Traditional Finance versus Crypto-Native?
Crypto versus traditional finance (TradFi) - we used to think that it was us versus them, and that one side will be left standing after the dust settles. Teams that built projects in the past, used to be comprised only of crypto-natives. TradFi used to look down on crypto-native institutions, crypto culture, and stigmatized the asset class. Crypto-native institutions believed that traditional finance did not know any better, and that there was no need for the involvement of TradFi in the crypto world.
The Convergence of Traditional Finance and Crypto Worlds
However, all of us at GRVT believe that we’ve come a long way since then. The space looks massively different from the past - instead of either side coming out as the victor, we have observed a convergence of the two worlds.
Convergence in Projects
When we look at the profile of teams building projects today, we now see a mix of professionals from the crypto-native side and traditional tech/tradfi. Crypto-natives offer their knowledge of ecosystems with each of its strengths and weaknesses, technical expertise in blockchain technology and smart contracts, as well as strong cultural understanding of the space that no one else can offer. On the other hand, executives from traditional tech and tradfi bring their wealth of experience from their relevant fields, as well as operational processes and frameworks, to elevate professionalism and sophistication of their project.
Convergence in Institutions
When looking at what used to be known as ‘crypto-native institutions’ such as QCP Capital, GSR, and the like, such institutions have evolved to look like tradfi institutions in terms of their structure, talent, processes, and practices.
Tradfi institutions, on the other hand, are trying to get involved in crypto as well, with the clearest example in the form of Bitcoin Spot ETFs. Institutions such as Blackrock, VanEck, ARK, amongst many others, are showing clear signs of getting their hands wet. In fact, such institutions are already seen collaborating with ‘crypto-native institutions’ for Ethereum ETFs - ARK and 21Shares, Invesco and Galaxy, etc.
GRVT epitomizes the Convergence of these Two Worlds
As such, it is apparent that there is no single winner here. Instead, we are living in a world where both sides win. Perhaps someday, labels of tradfi and crypto-native will be no more, and these organizations will merely be labeled as ‘institutions’ in the future, just as how it is a given that every business is more or less an ‘internet business’ today.
Just like many of the institutions that are backing and advising us (Matrix Partners, Delphi Digital, Susquehanna Investment Group, CMS Holdings, Hack VC, QCP Capital, amongst others), at GRVT, we epitomize the convergence of these two worlds, when looking at the profile of our talent, and the design & features of our offerings. As such, we believe that GRVT will lead the charge in this new frontier, where the two worlds have collided.
In order for us to give grounds for our motivations for building GRVT, let’s take a look at the story of finance in crypto and how we got here.
DeFi Summers: Periods of Massive Growth and Innovation
DeFi Summer 1.0: 2020
Crypto-natives often look fondly back at 2020, as a glorious era in the space. Although many DeFi primitives (Uniswap, Compound, Aave, Synthetix, Bancor etc.) had already existed before 2020, 2020 was a pivotal year for the sector, with a surge of innovation, capital, and returns for many that were involved. Thus, the term ‘Defi Summer’ was coined. (pun intended)
In terms of capital, TVL within the DeFi sector surged from $700m in early-2020, to a whopping $15b within the year:
Chart 1: TVL across all chains and protocols, 2019-2020 (Source: DefiLlama)
When it came to innovation in the first DeFi summer, we witnessed many breakthroughs and the expansion of innovation in many financial primitives/DeFi building blocks - from borrow / lending venues protocols, to DEXes.
The Revolutionization of Borrow / Lending Protocols and DEXes through Yield Farming / Liquidity Mining and Governance
In the realm of borrow / lending protocols during Defi Summer 1.0, Compound popularized the concept of yield farming / liquidity mining in May 2020 - one that was taken from Synthetix back in 2019. Through liquidity mining, yield farmers who borrowed and lent their assets on the protocol, were able earn boosted yield through the emission of Compound’s native token, $COMP.
