Three minutes to learn about DeFi Pooling: Provide scalability for existing L1 projects

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DeFi Pooling can move deposits, withdrawals, rebalancing, etc. to the scalable and low-cost Layer-2.

Original title: “Introduction | DeFi Pooling: Provide scalability for existing L1 projects”
Written by: Louis Guthmann
Translation: Ajian

Summary

  • The primary value of DeFi is financial popularization and open access. But with the rise of Gas Price, DeFi has increasingly become a game of giant whales.

  • Layer-1 fund pools (such as the treasury in YFI) can efficiently promote the popularization of DeFi because they are cheaper and simpler.

  • However, it is still expensive to join, leave and rebalance a pool of funds on Layer-1

  • StarkEx solves this problem. The solution we propose is called DeFi Pooling, which puts the bill on Layer-1 and completes the rebalancing of positions in Layer-2.

  • StarkEx 3.0 (coming soon in May 2021) will support the front component of DeFi Pooling: L1 Limit Order.

background

The goal of DeFi is to use its composability and access-free access to popularize financial services. However, when the gas price is too high, only people with big money can participate.

If we want DeFi to remain inclusive and gain the next batch of 10 million users, we need to solve the scalability problem so that transaction costs can be reduced.

We have already seen a step towards scalability on Yield Optimizer. Projects like YFI and Harvest allow retail investors to participate in more advanced and expensive trading strategies. Take the YFI USDt Curve strategy as an example.

As an ordinary trader, it is very complicated to maximize the deposit yield in the Curve project. They need to deposit money in a certain fund pool, and then deposit the deposit certificate of the fund pool in the Curve gauge, determine the lock-up period to increase the CRV reward, and vote on the chain to determine the proportion of the reward allocated to their pool .

With YFI, the above process can be abstracted away. Users only need to deposit money into the YFI USDt yVault contract, and then the agreement will automatically complete the remaining part. The price is that the agreement will charge a 20% management fee on profits.

For most traders, the 20% fee rate is cheaper than the many troubles and the transaction fees to be paid when doing those troubles.

In addition, because the voting rights of YFI users have also been gathered, YFI has become an investment fund, and it can influence Curve to benefit all YFI stakeholders: both traders and token holders.

However, YFI is not the most efficient in the use of gas, because depositing money into the pool and withdrawal, including rebalancing the entire fund, are still Layer-1 operations. Therefore, these operations are often prohibitively expensive.

DeFi Pooling is to solve this problem: it can move deposits, withdrawals, rebalancing, etc., to the scalable and low-cost Layer-2!

What is DeFi Pooling?

DeFi Pooling is a new mechanism that allows users to trade with their Layer-2 accounts without any fees: they can deposit money on Aave and Compound, invest in YFI or Harvest, or become Uniswap, Balancer And the liquidity provider on Curve.

Process

Let’s take a simple DeFi operation as an example: invest in USDt yVault.

The participants are :

Trader/User/End User

Alice, Bob and Carol are traders who have funds deposited on Layer-2

Off-chain part

An operator and the StarkEx system supporting the operator’s services

Chain part

  • DeFi target contract (yUSDt Vault in this case)

  • StarkEx smart contract

  • Broker Pool: A new on-chain smart contract that coordinates the demand from the StarkEx contract, manages the ownership of the pool, and interacts with the DeFi target contract itself

In our example, Alice and Bob want to deposit money in YFI, and Carole wants to withdraw money from YFI. Therefore, the needs of Alice and Bob exactly match Carole, and only the difference needs to be transferred on the chain.

Introduction | DeFi Pooling: Provide scalability for existing L1 projects

From the perspective of Alice and Bob, the operation of DeFi Pooling is divided into two steps:

  1. Replace USDt with shares minted from the agent pool by the StarkEx operator (for example, syUSDt)

  2. Change syUSDt to yUSDt

Step 1: Aggregate requirements

Introduction | DeFi Pooling: Provide scalability for existing L1 projects

  1. The share of the agent contract casting agent pool (for example, syUSDt)

  2. The agent contract sells shares to traders through a limit order (L1 Limit Order, see below) on the main chain

  3. StarkEx settles the sale on the chain

Step 2: Activate the pool

Introduction | DeFi Pooling: Provide scalability for existing L1 projects

  1. The agent contract withdraws funds belonging to the fund pool from StarkEx’s smart contract

  2. The agent contract deposits these funds in DeFi Vault (eg yVault)

  3. The agent contract receives deposit certificates (LP tokens, such as yUSDt)

  4. The agent contract creates a chain cap price order, giving the price of the deposit certificate to the pool share (for example, syUSDt)

Step 3: The trader receives the deposit certificate

Introduction | DeFi Pooling: Provide scalability for existing L1 projects

  1. Traders on Layer-2 use shares (such as syUSDt) to buy back deposit certificates (such as yUSDt)

  2. Agent contract burn share

Step 4: Rebalancing-icing on the cake

Someone may have noticed that now, a strategy can be expressed as a token under the chain. Then, rebalancing operations such as replacing yUSDt with yETH can be simplified to find another trader to exchange tokens, so it can happen completely in an environment without paying for gas.

One thing is still missing: chain ceiling price orders

Another thing we didn’t explain clearly above is the limit order on the chain. There are three basic operations on StarkEx: transfer, conditional transfer, and Layer-2 limit transaction. In the next version (StarkEx V3), we will also support Layer-1 limit orders, enabling smart contracts on Layer-1 to send transactions on Layer-2. This is the piece of the puzzle that everyone is missing now.

in conclusion

Retrieving the original intention of DeFi’s financial popularization, we need to provide larger-scale transaction processing and lower transaction costs. DeFi Pooling is such a solution. This is equivalent to replacing private jets with commercial aviation. If DeFi wants to cover the next 10 million traders, this is the right way.

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