How does DeFi Act as an Economic Cornerstone for Web3?by@duetprotocol
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How does DeFi Act as an Economic Cornerstone for Web3?

by Duet ProtocolApril 5th, 2022
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The rise of Web3 gives us reasons to believe that on-chain transactions will be one of the main factors shaping the future of economics. Web3 demands higher variety, stability and growth of assets, for instance, the “core-assets” in the market requires better availability, transparency and programmability. Duet Protocol utilizes over-collateralization to create the channel that transits value between the stable and the volatile assets, while creating mirrored assets that are risk-neutral.

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The rise of Web3 gives us reasons to believe that on-chain transactions will be one of the main factors shaping the future of economics. Among all the things we can do in Web3, distributed ledger and smart contracts have already supported users to manage their funds through wallets anywhere in the world. Users can lend and borrow cash to short or long assets anonymously, program tokenized real estate assets and zNFT assets, and trade with anyone in the world in a trust-minimized way.

However, Web3 also demands higher variety, stability and growth of assets, for instance, the “core-assets” in the market requires better availability, transparency and programmability. While most of these assets possess these features from a technological perspective, the performance of these assets is rather polarized in a volatile market. For example, the fiat-pegged assets are too stable and the native crypto assets are too volatile. Under such circumstances, investors are forced to take the “Barbell strategy”, in which they can only invest in either highly volatile assets or stable assets, but nothing in between. This is obviously not good for the health of the economy in the long term. In terms of the volatility level, a more uniform distribution of assets on the spectrum is expected by the Web3 economy.

Under the circumstance that there is no neutral asset in between, Duet Protocol thinks that filling the gap between the overly volatile assets and stable assets is the key to facilitate the transition of value to Web3. Duet Protocol utilizes over-collateralization to create the channel that transits value between the stable and the volatile assets, while creating mirrored assets that are risk-neutral. We call those unused inefficient assets “fixed assets”. From the investment point of view, the scenario of managing various kinds of assets from different markets all through a crypto wallet is gradually playing out. A trillion-dollar level market, from Bitcoin to S&P 500, from TSLA to XAU, together with a variety of derivatives can be freely designed and traded 24x7 from all around the world in a unified liquidity pool.

One of DeFi’s innovations is introducing over-collateralization to “solidify” value. In a traditional economic model, over-collateralization is to protect LP’s assets from risks. But from another perspective, it actually is a kind of “value solidification”. Let’s say, Alice buys a piece of code from Bob for 100 USD. The code then has the price of 100 USD. But what is the value of the code? It is hard to say in a volatile market.. Since Alice paid 100USD in cash, a 70% discount would definitely give people a lot more confidence to accept the deal. So it is reasonable to say that the new consensus forms around $30, the solidified value. And based on this new consensus formed with the discount, the solidified value will be much more reliable than its original value. Furthermore, when the medium of solidifying value is code, the code itself becomes valuable, and value then has been transported from the real world to the digital world.

The container of this solidified value is synthetic assets, in Duet protocol it is dAsset. dAsset is pegged to its corresponding risk-neutral asset in the real world, essentially a digital twin of its real-world asset, with all the perks of being on a decentralized platform, like accessible from anywhere through a wallet, infinitely divisible, and being protected by the algorithm. dAsset will be able to mimic all the openly-traded assets, ranging from stock, bond, futures, forex, index funds, goods, etc. And the DAO will be responsible for creating and managing the asset list based on the rules.

In the future, walled-based decentralized identity (which is NOT based on bio) will allow Duet to mark the behavior of users based on their on-chain footage. Such footage can be used to create users’ on-chain profile, assess users’ portfolio management capability, and perform targeted airdrop, etc. In the lending module of duet, the protocol will explore the transition from the over-collateralized lending to on-chain credit-based lending.

Further release of liquidity

Duet believes that DeFi is evolving in the direction of "everything can be staked", which is the biggest difference from existing synthetic protocols and the biggest feature of Duet. First of all, Duet will release the liquid value of real assets off chain with low liquidity and high solidified value, and provide stake assets with solid underlying assets on chain. This will also become a steady cash increment in the crypto market, serving as a cornerstone for the subsequent development of DeFi. Secondly, in order to capture on-chain liquidity, the generation process of dAsset is no longer limited to native tokens, as long as main digital currencies, NFTs and liquidity receipts with tradable and solidified value can be put into the collateralized debt pool (CDP) for creating the required mirror entities.

The generation of liquidity providers’ receipt tokens is an important milestone in DeFi, which plays a foundational role in the improvement of trading experience, the aggregation of liquidity, the guidance of derivative products, and the expansion of interest-bearing methods. Receipt tokens like UniSwap LP or compound deposit receipts lack liquidity as an emerging asset class as well as the low utilization as financial assets.

For example, as a liquidity provider, you have a USDT-BUSD LP receipt token and are optimistic about Apple's stock, you can put the receipt into DUET's CDP to mint dAAPL, and dAAPL will always keep the same price with the AAPL. This will allow you to easily access the returns of AAPL without opening an account from a broker.

Investors are able to allocate assets and manage risk exposure of different assets in one crypto wallet by aggregating decentralized liquidity on-chain.These synthetic assets are upgraded versions of tradfi assets, as blockchain technology supports properties such as availability, divisibility, and programmability. With the increasing adoption of blockchain technology and decentralized finance in a multi-chain environment, fragmentation of liquidity has become an inevitable challenge, where the liquidity of the crypto market is dispersed to different blockchains and different DeFi protocols.

