In ep. 18 of the Hash Rate podcast, host Mark Jeffery is joined by DEUS Finance founder Lafayette Tabor to discuss how DEUS can connect TradFi and DeFi, and bring the large derivatives market onto the blockchain.
Read our notes below to learn more.
What is DEUS?
It’s hard to count derivatives value as it’s so large and banks often use them to transfer risk.
Until recently, crypto only had spot trading.
TradFi uses debt too much, DeFi has the opposite problem as everything is backed which makes liquidity inefficient.
DEUS wants to find a bilateral balance between TradFi and DeFi.
DEUS provides infrastructure for users to create any market, which attracts TradFi.
Lafa’s twitter banner, showing potential market for DEUS.
DEUS realized if assets are backed by pool of liquidity, everyone has same liquidity and oracle risk.
To solve this, DEUS isolates every trade so you don’t have to trust an oracle, every trade has direct counterparties who are often market makers or brokers.
Lafa believes all of crypto will move to “isolated risk”model instead of pooled liquidity.
Crypto will improve UX first, then efficiency.
How Does DEUS Connect Counterparties?
Lafa began contacting brokers, found 2 parties who will initially provide liquidity to DEUS system.
Brokers can stream orderbook to DEUS system, don’t need to put liquidity anywhere.
When someone shows interest, broker can accept trade and lock collateral.
This system is as efficient as it gets for market makers or brokers.
Team is researching using NFTs to represent synthetic asset positions. This is more efficient than using tokens which are more over-collateralized.
System will work similar to dYdX (onchain perpetuals trading platform); users deposit USDC and trade on non-custodial platform.
DeFi vs TradFi
Counterparties pay for each others wins and losses.
Counterparties or “hedgers” may resell risk to other parties.
TradFi derivative trades often involve 10-12 parties that sell risk to each other.
DEUS system allows hedgers, brokers, market makers to make delta-neutral profits off of traders.
People in crypto are used to 0.3% fees, which is 500x what TradFi is used to.
Tokenomics
If system is efficient, having fees destroys value proposition.
To drive value to DEUS, they decided to create a fractional-backed stable coin (based on FRAX model) called DEI.
Goal was to make DEI 90% backed by USDC, 10% backed by DEUS. (currently 91.2% USDC backed).
Stablecoin transfers motion in economy into stability; with derivatives trading on DEUS there is a lot of motion.
Many people may not trust DEI stablecoin, so DEUS offers a system with fees and a system without fees.
To use system without fees you need to hold a lot of DEUS tokens or use DEI stablecoin to trade.
People can trade using USDC but will have to pay fees.
TradFi market makers who care about efficiency will want to use DEI or DEUS which brings value to DEUS token.
DEUS vs Algo Stablecoins
Following LUNA, UST stablecoin crash, DEUS team spent time researching, believes they identified issue with all algorithmically backed stablecoins.
Stablecoins mint governance token when there is deficit; this is a problem.
Token holders leave system, this creates bank run scenario.
DEUS creating new stablecoin model which includes total cap, instead of initial model that was based on FRAX.
Model involves buying back DEUS at low price and emitting DEUS at high price; won’t emit more DEUS than before.
Tail risk is on stablecoin holders rather than governance token holders.
LUNA failed because they ignored tail risk for LUNA and UST holders; DEUS acknowledges risk for stablecoin holders.
DEUS is changing current ve tokenomics model, making their system similar to GMX (DEX with leveraged perpetuals trading).
Lafa subscribes to Austrian economics ideals; regulation and market interference block innovation and is always a problem.
DEUS V3
V3 will connect the TradFi brokers with DEUS system.
Users will be allowed to trade with real money soon.
Will be limited number of wallets allowed to trade as system is being tested.
Thoughts on Solidly
Roosh, a large whale, is invested and has conviction in DEUS and Solidly.
Roosh worked with 0xDAO developer team to help fix Solidly, as it was flawed and move to ETH.
Curve (stablecoin swap protocol) has many large protocols who own their tokens and control emissions; Solidly can improve on this concept.
Soldily fees are bribes; this mechanism was broken in Solidly V1, has been fixed.
Fees now get bribes, directs votes which direct emissions, creating a flywheel.
Wow this really brings to light the huge potential of Deus.