the community has been actively working on different ways around these limitations. As such, several solutions have emerged. First were CEXs which unfortunately have provided a less-than-ideal method, offering a centralized platform where users can exchange, trade, and seamlessly move assets across different chains. This method, while effective, introduces a dependency on centralized entities, moving away from decentralization.

Another popular solution has been the development of cross-chain bridges. These bridges aim to facilitate asset transfers between blockchains by using various methods such as locking assets on the source chain and minting an equivalent amount on the destination chain. However, this approach has also been met with issues as it often introduces a central point of failure. This inherent vulnerability in cross-chain bridges has been a cause for concern for a long time with many bridge hacks occurring, ultimately highlighting the need for more secure and decentralized interoperability solutions.

Understanding Cross-Chain Transactions

A cross-chain transfer enables an asset from one blockchain, like Ethereum, to be sent and utilized on another chain, such as Solana. This process not only makes the token accessible on the destination chain but also enables it to be used within that ecosystem’s applications and services.

When tokens are transferred cross-chain several mechanisms can happen:

Burn and Mint

The burn and mint mechanism is one of the most efficient methods for cross-chain token transfers. It works exactly as it sounds. When a token is transferred, it is burned on the source chain and simultaneously minted on the destination chain. The efficiency of this method comes from eliminating the need to lock up collateral, thereby removing the necessity for maintaining a token pool. This approach significantly reduces the risk of exploits that token pools typically face.

An important aspect of this mechanism is that the tokens become native assets on every blockchain that supports them. This is a considerable advantage over wrapped versions, such as WETH, as it reduces the typical risks associated with wrapped assets and increases the user experience.

However, the implementation of the burn and mint mechanism is not as straightforward as it sounds. For burn and mint transfers to be possible, the token’s contract must be natively deployed on both the source and destination chains and must support the specific functionalities for burning and minting. Additionally, the cross-chain solution requires special privileges to enable these transfers.

Lock and Mint

The lock and mint method involves locking tokens on the original chain and then receiving a wrapped version of those tokens on the destination chain. To unwrap the tokens, you simply reverse the process — unwrap, burn the wrapped tokens, and unlock the original ones. This method is straightforward because it doesn’t require any additional features in the token’s contract. Its simplicity and compatibility with all tokens make it a highly popular choice.

Lock and Unlock

The lock and unlock method is another widely used strategy that sets up liquidity pools on both the source and destination blockchains. For cross-chain token transfers, assets are locked in the liquidity pool on the source chain and then unlocked from the liquidity pool on the destination chain. It’s common for LPs to be encouraged to lock tokens on both sides of the bridge, often with incentives like sharing in transaction fees.

The Advantages of Cross-Chain Protocols

Cross-chain protocols significantly enhance the entire ecosystem by offering a range of benefits that address various needs and applications. Perhaps the biggest advantage is the increased interoperability, which enables seamless communication between different chains. This facilitates the transfer of data and assets across networks that were previously unable to interact.

Additionally, cross-chain protocols contribute to increased liquidity and capital efficiency. Due to their ability to enable the movement of assets between chains, they can help pool liquidity and reduce the fragmentation of resources. This is especially crucial in DeFi because of the stability and depth of markets in making asset exchanges more seamless and reducing price slippage. It also opens up new financial strategies like arbitrage.

Lastly, improved scalability and reduced transaction costs is a passive trait that shouldn't be overlooked. By distributing transactions across multiple chains, cross-chain protocols help reduce network congestion, which ultimately leads to faster transaction times and potentially lower fees. While it's not a direct advantage, it's a side benefit that improves the overall experience.

Summary

Cross-chain protocols have long played an important role in not just DeFi, but the overall ecosystem, by tackling the interoperability challenges between isolated chains. By enabling transfers of assets and information across a multitude of networks, cross-chain protocols significantly improve liquidity and market efficiency. Mechanisms such as burn and mint, lock and mint, and lock and unlock enable these cross-chain transactions, creating new ways to interact with different blockchains.

How Are Cross-Chain Protocols Bridging the Gap in DeFi was originally published in Vesper Finance on Medium, where people are continuing the conversation by highlighting and responding to this story.

