Money Legos DeFi

Tom Howard

September 13, 2019

Money Legos DeFi

If you played with legos as a child, you know that you can combine them in new ways every time.  The same pieces that were a car yesterday can be a space ship today! Each piece can plug into the next, be separated and used in an essentially infinite number of ways.  In systems design, this is called composability.  A composable system provides components that can be chosen and combined to suit a specific purpose.  

Ethereum has been called a “money lego” platform by Ethereum influencer Ryan Sean Adams among others. In the lego world, ETH is the flat piece you can build your world on.   Decentralised Finance (DeFi) products, based in the decentralized stablecoin “DAI” in particular, have been hailed as immensely interchangeable financial products. 

Follow The Instructions?  Never!

If you did play with legos then you know “lego kits” let you build something like an X-Wing or hospital, but you could build whatever you wanted.  A handful of legos allows for a nearly endless combination of tools. In the same spirit that you can lego build a hospital with a laser gun on the roof, you can combine the tools of DeFi together in ways the projects never imagined when they were designed.  The addition of new money legos expands the options for what can be created.

DeFi Lending and the evolution of the “tokenized interest token”

Compound Finance and Fulcrum both use “interest bearing tokens” called cDAI and iDAI, respectively.  This was a revolutionary move because it allowed for those tokens to then be moved around, used as collateral, or even for payments.  Before this, tokens lent on DeFi lending protocols were locked up.

cDAI and iDAI are both examples of one of “legos” that can be plugged in elsewhere.  For example, you can start by connecting your DAI in exchange for cDAI, then you can connect your cDAI onto uniswap.exchange alongside ETH to provide liquidity for the liquidity pools.  The result is that you can earn additional returns by doing so, and in exchange, you receive a token from Uniswap that represents your share of that pools.  That uniswap token can be traded as well.

Legos within legos

These tokenized interest tokens can also be plugged into Set Protocol.  Set allows users to create yet another type of token based on sets of rules.  For example, a Set token could be designed to rebalance automatically depending on if iDAI or cDAI is earning the highest interest.  These sets are themselves new tokens, which can be traded or locked up as collateral.  Sets can also be designed to short assets or contain a basket of assets which have the ability to rebalance based on fluctuating prices.

A new project called rDAI has recently been announced that allows wallets to direct the earned interest to a location of the user’s choosing.  Instead of earning the interest on the balance, the principal remains the same value while the interest is directed elsewhere. One use case for this would be on a platform where DAI is locked up as collateral, such as on a prediction market.  This would allow the DAI to remain at a stable value while the interest is still captured by the owner of the DAI.  

The winner of the ETH Berlin Hackathon built LSDai, which leverages Market Protocol to create a way to long or short interest rates.  Interest rates on lending platforms fluctuate based on the market. LSDai allows people to lock in an interest rate so as to avoid the risk of a drop in the rate, while allows others to speculate and potentially earn more by predicting the direction of the future APR.

This tweet by an Eth developer sums it up well:

https://twitter.com/avsa/status/1165922710146428928

ETH: Provides volatile value

DAI: Uses volatility to provide stability

MKR: Governs the system that produces DAI

cDAI: Get volatile interest by lending your DAI

rDAI: Allows you to tokenise the interest and give it to someone else

LSDAI: Creates stable interests

The Future of Money Legos

Perhaps the most exciting thing about money legos is that no one can predict what they will be combined to create.  Once DeFi starts to encompass traditional securities like the stock market or real-estate, these assets can be mixed.  Imagine a token design that moves from Ethereum to commercial real-estate depending on which is appreciating in value, and sits in an interest-accruing stable iDAI when the market is not favorable for either asset!  


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About the author
Tom Howard

Contributing Author

Tom Howard is the CSO & co-founder of Mosendo, where they’re making peer-to-peer electronic cash a reality. Tom is also a co-founder of DeFi Nation, a thriving DeFi community.

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