Aave Flash Loans And Lending Protocol

100% Under Collateralized Loans

Aave is an open-source and non-custodial protocol to earn interest on deposits and borrow assets with a variable or stable interest rate. According to DeFi Pulse, Aave holds $16 million in total locked value. Founder Stani Kulechov joins us to discuss flash loans, stable interest, and protocol composability.

Aave Lending

In 2017, Aave launched ETHLend, a peer-to-peer order matching lending platform. In January of this year, the Aave platform went live, allowing lenders to earn interest on 15+ listed ethereum tokens. 

aTokens represent underlying assets under management on Aave. When a lender deposits funds, they receive an equivalent amount of aTokens. Interest is also paid in aTokens directly to the lender’s address and in real-time. Once a lender withdraws their funds, aTokens are converted back to the underlying asset. aTokens make it easier to asses the amount of interest earned by holding a stable value.

Aave Borrowing

Aave users can borrow crypto-backed loans. Aave also offers a stable interest rate and allows borrowers to swap their rates between variable or stable on a per-block basis. A stable rate reduces the risk of liquidation by locking borrowers into a predefined rate. Only two conditions can change the stable rate including when (1) the borrowing rate is lower than the deposit rate and (2) the new stable rate is cheaper than the current stable rate.

A loan-to-value (LTV) ratio is the percentage of funds that can be borrowed against collateral. Ethereum currently has an LTV of 80%. If ethereum is worth $100, users can borrow up to 80 DAI for every 1 ETH. The most important factors in determining the LTV are liquidity and volatility. Listed tokens must have enough volume to liquidate. Volatile tokens are at higher risk of liquidation. Aave recently dropped the LTV of MKR due to fear of a governance attack on flash loans. 

Flash Loans

The current state of DeFi has been driven by total locked value, a benchmark for assets under management. However, it’s not efficient to store assets on smart contracts. In an attempt to reuse staked collateral and provide additional products for borrowers, Aave introduced flash loans. With flash loans, borrowers can take advantage of 100% undercollateralized loans with interest rates as low as 0.09% per flash. The only caveat is that flash loans must be returned by the next ethereum block, which is roughly 13 seconds. If it’s determined that a flash loan won’t be returned by the next block, the loan will be reverted. However, borrowers can make multiple transactions within a single block. The recent bZx exploit showed what’s possible with flash loans. Kulechov explained that even more is possible, including:

  1. Arbitrage – borrowers can execute market arbitrage across multiple exchanges.

  2. Collateral Swap – borrowers can swap the underlying collateral on their Maker CDP.

  3. Refinancing – borrowers can close out a high-interest loan on one protocol and open a lower interest loan on another protocol.

Flash loans provide diversified income streams for depositors and attract more yield to other protocols. Developers can use Aave’s simple APIs and open-source code to implement flash loans into their applications.

Gasless Ethereum Transactions With Biconomy Relayer Network

Biconomy “Gasless” Transactions

Biconomy is a relayer infrastructure network and transaction platform that enables developers to build applications easily and reduce friction between applications built on the blockchain and end-users. Ahmed Al-Balaghi is the co-founder of Biconomy, is an advisor to the Matic network, and is the host of Encrypted, the largest blockchain podcast in the Middle East and North Africa (MENA).

Meta Transactions

In a relayer infrastructure network, developers can apply meta or “gasless” transactions. In a meta transaction, the application developer or a third party will cover the gas fees to enable seamless UX. These transactions can also be activated on layer 2 solutions for even more scalability. Platforms like NEO, Dharma, Origin, and Unstoppable Domains have built an in-house relayer network to enable meta transactions. However, it is very time-consuming and resource-intensive to build out a relayer network.

Biconomy is providing relayer-as-a-service infrastructure for applications. A single relayer can relay transactions for multiple projects. Biconomy is also blockchain agnostic and plans to enable a trustless relayer model over time. A relayer is an address that signs and relays the transaction on behalf of the user. Unlike nodes, relayers are off-chain and only require enough ETH to cover transaction costs. Application developers can choose to absorb gas fees or have users pay gas in a different token.

  1. Dapp developers can remove gas fees from the user completely. Relayers would pay the gas fees in ETH and dapp developers would pay Biconomy.

  2. Users can pay gas fees in any ERC20 token such as DAI. Relayers would pay the gas fees in ETH. Dapp developers would receive the token fees from users but would pay Biconomy.

Native Meta Transactions

With meta transactions, a transaction is signed by the relayer and sent to the receiving contract via a proxy. However, creating a proxy contract for each and every user is an expensive process. Native Meta Transactions on Biconomy directly relay user signed transactions to the receiving contract and remove the need for a proxy contract. Native meta transactions only require the user account address, removing a dependency on contract wallets.