Exploring the Core Differences Between DeFi and TradFi and Their Impact on the Future of Finance

Overview

• What is Lending and Borrowing in DeFi?
• Popular Protocols
• How is TradFi Different?
• A Look into the Future
• Conclusion

What is Lending and Borrowing in DeFi?

When you think about borrowing money, you probably picture walking into a bank, filling out lots of paperwork, and waiting for a credit check. That’s the world of TradFi — centralized and often wrapped in red tape. However, DeFi on the other hand flips this whole process on its head.

In DeFi, the rules are different. There are no banks, no credit checks, and no need to hand over your details. It’s all about blockchain, where decentralization is encouraged. Imagine a system where you’re in full control, with your digital wallet acting as the only gateway to your funds. This is a game-changer for people who’ve been locked out of the traditional banking system.

Here’s how it works:

Platforms on Ethereum for example let you use your crypto as collateral to take out loans. It’s a simple trade-off — you lock up some tokens, and in return, you get access to funds. These platforms run on smart contracts, which are self-executing contracts with predefined terms directly written into code. Once you agree to a contract, it’s set in stone — if you want to change anything, you need to settle the current deal and start a new one.

The lending and borrowing process in DeFi might remind you of traditional finance, but there’s a twist. In DeFi, this happens in a more dynamic environment, where thousands of people are lending and borrowing from each other, all without ever interacting. This is how decentralized markets are born.

Popular Protocols

Aave

Perhaps one of the most popular lending platforms out there, Aave enables users to lend and borrow a wide variety of crypto assets. One of the standout features of Aave is its flash loans, which are uncollateralized loans that must be repaid in the same transaction. This unique feature has opened up new possibilities for developers and arbitrageurs.

Compound

Similar to Aave, Compound is a prominent DeFi lending platform featuring an algorithmic interest rate protocol. It enables the direct supply of collateral and borrowing of assets through a single collateralized debt position (CDP) model, simplifying transactions and increasing capital efficiency.

MakerDAO

MakerDAO is centered around the DAI stablecoin, which is pegged to the US dollar. Users can deposit collateral in the form of various cryptocurrencies to mint new DAI. MakerDAO is widely considered one of the more stable choices out there.

How is TradFi Different?

Traditional finance is like the classic playbook of money management. This means operating on a centralized model, which is essentially big, established institutions such as banks, credit unions, and finance companies at its core. They are the gatekeepers, controlling how money is saved, borrowed, lent, and invested.

One of the key features of TradFi is the reliance on intermediaries. Want a loan? You go through a bank. Looking to invest? You might work with a brokerage. These intermediaries serve as the link between you and your financial goals, but they also add layers of process and regulation. For instance, getting a loan in TradFi typically involves credit checks, income verification, and collateral — steps designed to reduce risk but can also limit accessibility.

This structure is extremely segmented. Those with established credit histories, steady incomes, and existing bank accounts generally find TradFi more accessible. However, it can be a challenge for underbanked or unbanked populations to tap into these traditional financial services.

A Look into the Future of Finance

In exploring the dynamic landscape of finance, we’ve examined both DeFi and TradFi. With this understanding, the question arises, is DeFi poised to replace TradFi? While the initial response might lean towards “probably not,” it’s important to understand the possibility of a hybrid relationship.

TradFi indeed has a deeply ingrained system, one that’s been built and refined over centuries. Replacing it entirely seems like a huge task. However, this doesn’t mean DeFi lacks influence. DeFi’s role in the evolution of finance, especially looking forward to 2024 and beyond, is both crucial and transformative.

The true potential of DeFi lies in its ability to reshape our understanding of financial operations. It offers a glimpse into a future where finance is more accessible and secure, breaking down barriers that have long stood in the traditional system. While it’s accurate to say that TradFi often exhibits a slower pace of change, we’re beginning to witness signs of a gradual shift towards a more DeFi-inclusive model.

The future of finance might very well lie in a hybrid model that adopts the best of both DeFi and TradFi. This isn’t just speculative, it’s already happening. This is evident in HSBC’s partnership with FCF Pay to enable mortgage and loan payments in various cryptocurrencies, a significant stride towards the mainstream adoption of digital currencies.