Despite the protocol taking a page out of Synthetix’s book, Compound was also revolutionary in its own right, by introducing the concept of governance. For the very first time, token holders were able to propose and vote on changes to the protocol. Just as how large equity holders of companies in the traditional world would typically get a seat on the board, and thereby the authority to influence the direction of an organization, Compound revolutionized the concept of governance not only within the crypto space given its level of decentralization, but also outside of it - a true sense of ownership, in a democratized and decentralized manner. With this new concept and style of governance, prominent borrow / lending protocols such as Aave and Curve followed suit. Today, governance functions implemented within a token’s design is not an uncommon sight.
This gave rise to Yearn Finance in early-2020, which elevated the popularity of (i) yield farming / liquidity mining and (ii) governance. Their native token, $YFI, surged from $6 to over $30,000 within a span of two months. Just as Compound inspired the birth of Yearn, Yearn served as the inspiration for the birth of two Yearn iterations, Ampleforth and Yam.
DEXes: Sushiswap, Vampire Attacks, and ‘Food Protocols’
On the DEX side of things, Uniswap was the dominant DEX even back then. However, a new rival arose - the creation of Sushiswap. Sushiswap introduced the concept of vampire attacks, with the objective of funneling liquidity away from the dominant DEX, Uniswap. Liquidity providers on the DEX were incentivized with $SUSHI tokens as rewards, which allowed the new DEX to attract up to 1b in liquidity.
With the success of Sushiswap, the leading incumbent Uniswap, subsequently responded with a 1-2 punch combination of its own. Firstly, they rewarded its users with a retrospective airdrop of its native token, $UNI. Uniswap also started its liquidity mining program of its own, which attracted up to 2b in liquidity, most of which was taken back from its then rival, Sushiswap. Safe to say, Uniswap’s comeback was extremely successful in quelling the vampire attack by Sushiswap. Regardless, the massive success of Sushiswap (and Yam as well, in the borrow/lending sector), gave rise to other protocols named after different foods - Hotdog, Pasta, etc.
Unfortunately, all good things had to come to an end, as Defi Summer came to a close in September/October 2020 - yield farming/liquidity mining with yield enhanced by protocols minting more of their native tokens naturally made their tokens more inflationary. With native tokens becoming more inflationary and therefore worth less, this made yield farming/liquidity mining less attractive for users, ultimately causing a collapse in the DeFi sector, and a slowdown in its overall growth.
Defi Summer 2.0: 2021
Despite the first Defi Summer coming to an end, Bitcoin broke its 2017 all-time high in end-2020, breathing hope into the Defi segment. Many may have the view that the star segment for 2021 was NFTs. However, the overarching bull run in early-2021 allowed the DeFi sector to pick up where it left off, kicking off Defi Summer 2.0 in 2021, where the ~15b in TVL grew to ~$58.4b by September 2022. The growth of DeFi in 2021 was so explosive, that it made DeFi Summer in 2020 look like merely a blip.
Chart 2: TVL across all chains and protocols, 2020-2021 (Source: DefiLlama)
At the same time, there were many significant innovations/mechanisms in the DeFi sector in 2021 as well, one of which (veCRV) remains relevant till today.
Borrow / Lending: The Dawn of ve Tokenomics
In the field of borrow / lending protocols, ve tokenomics, was popularized by Curve in 2021. To explain it briefly, users could lock their $CRV tokens (Curve’s governance token), for various periods ranging from one week to four years, and obtain $veCRV. Assuming that Person A and Person B locked up the same amount of $CRV, the person that locked their $CRV for a longer period would have a higher amount of voting power in the form of $veCRV. This in turn promotes long-term engagement with the protocol. With $veCRV, holders can increase their staking rewards by locking their tokens, and at the same time, decide on which liquidity pools receive higher $CRV token emissions. With this move, it sparked the dawn of what many recall as the “Curve Wars”.
The Curve Wars
In the Curve Wars, we saw competing protocols such as Convex, Yearn, Abracadabra, Stake DAO, and others, staking their $CRV to obtain as much $veCRV as possible, to accumulate the most voting and decision-making rights in the Curve ecosystem. The protocol that had the most decision-making powers on Curve, could then dictate how Curve’s rewards are distributed, through determining the amount of $CRV rewards allotted to each pool on Curve - ie. the ability to influence gauge weights. Hence, it was paramount for a competing protocol to influence their token holders with $CRV emissions, to deploy liquidity in pools with their native token, so as to mitigate potential sell-pressure of their native token.