Orchid Protocol Decentralized VPN

Understanding Decentralized VPNs

Orchid is building open source tools for custom VPN configurations and privacy services. Orchid CEO Steven Waterhouse talks about the vulnerabilities of today’s VPNs, the purpose of OXT, and shares his experience with being SIM swapped. 

Orchid Decentralized VPN

Orchid is a decentralized VPN that enables users to connect to multiple bandwidth providers. The network is permissionless allowing anyone to operate a node and receive payment in Orchid’s native ethereum-based token OXT. Several VPN companies have also onboarded as network nodes on the platform. Orchid’s system-wide VPN is compatible with any browser and mobile device, including android and Apple test flight.

Probabilistic Nanopayments

To support the throughput required for real-time payments between Orchid users and bandwidth providers, Orchid built an advanced payment architecture known as probabilistic nanopayments. Orchid users send payments through packets, units of data that are routed between an origin and a destination on the web. However, only one payment sent through the packets holds value while the rest are not worth anything on a probabilistic basis. This can be compared to a lottery, where the winning ticket is worth a lot, but the expected value over time is the same as if each packet was equally valued. A transaction fee is only incurred on the “winning” nanopayment. Providers are then able to capture the packets and redeem the winning ticket for payment.

The OXT token is used as a form of payment in the Orchid ecosystem. Users connect to the Orchid App and lock up OXT into an Ethereum smart contract. The smart contract then sends nanopayments to any provider on the network that is accepting payments for service. Providers can then redeem the winning ticket as payment via an on-chain transaction. Over time, the value transmitted on-chain will match the value represented in the probabilistic nanopayments. Providers stake OXT to operate nodes on the network.

Maintaining Privacy

Users can string together or “hop” multiple VPN providers in order to make their IP connection more private. Orchid nanopayments are pseudonymous by the nature of many payments being sent to multiple bandwidth providers. Users can also build protection against timing attacks by using a different ethereum address connected to each hop.

Kyber Network on-chain Token Swaps and Decentralized Liquidity Pool

A protocol for instant token exchange with high liquidity.

Kyber Network is a liquidity protocol that allows traders to exchange and convert tokens. Developers can integrate Kyber into crypto wallets and DeFi applications. Kyber Network’s head of growth Deniz Omer joins me to discuss decentralized liquidity, challenges of DEXs and his thoughts on the recent bZx complex market arbitrage.

Centralized Exchanges

Exchanges like Coinbase, Binance, and OKEX use an order book of buyers and sellers to determine the market price. Although centralized exchanges have a friendlier onboarding process, custody remains to be the largest drawback. There is no shortage of hacks, lost funds, and frozen accounts such as the case with Mt. Gox, Quadriga, and Einstein. Decentralized exchanges are known for being clunky but they have come a long way with UX improvements. Kyber Network is working to bring seamless dapp integrations and access to decentralized liquidity.

Decentralized Liquidity

In 2018, Kyber Network launched what is now known as KyberSwap, a DEX for swapping and trading tokens. Later that year, wallet providers ImToken, MEW, and TrustWallet integrated with Kyber. In 2019, Kyber saw the rise of DeFi with 30+ dapp integrations.

Kyber’s liquidity protocol connects takers with makers. Liquidity providers such as KyberSwap, Uniswap, OASIS, and Bancor compete to provide the best price for any given token pair. Takers from apps like Fulcrum, InstaDapp, and Argent are connected to the pool of liquidity providers. When a trade is executed, a smart contract selects the best priced token pair available from the pool. 

Applications can integrate the Kyber widget to enable token swaps, APIs to make calls and trades, or smart contracts to achieve seamless UX.

bZx Fulcrum “Exploit”

During the Ethereum Denver 2020 Buidlathon, an individual was able to game bZx’s Fulcrum trading platform and left with a $350k profit. In a tweet from KyberStatsBot where Denis noticed a single trade over $1.5 million passing through Kyber Network.

The trade includes DyDx, Compound, Uniswap, Fulcrum, and Kyber. According to Reddit, an individual took out a flash loan of 10k ETH from DyDx and moved half to Compound and half to Fulcrum. He then opened a large short on BTC/WBTC on Fulcrum with 5k ETH, causing the ETH lending supply rate to spike on Fulcrum. Simultaneously, he borrowed 112 WBTC on Compound and sold it on Uniswap to push down the price of WBTC, resulting in a profit from the short on Fulcrum. Lastly, he paid back the 10k ETH flash loan to DyDx and was left with about $350k in profit. Deniz describes the situation as price manipulation rather than a hack.