Additionally, initiatives such asOneSafe, which position itself as a Global Crypto Banking solution for Web3 startups, indicate a growing trend. Such projects show the ongoing integration of traditional banking systems with Web3 and crypto technologies, suggesting that the future financial ecosystem will likely capitalize on the strengths of both DeFi and TradFi.

Conclusion

As we progress through 2024, DeFi’s innovative approach to lending and borrowing is poised to significantly influence the financial landscape, complementing rather than replacing traditional finance. This merger promises a more inclusive, efficient, and versatile financial ecosystem, harnessing the strengths of both decentralized and traditional systems for a broader and more adaptive approach to finance.

DeFi Lending and Borrowing In 2024 was originally published in Vesper Finance on Medium, where people are continuing the conversation by highlighting and responding to this story.

What is ERC-4337 and why was it such an important upgrade?

Overview

• Introduction
• How Does ERC-4337 Work?
• The Benefits of ERC-4337
• What is a Paymaster Contract?
• Smart Wallets
• How Does the Alt Mempool Work?
• Summary

Introduction

The ERC-4337 standard, introduced in 2023, marked a significant step forward for Ethereum, particularly in improving interactions with DeFi protocols. Known predominantly for Account Abstraction, ERC-4337 enables smart contracts to utilize features typically associated with Externally Owned Accounts (EOAs). This development essentially bridged the gap between the flexibility of EOAs and the power of smart contract wallets.

Originally when Ethereum was established, it operated on different models with two types of accounts: EOAs, controlled by users through their public and private keys, and contract accounts, governed by smart contract code. Each had its strengths and weaknesses, leading to the question — why not merge these functionalities? ERC-4337 addressed this by combining the best aspects of both account types, offering a more integrated and efficient approach to managing digital assets.

How Does ERC-4337 Work?

Account Abstraction, a key feature of the ERC-4337 standard, simplifies user interactions with Ethereum by bypassing the consensus-layer protocol. Instead, it introduces a new protocol layer and alters the basic transaction type. This change brings in a concept called UserOperation, a kind of pseudo-transaction. Users send these UserOperation objects to an alternative mempool. Then nodes, known as bundlers, gather these objects and bundle them into a single transaction by calling a specific contract. The bundled transactions are sent to a global smart contract called the “EntryPoint”. This bundled transaction is what eventually gets included in a block.

To process these transactions, a bundler starts by making a call to a function named “handleOps” on the EntryPoint contract. When this function receives the bundled transaction, it triggers another function called “validateUserOp” for each account involved. This step is essential for ensuring that each transaction within the bundle is properly validated and processed.

The role of the “validateUserOp” function is critical in the transaction process. It verifies the authenticity of the operation’s signature and checks if it matches the account. If everything is correct, it processes the gas payment. Following this, each smart contract wallet is required to implement a specific function to execute the operation sent by the EntryPoint contract. This makes the entire process more smooth, ensuring a more automatic and user-friendly experience by eliminating the reliance on key dependencies.

The Benefits of ERC-4337

Wallet Recovery

ERC-4337 facilitates easier and more versatile wallet recovery methods through account abstraction. Unlike traditional wallets where recovery relies heavily on remembering a seed phrase, ERC-4337 enables alternative methods, such as setting up a trusted contact or using multi-factor authentication.

Increased Security

With ERC-4337, security is increased through a more robust authentication process. By shifting certain security responsibilities from the user to the smart contract, it reduces the chances of user errors. It also enables the implementation of additional security layers such as multi-signature verification or automated algorithms.

Flexibility

ERC-4337 significantly extends the scope of wallet functionality, including features such as shared accounts and multi-user operations. This means better collaboration for the management of funds and transactions, particularly beneficial for users who require joint control over assets.

Compatibility

Designed to be fully compatible with the Ethereum Virtual Machine (EVM), ERC-4337 ensures easy integration with various Layer 2 chains and other EVM-compatible chains. This compatibility facilitates smooth interoperability and extends the reach of ERC-4337’s benefits across a broader range of applications.

What is a Paymaster Contract?

