Infinity Exchange is a hybrid protocol that runs computations off-chain, and settles transactions on-chain. This enables us to address some of the largest fundamental inefficiencies and flaws preventing continued growth in the first generation of DeFi (“DeFi 1.0”), whilst continuing to offer fully seamless, permissionless transactions. Our first initiative is to build a lending protocol appropriate for institutional usage. We believe Infinity Exchange is taking a giant leap forward into the next generation of DeFi 2.0.
An institutional money markets protocol differs from today’s lending protocols in a few key ways:
Our interest rates are market-driven and not manually determined.
With existing DeFi 1.0 lending protocols, rates are decided by a group of folks getting together every once in a while (not exactly, but kinda). These folks draw two straight lines with interest rates (the y-variable) being a function of the utilization of the available lending pool (the x-variable).
These rates are deterministic. For any relative level of utilization of the lending pool, the interest rate will be exactly the same each, and every time - no matter the market conditions - that is, until such time that the group of folks decide that the two lines, and thus the interest rates, should change.
We designed the Infinity Exchange protocol to offer the theoretical equilibrium state, that is where there is maximum benefit to both lenders and borrowers. From there, we stepped back to account for both fees and market-driven factors (i.e. risk management parameters). If we employed the concept of utilization, it would be 100% utilization 100% of the time.
While existing DeFi 1.0 protocols adopt utilization to dynamically adjust for fluctuating interests of lenders and borrowers, they are designed to be inefficient. The ‘optimal’ utilization lies somewhere between 70-85% depending on the token, but as this utilization can drop to 1% its usefulness decreases as its costs to end-users increases.
From a market-inefficiency perspective, existing DeFi 1.0 lending protocols only achieve 30-50% of total welfare for their participants at their optimal utilization, or conversely produce a 50-70% deadweight loss. By designing around the equilibrium state, Infinity Exchange’s protocol should be able to grow money markets 2x given the increased utilization and reduced friction (and potentially even greater if the benefit is non-linear).
In the diagram above, if we assign some arbitrary numbers to the points of interest, we can ballpark the following:
• Borrower Surplus = 8%
• Lender Surplus = 29%
• Deadweight Loss = 63%
For example, assuming the same borrower demand and lender supply but simply moving from a utilization based DeFi 1.0 protocol to Infinity Exchange’s DeFi 2.0 lending protocol:
• For every $100 of lending supply available in DeFi 1.0 (of which only $61 is actually utilized), lending supplied and utilized on Infinity would see that increase to $145, and
• For every $61 in borrowing demand provided for in DeFi 1.0, borrowing demand on Infinity would see that increase to $145.
This results in a ($145 + 145) / ($100 + $61) = 1.8x increase in the overall volume/economy or a ($145 x 2.60%) / ($100 x 1.80%) = 2.1x increase in interest paid/received.
A good lending protocol would be remiss without addressing the risk management of collateral that enables the lending side of the protocol to function. Infinity Exchange’s focus on building an institutional lending protocol means that we start with the theoretical maximum, and work backwards to what makes sense, today, for permissionless finance.
In principle, our risk management is based on providing multiple avenues for each action. In relation to pricing:
• We can price through Oracles where prices are available;
• We can price through direct means (i.e. from the protocol itself); or
• We can price through dynamic replication (i.e. synthetically reproducing the price through its known/attributable inputs); and
• We can even create our own markets.
In respect of liquidation (or hedging), we can:
• Liquidate an asset directly; or
• Hedge its primary or directional risk through similar/correlated tokens; or
• Hypothetically, sell via CeFi exchanges.
With the Infinity Exchange protocol, we’re completely unconstrained in our ability to price, liquidate, and hedge tokens in several ways (highlighted above). To question the limitations currently in place in DeFi 1.0, consider this example: If Compound could take Aave’s aTokens as collateral, how does Compound liquidate those aTokens if Aave has no liquidity and if there is no functional market to sell aTokens? They can’t, and for this reason, much of DeFi 1.0 is based on a 100% full collateralization model.
Risk Management is a subset of topic 2) Economic Efficiency discussed above in the sense that if you can address risk management properly, you open up the Lending Protocol to dozens of other use-cases. With the Infinity Exchange lending protocol, investors may now be able to implement arbitrage or relative-value trading between lending protocols; and in the future potentially even between yield-based protocols (i.e. LP positions, and staking).
• The Lending Rate = Borrowing Rate
• You can post more Complex asset as collateral, currently: Aave aTokens, Compound cTokens, Uniswap LP Tokens, and Curve LP Tokens. You could then borrow against them, and recursively lever those positions accordingly until risk-neutral returns are aligned, and
• You can farm our token, contribute to, and support the most significant leap DeFi has had in the last 3 years
Today’s…or rather, yesterday’s DeFi 1.0 lending protocols were created and designed in a time when there was uncertainty about demand for money market products and protocol builders had to make certain choices in order to achieve widespread interest, let alone adoption. While DeFi 1.0 succeeded in proving the viability and tremendous market demand for decentralized and permissionless finance, it was also built on an unstable foundation with fundamental flaws.
Our primary objective with Infinity Exchange is to build upon DeFi 1.0 and to enable DeFi 2.0 to accept the trillions of dollars of assets waiting to be tokenized and traded in DeFi (e.g. US Treasuries, money market funds, and commercial paper). The incumbent DeFi 1.0 protocols are grossly insufficient for this purpose. We need to rebuild the lending protocols to operate along the same mechanics/efficiencies as the broader TradFi markets and the only way to do so today is as a hybrid protocol. As crypto evolves, and as bridges between chains improve, we hope to move this initiative entirely on-chain.
We proudly present to you, Infinity Exchange and our first initiative - an Institutional Money Markets Protocol that:
• Maximizes the Money Market industry to it’s theoretical limits
• Enables enterprise-grade risk management to handle a broad, and complex set of financial instruments, and
• Sets the stage for equally-as-significant institutional product development for not just ourselves, but for DeFi as a whole (the creation of DeFi 2.0)
Capital will go to where it is most efficient. We look forward to working with each and every one of you.