The center of the exploit is bZx’s price oracle. Some believe bZx used a single price feed from Uniswap, which uses automated market makers to provide liquidity based on a curve formula. A major drawback of this is increased slippage with larger volumes. According to Deniz, a “DEX bridge” provides the market price for some decentralized exchanges. Deniz says on-chain price oracles can be manipulated and Kyber Network is very open about telling developers to not use Kyber or Uniswap as an independent price oracle. Kyber also provides a feature for slippage, enabling partners to revert transactions that exceed the set slippage percentage.

Cross-Chain Liquidity

Kyber believes that it’s highly unlikely that Ethereum will become a single dominant force and accrue all the value within the blockchain space. In an effort to look for blockchains with different strengths, Kyber has dabbled into non-ethereum blockchains by building a bridge between ETH and EOS. As a proof of concept, the Waterloo Bridge enables users to lock up funds from one chain and issue them on the other chain.

Jan. 23rd: World Economic Forum Develops CBDC Framework

This Week in Crypto

Quick Take

  • Amun launched “21Shares Short Bitcoin ETP (SBTC),” enabling traders to short bitcoin.

  • BitMEX announced the launch of an XRP-USD quanto swap.

  • Gemini passed the SOC type 2 security compliance examination conducted by Deloitte.

  • Pornhub adds support for Tether (USDT) via the TRONlink wallet.

  • The World Economic Forum developed a framework for central bank digital currencies (CBDCs).

Listen to Podcast

Amun Launches Inverse Bitcoin ETP

Digital asset issuer Amun has listed a new Inverse Bitcoin Exchange Traded Product (ETP) on the Swiss Stock Exchange (SIX). The so-called 21Shares Short Bitcoin ETP (SBTC), tracks bitcoin’s price movements inversely, enabling traders to short bitcoin.

When compared to entering short trade positions on bitcoin via crypto derivatives, Amun’s Short Bitcoin ETP does not require loaned capital. Positions also reset at the end of each trading day and performance is not rolled over to the next day.

Amun holds over $50 million in assets under management and has 10 crypto-based ETP products on the Swiss Stock Exchange (SIX). The company recently received approval from the Swedish Financial Supervisory Authority (SFSA) to extend its offering into the EU, in which it plans to add listings on least two European exchanges by end of 2020.

BitMex To Launch XRP Swaps

BitMEX has announced the launch of an XRP-USD quanto swap, a derivative in which the underlying asset is denominated in one currency, but the instrument itself is settled in another currency at some rate. When the contract expires, the notional amount gets settled in cash at a pre-defined exchange rate. This kind of swap can be beneficial for speculators in search of liquidity.

The move coincides with the delisting of existing BitMEX UP and DOWN contracts. A DOWN contract allows buyers of the contract to participate in the potential downside of the underlying instrument and a UP contract allows sellers of the contract to participate in the potential upside of the underlying instrument. BitMEX says the contract details will be available on Testnet beginning Friday, with a launch date set for Feb. 5th.

Gemini Passes Security Exam By Deloitte

Gemini has passed a second-level security compliance test conducted by Deloitte. Gemini claims it is the world’s first crypto exchange and custodian to have completed the SOC Type 2 examination. The exchange passed the Type 1 examination in January 2019.

Yusuf Hussain, head of risk at Gemini, stated “We believe this kind of assurance, in addition to other safeguards we have implemented, such as digital asset insurance, helps protect our customer’s data and cryptocurrency,”

Hussain added to say that Gemini will be completing a SOC Type 2 examination on an annual basis. The System and Organization Controls (SOC) examinations asses an organization’s cybersecurity risk management and were first introduced in April 2017 by The American Institute of Certified Public Accountants (AICPA).

WEF Issues CBDC Framework 

The World Economic Forum has developed a framework for central bank digital currencies (CBDCs) in an attempt to help policy-makers understand whether deploying a CBDC would be advantageous. The CBDC Policy‑Maker Toolkit provides information on retail, wholesale, cross-border and “hybrid” CBDCs, for all sizes of emerging and developed countries.

The WEF said it neither advocates nor is against the implementation of CBDC in any country. However, it wants to help central banks to “confidently” evaluate whether CBDC is the right fit for their economy. The WEF collaborated with regulators, central bank researchers, international organizations, and financial institutions to develop the framework.

Pornhub Adds Tether To Payment Options

PornHub added Tether (USDT) to its payment options for performers via the TRONlink wallet. TRON first became a partner in June 2018, when Pornhub started accepting its TRX token for buying content.

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