Paymaster contracts within the ERC-4337 standard, offer a practical solution for handling transaction fees and may be crucial for users who are not familiar with or capable of managing Ethereum gas fees. They function by taking on the responsibility of gas costs to enable a better experience for users.

When a user initiates a transaction, the Paymaster contract essentially steps in by covering the gas fees. This approach is particularly beneficial as it enables a wider range of users to participate in the ecosystem without the immediate need to understand or possess ETH for gas. The contract holds funds that are used specifically for this purpose and is programmed with criteria to determine which transactions it will cover. This could be based on factors like the user’s history, the type of transaction, or other predefined rules set by the protocol that deploys the Paymaster contract. This means a DeFi protocol could set up a system where initiating and executing transactions are covered by them instead of the user, most likely found on a Layer 2 network such as Optimism.

This introduction of Paymaster contracts represents a step towards a more accessible ecosystem. By abstracting away the complexities of gas fees, these contracts help reduce the technical barriers associated with Ethereum transactions. This is especially important in trying to create a more inclusive environment where users from various backgrounds can interact with DeFi applications without the upfront need for technical knowledge. This could even extend to creating more common web2 frontends that users are familiar with and integrating a more web3 backend, utilizing the flexibility of ERC-4337.

Smart Wallets

Smart Wallets are an interesting part of ERC-4337 as they step away from what you’d expect from typical wallets, offering a smarter, contract-based interface. This isn’t just about making things simpler, it’s about opening the door to DeFi for more people.

These Smart Wallets are not just about storing assets. They are equipped to perform complex tasks such as automated transactions based on predefined conditions and offer increased security features such as multi-signature verification. The user interfaces are also more intuitive compared to standard wallets.

The main advantage of Smart Wallets lies in their proactive functionality. They go beyond typical basic functionality, actively managing and executing operations, which is particularly helpful for users less familiar with the technicalities of navigating the landscape.

How Does the Alt Mempool Work?

In the more conventional system, users typically submit transactions to a public mempool, which houses pending transactions for EOAs. However, within ERC-4337, UserOperations are directed towards a specialized, higher-level mempool known as the “UserOperation mempool.”

In order to facilitate the bundling process, bundlers actively monitor the UserOperation mempool, where they group multiple UserOperations into a standard transaction. Before bundling, they carefully assess the legitimacy of these UserOperations by using the relevant EntryPoint methods. Once validated, the bundler then includes the UserOperation transaction in the next block they propose to the network. It's important to note that this transaction is not sent to the regular mempool as bundlers are either block builders themselves, or work with block builders.

Summary

To Summarize, ERC-4337 was introduced in 2023 as an innovative approach designed to simplify the entire DeFi experience for users of all levels. It has many benefits from ensuring more security for users on a personal and smart contract level, to providing a more intuitive interface for users.

The ERC-4337 standard uses account abstraction and an alternative mempool to accommodate UserOperation transactions, granting users greater flexibility in customizing their options. Looking ahead, it is highly likely that more DeFi protocols will adopt account abstraction to facilitate a smooth transition and simplify the onboarding process for users.

Understanding ERC-4337 was originally published in Vesper Finance on Medium, where people are continuing the conversation by highlighting and responding to this story.

Whether a transaction succeeds or fails, gas fees are a constant in the world of crypto. But what are they exactly?

Overview

• What Is Gas?
• Why Do We Need Gas?
• How Are Gas Fees Determined?
• How Can Layer 2’s Help?
• Summary

What Is Gas?

First and foremost it's important to understand that every transaction on Ethereum requires “Gas”. Essentially it refers to the effort required to get things done on the network. Since every action has a different level of complexity, gas costs can fluctuate depending on the task required, and the overall network usage at the time of the request.

But why exactly do we need gas?

As mentioned above, every transaction requires gas to execute. This is because those resources come at a cost in order to ensure Ethereum can't be spammed and get stuck in infinite computational loops.

In order to work out how much exactly a transaction will cost, the gas fee is determined by the amount of gas used, multiplied by the cost per unit of gas. It’s important to note that even if a transaction fails, you will still need to pay the gas fee.

