As a liquidity management solution, Everbloom aims to provide an automated and optimised software framework that is able to capture sustainable yield on blue chip digital assets. We use Ethereum as our core infrastructure layer. As the most developed and mature Decentralized Finance ecosystem, Ethereum has the deepest liquidity, widest diversity of DeFi protocols and a native yield-generating process in the form of ETH 2.0 Proof-of-Stake Staking.&nbsp;&nbsp;<h2 style="margin-left:0px;">What is ETH 2.0 Proof-of-Stake Staking?</h2>In September 2022, the Ethereum blockchain switched from Proof-of-Work to Proof-of-Stake as a consensus model. In Proof-of-Work, specialised hardware operators (miners) run a software client that solves small mathematical puzzles in an attempt to find a valid solution which results in the appending of a new block to the blockchain. The miner is rewarded with new tokens as an incentive to participate honestly in this lottery. Proof-of-Work is very secure, especially once a certain size of computing power is reached. But it also has some significant drawbacks, most notably the fact that the process is very energy-intensive. For a system like Bitcoin, in which decentralisation, censorship-resilience, stability and security are of primal importance and where compromises can not be made, Proof-of-Work is most likely by far the best choice for its consensus algorithm. For Ethereum, which has different objectives than Bitcoin and which needs a more flexible consensus model if it wants to implement its scaling roadmap, the choice was made many years ago to switch to Proof-of-Stake. That change came into effect last September.Proof-of-Stake is fundamentally different from Proof-of-Work as it doesn’t require computationally expensive calculations to participate. Instead of energy expenditure, Proof-of-Stake uses ETH token deposits as input for its process. Creating blocks is done by an ETH 2.0 Validator, which is a general purpose hardware system running validator software that requires a certain number of ETH to be pledged. The ETH locked up in the Validator is called the ‘Stake’. If the validator contributes to network operation in a constructive and positive way, he is rewarded with fees and block rewards not unlike what is given as an incentive in a Proof-of-Work model. But if the validator submits invalid blocks that are not compliant with the network rules or is not sufficiently available because of downtime, then the&nbsp; ‘Stake’ can be ‘slashed’, resulting in a loss of ETH placed within the validator. Similarly to Proof-of-Work, positive contribution to a healthy network is encouraged and rewarded while undesirable behaviour is punished. Proof-of-Stake doesn’t require large amounts of energy but its security properties are less studied, tested and understood. While the jury is not completely out on which consensus model is the best, both can work and have different effects on the network they attempt to secure.&nbsp;Another advantage of Proof-of-Stake as its being used right now in the Ethereum network is that it democratises block production. While Proof-of-Work has some centralising forces for miners, like economies of scale and geographical differences in energy prices, Proof-of-Stake enables the common user to participate in network security. This is partly theoretical, as in practice running a validator is non-trivial. The Ethereum blockchain size is multiple terabytes in size which needs to be stored on the hard drive of the validator. There is also quite a bit of network traffic and network latency needs to be low enough, so an expensive internet connection is required. Since slashing can occur if the system does not have sufficient uptime, monitoring the uptime of validators and intervening in case of hardware failures is needed.&nbsp;Because of the complexities of running a validator and the severe penalties when it is done inadequately, professional entities are offering these services in the market in a very special manner.&nbsp;<h2 style="margin-left:0px;">Liquid Staking Derivatives</h2>While the ETH 2.0 was being rolled out, a certain trend in DeFi was gaining traction: tokenisation. The idea is that blockchain-based tokens represent the state of capital and can be used in a composable way across DeFi applications. The companies offering professional validator services used this breakthrough in tokenisation technology to create a liquid staking derivative of the outside Ethereum that they were offering to manage. For every ETH that is sent to a staking provider, the provider issues a tokenised derivative to the sender. This tokenised derivative (LSD) represents ETH staked with the staking provider. ETH 2.0 is still being rolled out completely and currently there is no way to withdraw ETH placed in validators. When this upgrade is implemented, tokenised derivatives will be interchangeable again for ETH from suspending validators. In the meanwhile, there is a supply and demand driven market based on liquidity pools that support swapping back and forth between the staking derivative and real ETH. Owning the staking derivative gives the holder the rights to the majority of the staking rewards from that validator with a small fee going to the staking provider. It also allows participating in ETH 2.0 on a smaller scale as running a manual validator requires increments of 32 ETH. LSD’s allow multiple smaller entities to combine their ETH to participate by weight in staking process. The growth of LSD’s and staking providers has accelerated throughout 2022. There is now increased diversity in tokenised staking derivatives and their liquidity and price stability are improving. They are being integrated across DeFi protocols which make owning them more efficient and profitable. We will show the efficiency benefits of LSD’s in the next chapter as we explain how Everbloom capitalises on their properties.