Convex was a notable leader, and played a huge role in the Curve Wars - they managed to poach $CRV holders through the attractive incentives they provided. Convex users were able to stake their $CRV, to obtain $crvCVX in return (which is tradable, unlike $veCRV), while receiving additional $CRV tokens and trading fees from Curve. Today, ve tokenomics inspired by $veCRV are still very much relevant, and implemented in many tokens’ designs.
Climate-related Projects (ReFi)
Apart from ve tokenomics in Defi Summer 2.0 in 2021, there were also other innovations in DeFi that arose, which came with its respective strengths and weaknesses.
Climate-related projects (ReFi) such as klimaDAO and Toucan came about, creating carbon-backed tokens of varying designs, which aim to solve issues surrounding liquidity, transparency and efficiency.
Rebasing / Protocol Owned Liquidity and Recursive Borrowing
Protocols that championed concepts of protocol owned liquidity, range bound stability and rebasing, also were the center of attention, the most prominent one being OlympusDAO, with its reserve currency token.
The protocol created $OHM, where its value was backed by a treasury comprising of a basket of crypto assets, namely, $DAI, $FRAX, $wETH, amongst others, where at its minimum, each $OHM was to be equivalent to $1. The OlympusDAO treasury allows users to buy bonds (ie. $OHM at a discount, by putting in a currency that the treasury needs, such as $wETH or even LP tokens). Bonding essentially allowed the Olympus treasury to earn profits and mint more $OHM if its price was over $1, while bonders stood to earn profits as well. The protocol also enabled staking of $OHM, which allowed stakers to earn even more $OHM. With these actions of bonding and staking, it alleviated sell pressure of $OHM, although supply of the token increases. Since bonding and staking enabled the over-collateralization of $OHM, it allowed the protocol to mint more $OHM for distribution to stakers - as such, most of the time Olympus held majority of $OHM’s liquidity. In the event that $OHM was under-collateralized, the protocol would buy-back $OHM. Because the protocol owned most of $OHM’s liquidity, they were able to earn majority of trading fees in the form of LP rewards.
Due to this design, the game-theory meme of (3,3) permeated crypto-culture, where the most utilitarian outcome would be for all actors in the protocol to stake their $OHM, while the worst outcome would be for all actors in the protocol to sell their $OHM. The protocol provided assurance to $OHM holders, as protocol-led buybacks were promised, in the event that $OHM sank below its floor price. We all know how this eventually panned out, where large sales of the token triggered cascading liquidations, as traders realized their profits, and breaking the strength of (3,3) in the community. Nevertheless, concepts brought about by OlympusDAO brought about new ways about designs in DeFi, and also inspired the creation of an Olympus fork on Avalanche, Wonderland.
Many DeFi users recall the Frog Nation in 2021, composed of community members from Wonderland, Abracadabra and Popsicle. The $OHM equivalent in Wonderland is known as $TIME. Abracadabra had two tokens, $MIM, a stablecoin backed by interest-bearing tokens, and $SPELL, its governance token with incentives and revenue-sharing benefits.
With the synergies of these protocols in play, specifically Wonderland and Abracadabra, it brought about the concept of recursive borrowing. $TIME stakers used their $MEMO earned from staking $TIME, to borrow $MIM. They then used the borrowed $MIM to purchase more $MEMO, and repeated this loop, creating a highly leveraged borrowing position. Ultimately, a combination of (i) cascading liquidations ($MEMO’s price drop that triggered its selling to pay off $MIM debts) and (ii) the doxxing of Wonderland’s treasury manager, 0xsifu, as Michael Patryn (Co-Founder of the fraudulent QuadrigaCX), catalyzed an overall loss in confidence of the ecosystem, leading to its demise.