You might have also encountered the term GWEI, often referred to as the “gas price.” In essence, GWEI is a smaller unit of ETH, with one GWEI being one-billionth of an ETH, or 0.000000001 ETH. Using a GWEI calculator makes it easier to figure out the gas price at any moment, which can help you decide when to make a transaction based on whether the GWEI is high or low.

Why Do We Need Gas?

So now we know what gas is, why exactly do we need it? Put simply, it helps keep the whole Ethereum network secure by incentivizing validators to accurately process transactions. But let's first look at the initial use case of gas.

Initially, gas was introduced to deter malicious activities, such as network spamming. By setting a limit on the computational steps a transaction can use, it prevents unintended or malicious infinite loops and computational waste (any gas not used is always returned to the user).

Validators on the other hand ensure the security of the network by verifying blockchain transactions, which is where the computing power comes from. Typically, these validators invest in specialized equipment and purchase ETH to take on this role, therefore to encourage their participation, they earn fees from transactions, which is included in the gas fees. As Ethereum operates on a proof of stake (PoS) consensus mechanism, these validators are rewarded by committing a specific amount of ETH (32 ETH) to the network.

How Are Gas Fees Determined?

While it might seem complex with terms like “gas wars,” understanding gas fees isn’t too tricky once you break it down.

When you submit a transaction, you can choose how much gas you’re willing to pay. However, setting a low gas price might mean your transaction is slower than usual or fails, as validators may prioritize others who bid higher for a spot in the next block. It’s a balancing act — bid too high and you might waste gas, but bid too low and your transaction might not go through, losing that fee.

But why does this matter?

The total gas fee has two parts: the base fee and the priority fee. The base fee is set by the protocol, while the priority fee is like a tip to make your transaction more appealing to validators so they choose you. Essentially, a higher “tip” can help you win any gas wars and ensure your transaction goes through, however, this could get quite expensive.

How Can Layer 2’s Help?

High gas fees on the Ethereum mainnet, particularly during periods of heavy network usage, have often been a massive barrier to entry for many users seeking to get involved. Layer 2 solutions like Optimism and Arbitrum were created to directly address this issue. These solutions, commonly referred to as Layer 2s or L2s, are built on top of existing blockchains and have become instrumental in increasing the efficiency of these networks.

But how?

Well, L2s are designed to process multiple transactions off-chain and batch them together before submitting them to the main chain, significantly reducing overall gas costs. They also undertake most computational tasks, such as transaction validation and smart contract execution off-chain, submitting only the final state or a cryptographic proof to the main chain. By doing this, Layer 2 solutions drastically improve scalability and increase the transactions per second (TPS) without burdening the main chain. This reduces overall network congestion and, as a result, lowers gas fees for users.

Summary

To summarize, in Ethereum, every transaction requires “Gas,” a measure of computational effort, to execute actions. Gas fees ensure network security by preventing spam and incentivizing validators to process transactions. These fees can fluctuate based on the complexity of tasks and network demand. However, Layer 2 solutions, like Optimism and Arbitrum, offer a welcomed change by reducing the typical high gas fees of Layer 1s through processing transactions off-chain and then batching them to the mainnet. This approach improves scalability, reduces congestion, and offers a more affordable experience for users.

What Are Gas Fees? was originally published in Vesper Finance on Medium, where people are continuing the conversation by highlighting and responding to this story.

Exploring the fundamental differences between off-chain and on-chain governance

Overview

• Introduction
• What is Off-Chain Governance?
• What is On-Chain Governance?
• Strengths and Weaknesses of Both Models
• Hybrid Approach
• Summary

Introduction

As DeFi continues to mature and DAOs grow ever more popular, the question of effective mechanisms becomes increasingly more popular, particularly around the topic of off-chain and on-chain governance. Each strategy, with its own set of benefits and challenges, plays a crucial role in steering the direction of decentralized protocols. In this exploration, we will unravel the specifics of these governance mechanisms, with the aim of shedding light on their applicability and suitability for different decentralized situations.

What is Off-Chain Governance?

Off-chain governance refers to the process of collecting votes on platforms such as Snapshot through what’s commonly known as “Improvement Proposals.” This helps protocols get a read on how the community feels about different issues and enables them to cast sentiment votes.