&nbsp;<h2 style="margin-left:0px;">Everbloom and LSD’s</h2>Thanks to deepened liquidity and price stability compared to its underlying staked token, ETH in this case, LSD’s are becoming a replacement for native ETH. With the added benefit of being yield-bearing, LSD’s are a pristine form of collateral. Money markets such as Aave and Euler allow users to deposit yield-bearing LSD’s as collateral for borrowing. Since the collateral increases in value over time and its value is closely correlated to potential borrowing assets, this introduces plenty of opportunity for ingenious strategies.&nbsp;Our flagship Ethereum strategy takes ETH deposits and swaps them to a yield-bearing LSD. It then deposits that LSD to a money market and borrows ETH against it. That ETH is again swapped for the LSD and deposited again. This has further increased our borrowing power which allows us to repeat the process. The result is a leveraged position with a low risk-profile since the collateral and debt are correlated assets. This allows for more aggressive borrowing. Besides the usual smart contract risk that is always present when using DeFi protocols, the main risk comes from the peg stability of the LSD. In order to make LSD’s liquid, the issuing protocol has to incentivise a liquidity pool that allows for low slippage token swaps between the LSD and its underlying token. If that pool becomes unbalanced by having too much of the LSD token in it, then the mechanism to swap between LSD and underlying token breaks down and becomes inefficient. The price of the LSD can then trade several percentage points below the price of the underlying token. Especially in scenario’s with high volatility, when market participants need liquidity at all costs, this has proven to be a challenge. When the value of the LSD decreases slightly, the value of our collateral would also decrease, potentially resulting in our position being unhealthy. This means its at risk of partial liquidation by an external liquidator. Getting liquidated used to be quite costly with penalties of 5 to 10 percent of the collateral but recent innovations like reverse Dutch auctions make a liquidation event not as harmful. Either way, it should be avoided by constantly monitoring the price of the LSD against the underlying token and reacting if a sudden change takes place. Thanks to monitoring and proper risk management, we can leverage the LSD for maximum efficiency and enjoy a yield on the underlying token that is double or triple the normal LSD staking yield.&nbsp;&nbsp;<h2 style="margin-left:0px;">The future of staking and LSD’s</h2>Here we speculate on what the next year might hold for LSD’s and staking. At the time of writing, January 2023, we have just seen an explosive boom in demand for LSD’s. Besides the market leader Lido, we have seen Frax, Rocketpool and also Coinbase gain traction and market-share, decentralising and bringing competition to the DeFi vertical of LSD’s. We’ve seen deepening liquidity and an increased confidence in the price stability of these LSD’s. This has led to more adoption across DeFi protocols, with money markets at the forefront as the LSD is a great form of collateral. I suspect we see these trends continue with more exotic and innovative usage of LSD’s undoubtedly to follow.&nbsp;A big change for ETH 2.0 staking is coming in the form of the Shanghai hard fork. The main purpose of this software upgrade to the Ethereum network is to enable withdrawals from validators. Up until now, you could only deposit ETH to validators but you could not withdraw your deposited ETH or any of your accumulated rewards. While a definitive date has not been set, the update is expected to arrive in March or April. An event like this always introduces some form of uncertainty in the market and we could see reactions in the price of ETH. After all, it is expected that significant numbers of ETH will become liquid again, which could lead to a sell-off. But markets are often forward-looking and since this is a well-known and anticipated event, the unlocking could be priced in already. One could argue that if Shanghai goes well, LSD’s will trade almost at 1 to 1 with ETH as the withdrawal process allows for arbitrage opportunities in case LSD’s trade at a discount. We should see LSD prices trade closer to ETH as we approach the Shanghai upgrade. This final step in the ETH PoS switch could lead to higher adoption of 2.0 staking. Currently, approximately 15% of all ETH is staked in validators and while this is a healthy chunk, there is much room for growth. When it is actually possible to withdraw, large players could feel a lot more comfortable dedicating ETH to 2.0 staking. This means higher demand for ETH as an increasing share is locked in validators. Since validator yield depends on usage of the Ethereum network as they earn fees from transactions, if that usage remains the same but more ETH is locked in validators, that could lead to a decrease of yield. At some point, a balance will be found, but it might not be as high as current yields we are seeing. All of this is speculation of course, but it should be clear that Shanghai is a significant event for ETH and LSD’s.&nbsp;As usual, Everbloom is on top of any developments and is closely monitoring for risks and opportunities in the ever-evolving landscape of DeFi.