The Design of Duet Protocol: Continuously attract liquidity and improve asset efficiency

Duet Protocol is a synthetic asset protocol built on an asset-collateral. Among the products launched in the first phase, Duet regards single assets such as BTC/USDT/DAI and receipt tokens such as WBNB-BUSD LP as collateral, as well as providing liquidity to users in the form of synthetic stablecoin and other synthetic assets. In the long run, DAO community members (who own DUET/bDUET(bonded DUET) or other governance tools) vote to choose the collateral to include and the synthetic assets to offer.

As shown in the bellowing figure, the Duet protocol aims to build a multi-chain compatible technical and financial infrastructure. In the first phase, Duet Protocol is more like a matching synthetic asset protocol built on a liquidity aggregator which focuses on dUSD. In the second phase, we will evolve into a cross-chain order aggregator that can swap assets frictionlessly.

In short, Duet will first implement a synthetic asset minter based on the yield aggregator, maximizing its returns and releasing additional liquidity to users in a process of automatic compounding. In the short term, receipt token holders can boost their returns with stablecoin minted by Duet Protocol. Users will gain the highest passive returns from on-chain risk-free strategies without losing liquidity. In the long run, our vision is to make Duet Protocol an entry point for liquidity provision, and to reservecapital system for providing liquidity for almost all DeFi protocols, exporting stable assets and providing clearing services, as well as becoming a common infrastructure tool layer among DeFi protocols.

For Duet Protocol, the value capture path of each module is shown in the figure above. When a receipt token is provided, it is held by Duet Yield Enhancer, and the protocol automatically reinvests the liquid assets corresponding to the receipt to maximize returns. When a native token such as ERC 20 is provided to Duet Protocol, it can be used directly as reserve capital for minting synthetic assets, or wrapped in any supported receipt token to generate additional yield. Interest-bearing assets including but not limited to LP assets, PoS staking receipts, deposit receipts, and governance receipts will be gradually supported by the protocol as reserve assets. Other crypto assets such as native tokens on the public chain and ERC 20 tokens will also be supported.

Participants in the system

Participants in Duet Protocol include liquidity providers, market makers and traders. The protocol provides automatic compounding, liquidation, price feeds, and liquidity pools.

Liquidity provider

Liquidity providers in Duet Protocol can play two roles which are liquidity providers and market makers. When a user provides funds to Duet Protocol, which is subsequently provided as liquidity to other DeFi protocols, the user is considered a liquidity provider. Liquidity providers can mint synthetic assets whose value typically does not fluctuate, such as dUSD.

Liquidity is undoubtedly the most important element in the DeFi market, and liquidity providers of Duet Protocol will receive the most efficient incentives for participation. The service of Duet for liquidity include:

● Automatic Compounding: to reinvest receipt token rewards automatically and increases overall returns

● Free credit limit: to mint dUSD interest-free to gain additional exposure of more assets, or spend it directly without selling its position

● Yield from dUSD lending pools: to mint dUSD and deposit in lending pools to earn additional yields on the basis of automatic reshaping

● dUSD AMM Pool Rewards: to mint dUSD and provide liquidity to designated dUSD AMM pools to earn rewards.

Duet Protocol liquidity providers can explore rich practical use cases based on the basic functions provided by the protocol, such as:

● Stable asset dUSD can be obtained by staking receipt assets, and stablecoin can be purchased and injected into LP

● The liquidity incentive is extracted partially and circulated to enhance liquidity;

● to mint dUSD for arbitrage in secondary market

Market Maker

Users are regarded as market makers when they provide capital to mint any synthetic asset that fluctuates in value before offering it to the market. Market makers typically take short positions in the underlying synthetic asset. They are expected to buy back and return synthetic assets to claim their reserve capital. This can lead to losses when asset prices rise, or even liquidations when the liquidation ratio is exceeded.

Duet Protocol provides market makers with:

● Automatic Reinvestment: Automatically reinvests Receipt Token rewards and increases overall returns

● AMM Pool Rewards: Synthetic assets can be used in various mining pools

● Mint to earn rewards: Duet Protocol rewards market makers for taking more risk and earning rewards from Duet swap

● Covering short positions: Traditional synthetic protocols compensate market makers for losses by paying large amounts of tokens. Duet Protocol introduces a novel solution where market makers are able to hedge all short positions by opening long positions in the underlying asset market

Crypto investors

Duet Protocol is able to meet the needs of both crypto investors and traditional investors, and crypto investors can implement various use cases through the protocol:

● Open leveraged positions: to mint dUSD by using crypto assets as collateral and gain additional risk exposure subsequently

● Yield Farming: crypto investors can package their holdings into receipt tokens with Duet and earn rewards typically offered by liquidity providers

● Diversification: to gain exposure of assets with low correlation to crypto markets without moving liquidity out of crypto markets

Traditional investors

Duet protocol will offer traditional investors benefits as following:

● Usability: to access various asset classes with just one crypto wallet

● Severability: to own or divide indivisible assets previously

● Programmability: to program your assets

● Yield Farming: to participate in various mining pools by using synthetic assets or just dUSD

Third-party DeFi protocols

Third-party DeFi protocols are able to increase their TVL (Total Value Locked), improve returns for their liquidity providers, create liquidity and use cases for their existing liquidity providers by partnering with Duet Protocol.

$DUET Token Economics

Another challenge for DeFi protocols is how to attract enduring liquidity in a sustainable way. In Duet Protocol, we decided to distribute our native token --"Duet Bond" in an innovative form in order to guide our community while alleviating massive selling pressure.

DUET is a key facilitator of the Duet system. All services include that minting units, security units, clearing units, and exchange units, will charge users fees which are paid to the Duet Treasury as revenue. Duet DAO will approve various expenditures for farms. Farms set clear goals to develop the ecosystem to increase demand for Duet services and generate more income.

Duet Treasury will repurchase Duet token with remaining income to increase the price of DUET in the long run.