Typically, these proposals are launched on forums or Github repositories to give users a heads-up about what might be coming up in the pipeline. Then, platforms like Snapshot are used to actually enable voting. After a decision is made, the protocol’s team starts to implement the proposals. While this method isn’t typically considered fully decentralized (since the community’s votes aren’t binding on-chain and the team has the final say), it does let the community weigh in on the decision-making process.

What is On-Chain Governance?

On-chain governance shares similarities with off-chain governance such as making decisions public and open to voting. However, a key distinction lies in its execution. On-chain governance conducts the voting process directly on-chain (on the blockchain), making it binding and final. Platforms like Tally facilitate this process, offering a user-friendly frontend that enables users to create proposals, complete with executable code, in a straightforward manner.

Tally differs from platforms such as Snapshot because DAOs often utilize smart contracts to propose, vote on, and execute decisions. This method means an automated, trustless, and arguably more trustworthy environment, as the automated execution of proposals is managed directly by code, minimizing the need for manual intervention and reducing the potential for any bias or mismanagement.

Strengths and Weaknesses of Both Models

On-Chain Governance Strengths

• Transparency and Immutability: All proposals and voting outcomes are recorded on the blockchain, ensuring transparency and longevity.
• Automated Execution: Successful proposals can be automatically executed via smart contracts, ensuring the community’s voice is heard without the need for manual intervention.
• Trustless Environment: The decentralized and coded nature of on-chain governance reduces reliance on any one particular individual or team.

On-Chain Governance Weaknesses

• Gas: Every vote, proposal submission, and execution means a transaction on the blockchain, which could be very costly depending on the chain (such as Mainnet) and time of the submission.
• Complexity: Crafting proposals that contain executable code requires a certain level of technical ability, which could potentially create a barrier for the more non-technical participants (Tally does simplify this process however).
• Finality: Once a decision is made and executed on-chain, it can be challenging or in some cases impossible to reverse, despite potential unforeseen consequences. Although most DAOs utilizing on-chain governance will implement certain safety precautions such as a timelock contract to delay the execution of a function, this does not mean it is 100% foolproof.

Off-Chain Governance Strengths

• Accessibility: Without the need for any technical skills, off-chain governance can be more accessible to a wider audience.
• Flexibility: Decisions can be discussed, refined, and ultimately improved upon before any actual implementation takes place, which enables adaptability.
• Cost-Efficiency: Voting and discussions are conducted off-chain, avoiding the direct transaction costs associated with on-chain interactions. Platforms such as Snapshot simply require a user to sign a transaction in order to count their vote.

Off-Chain Governance Weaknesses

• Centralization: Final implementations are typically enacted by a protocols core team, which could potentially mean a negative impact in terms of power or influence on the outcome.
• Lack of Binding Commitment: Since decisions are not automatically executed by smart contracts, there may be delays or differences between a successful proposal and the actual implementation.
• Transparency Issues: While proposal and voting details can be public, the lack of on-chain verification could raise questions about the integrity of the outcome.

Hybrid Approach

Some protocols may take it a step further and enact a hybrid approach that combines the strengths of both on-chain and off-chain components. Proposals may be initially introduced off-chain for community discussion and, after a designated time, moved on-chain for final voting. If the proposer wants to make any changes before putting it on-chain, they have the added option of being able to do so. This adds an extra layer of community involvement and decision-making that ensures the outcome is well thought through and quorum can be reached.

Summary

To summarize, off-chain governance offers an accessible and flexible, yet non-binding approach, enabling sentiment voting and detailed discussion before implementation by the protocols core team. Alternatively, on-chain governance ensures a trustless, transparent, and immutable environment, with potentially high costs and technical complexity.

Some protocols may take the route of a hybrid approach that kicks the process off with off-chain proposal discussions, followed by on-chain proposal creation, structured voting, and a timelock mechanism for execution, all with the goal of establishing a fair and well-governed, decentralized ecosystem.

Decentralized Governance was originally published in Vesper Finance on Medium, where people are continuing the conversation by highlighting and responding to this story.