This blog post will explore ETH 2.0, an extension on it called Liquid Staking Derivatives and will show how we can use LSD’s for maximum efficiency in our yield generating strategies.

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Generating yield with liquid staking derivatives

It is important to explain some of the verticals that exist in this new financial paradigm to introduce the reader to some of the innovations taking place. We’ll also explain where yield comes from and how it is sustainable. We would also like to caution the reader and make them aware of the risks involved with this still experimental technology.&nbsp;The main goal of the article is not to explain every single aspect of DeFi. We could write a 500-page book about everything so far and once we would finish a first draft, another book could be written again. The rate of innovation and the iterative learning happens at such a fast pace that it really is a full-time field to spend time and attention on. Good thing we have a passionate team for whom this is second nature.&nbsp;<h1>Bringing DeFi to life</h1>&nbsp;An important building block on which DeFi was able to build its foundations was MakerDAO, a decentralized currency protocol on Ethereum. MakerDAO launched DAI, an overcollateralized stablecoin pegged to the US Dollar. DAI was magically created out of thin air, supply was added through the increase of a number in the smart contract. A very important caveat is that creation of DAI was always dependent on overcollateralization in MakerDAO. The user would have to deposit a higher value in ETH to secure this DAI minting. This meant that every DAI would always be backed by more assets being locked up. The experiment worked and DAI was embraced as an important stablecoin that allowed ETH owners to receive extra liquidity. This idea of over-collateralised borrowing is not new. It exists in traditional finance, for example when you mortgage your house or borrow against your stock portfolio. But now, for the first time, crypto-assets could be used as collateral and the system was built using smart contracts, allowing for all the interesting properties that we so applaud: verifiable execution, immutability, transparency and an open-source nature. MakerDAO was an absolute game-changer for Ethereum and remains an important protocol to this day.&nbsp;We look for the true birth-date of DeFi somewhere in early 2020 with the launch of Compound Finance, an autonomous interest rate protocol for crypto-assets. Simultaneously, Curve Finance was launched: an exchange liquidity pool on Ethereum designed for extremely efficient stablecoin trading.&nbsp;They present two important verticals within DeFi. Compound enabled the use case of lending and borrowing. It also relied on over-collateralization to enforce security and stability of loans. Users were able to deposit a certain crypto-asset to Compound and receive some borrowing power in return to borrow another asset. You could borrow stable coins (USDT, USDC and the new DAI) against your ETH or use your stable coins as a deposit to borrow ETH. In the first case, this looks similar to MakerDAO with the important difference that no supply is created when entering a position, rather the stable coins of another depositor are used for the borrower. Lending and borrowing crypto-assets without a middlemen regulated by a smart contract setting dynamic interest rates depending on supply and demand worked. Another experiment succeeded.&nbsp;At the same time, users were juggling between different stable coins that all presented the same value but had a different on-chain representation. The need arose to swap these tokens against each other. Most centralised exchanges only accepted USDT and USDC, two centralised stable coins with a centralised party issuing and guaranteeing the backing and value. But MakerDAO users had DAI they minted against their ETH. Other DeFi protocols adopted DAI because of its decentralized nature and did not want to deal with USDT and USDC. So while the target value of all these stable coins was the same, depending on what you wanted to do with them, you needed a different one. Curve Finance was a true mathematical breakthrough that allowed users to swap these stable coins against each other with low fees and low slippage. It used the concept of StableSwap liquidity pools. These pools were comprised of all the assets possibly involved in the