DeFi Summer 2.0 peaked in November 2021 - with the rout of cyber exploits, and rug pulls, amidst overarching macroeconomic conditions of inflation and the fear of interest rate hikes and falling prices of crypto assets, it marked the end of DeFi Summer 2.0 and the bull market.
Innovations in DeFi Derivatives over the years
Throughout DeFi Summer 2.0 in 2021, and even during the bear market of 2022 which was wrought with crises in the space, there were many innovative breakthroughs and advancements in derivatives in the DeFi sector.
Perpetuals were commonplace in CEXes, but were popularized in the DeFi sector by pioneers such as dYdX, Perpetual Protocol, Synthetix, UMA, Hegic and more, since 2020. In 2022, GMX took perpetuals to another level, and gained much popularity through its revenue-share mechanism that was embedded within its token design.
A very notable development in crypto options was the introduction of Defi Options Vaults (DOVs) in 2021, invented by QCP Capital, through their advisory roles and investment into Ribbon Finance, and incubation of Thetanuts. DOVs are an elegant mechanism that facilitates the trading and settlement of crypto options in a trustless and permissionless manner. Apart from the majors, it also provided options exposure to altcoin options, which were not offered on options CEXes at the time. Another unique offering that DOVs introduced, was a concept of organic yield that is derived from the volatility of the underlying asset, instead of inorganic and inflationary means of yield through the minting and distribution of native tokens.
With the birth of pioneers such as Thetatnuts and Ribbon Finance, we saw other protocols such as Friktion and Katana being created, facilitating the options markets in other ecosystems outside of Ethereum. From the newly created options markets in DeFi, catalyzed the birth of early structured products in the market by protocols such as StakeDAO, Lyra, Dopex, amongst others.
In 2022, more radical developments in DeFi options arose - Perpetual Options (also known as Everlasting Options) were introduced, through protocols like Panoptic. Perpetual options are an exotic and rare instrument, with no expiry date and no restrictions on when it can be exercised.
In the same year, we also witnessed more novel ideas - the realization of optionality in an LP position, facilitated founders to design solutions for users who did not have the ‘know-how’ to rebalance their LP positions, assisting them in avoiding impermanent loss, and turning it into impermanent gains.
Drawbacks of DeFi over the years
It is safe to say that both DeFi summers fostered democratization, were financial equalizers for the common user, and played pivotal roles in reshaping the way the world thought about finance and how it could be conducted. Despite the breakthroughs in innovation across the two years, attracting interest and curiosity, along with its explosive growth, came with its limitations and downsides, and hence, skepticism from regulators.
At the height of DeFi in 2020 and 2021, issues of scalability were brought to light. Given that the majority of DeFi activity was on Ethereum, the network experienced high network congestion, leading to high gas fees and failed transactions - a very suboptimal experience for many.
According to Crypto.com Research, there was over $500m lost in DeFi hacks, between late-2020 and mid-2021, namely through oracle and smart contract vulnerabilities.
The manipulation of oracles was once the most common attack vector in DeFi, where attackers manipulate asset price data on DEXes in order to buy or sell an asset, in which its price is deviant from its fair market value. Another form of attack via oracle manipulation are flash loans, requiring a large amount of capital to exploit vulnerable smart contracts - through a flash loan, attackers could borrow as much as they desired, without any capital as collateral, and could repay that loan after executing arbitrage trades.
Smart Contract Vulnerability:
A common type of attack that exploits vulnerable smart contracts are reentrancy attacks. Smart contracts can be drained when an execution is interrupted before its internal state is updated, re-entered, while both runs are completed without any errors during execution, allowing the exploiter to withdraw as much as they wish, until there are no more assets left. This can be done via external call functions (invoking a function in another smart contract from the current contract, where reentrancy attacks occur when the external contract reenters the calling contract before state changes are finalized, allowing for potential manipulation), or internal call functions (invoking a function within the same smart contract, where reentrancy attacks can happen when the called function recursively calls back into itself or other functions within the contract, potentially leading to unexpected state changes).
There are various ways in which founders are able to conduct rugpulls. Some had raised funds for their project via a pre-sale by manually sending their assets to an address, while others had created smart contracts for users to deploy their assets in a liquidity pool comprising of their native token and a recognized asset such as ETH or a stablecoin. In both cases, the founders would run off with users’ assets while citing poor excuses or none at all, or lock the smart contract and drain the liquidity pool, respectively.
Protocol Design - ‘ponzinomics’, (3,3) breakdowns, and absurd APYs (to name a few):
The benefits that new and innovative protocol designs brought to the sector, introduced gaps in these mechanisms as well. (3,3) breakdowns in protocols that highly relied on it, as well as absurd APYs provided by protocols through highly inflationary printing of their native token (eg.Snowdog on Avalanche as seen below), would eventually lead to the demise of the protocol sooner or later, once any of these mechanisms break down.
GRVT: Internalizing lessons learnt over the years, and leading the charge in a new Era
Fast forward to 2023, the space has changed massively, given the lessons learnt over DeFi Summers in 2020 and 2021, as well as the many CeFi-related crises in 2022. The GRVT Team, comprising of professionals with backgrounds in CeFi and crypto, have watched all of this unfold over the years, and have internalized lessons that came with it, which inspired us to embed designs, mechanisms and processes to prevent such mishaps from occurring on our platform.
The GRVT Team decided to build on zkSync, the dominant Layer-2 protocol that scales Ethereum with cutting-edge ZK tech. We had decided to leverage zkSync’s Hyperchains, due to the need for high throughput and low latency. With our own private app-chain/Hyperchain, custom sequencing logic is enabled, which allows for deterministically clear trades and achieves higher TPS and lower latency trade settlement and clearing, achieving speeds of up to 600,000 trades per second with less than 2 milliseconds of latency. Hyperchains also allow us to scale our underlying infrastructure horizontally, across multiple interoperable Hyperchains, allowing traditional market markers to provide liquidity as they would on a CEX. Furthermore, gas-less trading is enabled, as we are able to take advantage of Hyperchain’s remarkably low gas fees. Lastly, we enable scalability through the enhancement of accessibility to a wide offering of wallet providers.
The technology of zkSync and its Hyperchains allow users to maintain data privacy of sensitive information, with a UX akin to CeFi, while allowing users to retain self-custody of their assets. While the orderbook is run off-chain for seamless trading experiences, actual payments are executed on-chain, providing unmatched security and transparency. Through zkSync’s Hyperchains, we are able to handle computationally intensive tasks such as complex business logic and risk scanning for derivatives trading, all while ensuring decentralization to maintain transparent and equitable trading conditions.
GRVT operates outside an AMM model, allowing traded prices to be solely determined by participating traders, but mark price manipulation poses a risk of unfair liquidations. To address this, GRVT collaborates with BlockScholes, an external oracle provider, ensuring mark prices are externally signed and immune to unilateral manipulation. These prices are aggregated from top centralized exchanges, and though not manipulation-proof, it demands significant resources. For Options and Futures pricing, which involves low-liquidity instruments, prices are derived through aggregation methods. Options pricing requires manipulating numerous instruments on other exchanges to impact the arbitrage-free Vol Surface, significantly raising the capital requirement. Similarly, Futures pricing involves manipulating multiple futures contracts on other exchanges to influence the forward curve used as the mark price.
The GRVT team is fully-doxxed, with former experience from illustrious institutions such as Goldman Sachs, Crypto.com, DBS Bank, GovTech Singapore, Meta, and more. We are also trusted by many prestigious organizations who have backed us as investors and/or advisors, namely, Matrix Partners, Delphi Digital, Susquehanna International Group, Hack VC, CMS Holdings, QCP Capital, and more.
Through the flaws in protocol designs over the years, we have taken the best aspects from CeFi and DeFi, and abstracted away their respective disadvantages, to create the world’s first hybrid exchange (HEX), as shown below:
We have brought these solutions to the table, creating GRVT as a culmination of lessons learnt over the years, from the worlds of DeFi and CeFi. Armed with our experience and the support from our investors and advisors, we stand at the bleeding edge of technology and at a time where the worlds of crypto and traditional finance have collided. Join us as we lead the charge in this new era.