swap and they allowed for users to deposit these stablecoins and become liquidity providers to the pool. Now when a USDC owner wanted to swap to USDT or DAI, the protocol would add his USDC to the pool by increasing the pool balance for USDC and remove USDT or DAI from the pool by subtracting the pool balance. The swapper successfully received a different asset while the underlying pool distribution changed slightly. Users that contributed liquidity to the pool were rewarded with trading fees and an extra incentive in the form of Curve governance tokens. We refer the decentralised exchanges like Curve as automated market makers requiring no manual intervention or peer to peer order matching.&nbsp;Interestingly these three projects, MakerDAO , Compound Finance and Curve Finance all had their own governance token. MAKER, COMP and CRV were given as an extra incentive on top of true protocol revenue resulting in a more profitable opportunity for liquidity providers than just the demand for swaps or borrowing. All these tokens gave voting rights in the protocol governance process. This usually meant public discussion of future changes or protocol parameters followed by a voting round to decide which choice would be made. Users and stakeholders were governing these protocols with the development team taking more of a backseat when it came to making decisions. In general, consensus would need to be reached within the community before significant changes could be enacted. This new type of governance resonated well with the crypto crowd in these early days.&nbsp;With the appearance of these new and shiny governance tokens, people needed a place to trade these. The old process of talking to centralised exchanges and convincing them to list a token, often paying a hefty fee, was not suitable for the type of small and experimental projects that appeared in DeFi. These needed the ability to create liquidity pairs without permission or barriers of entry. Uniswap, the most sophisticated automated market maker that enabled token swaps of non-stable nature, had just launched its V2 and was in prime position to capture this new demand for decentralized token swaps and liquidity provision.&nbsp;With all these primary building blocks in place, DeFi started to gain more traction and attention. Now that everyone was passively earning a return on their assets, protocols started to pop up that optimised the process of yield farming. Yearn.Finance was the first yield aggregator that enabled single-asset deposits through non-custodial vaults that enacted certain strategies to generate profit. Everbloom actually is based on this model first pioneered by Yearn.&nbsp;The next years saw hundreds of new protocols pop up and either stay to capture some meaningful market share or disappear into irrelevancy. Since it was so easy to launch a protocol by copying open-source code and changing a few parameters, a lot of malicious actors found their way to DeFi. They would execute a so-called ‘rug-pull’, launching a protocol for it to attract liquidity and to then run off with the funds. Black hat hackers were also targeting smart contracts protocols in an attempt to find loopholes in the code. They could then withdraw funds that were not their own to extract millions of dollars from these protocols, leaving the protocol and its users with empty hands. All of this was one giant experiment with mistakes made and mistakes punished. But over time we’ve seen significant evolutions in programming and thinking. Attack surfaces are better known, the utility of tokens is ever-improving beyond some of the naive assumptions that were made during the first years and DeFi expanded to more exotic use cases such as decentralized options and futures.&nbsp;We now have DeFi activity on a large amount of layer 1 blockchains. DeFi transactions, together with NFTs, at some point congested the Ethereum blockchain so badly that it accelerated the development and adoption of layer 2 initiatives to scale Ethereum and increase transaction capacity and throughput. Every day, the landscape improves on the day before. Either with a new protocol launch covering some unexplored segment of the market, a new exploit being discovered and patched or a new insight learned.&nbsp;Slowly, banks and other financial institutions are making their entrance into this future of finance. As these protocols gain more and more maturity, confidence in its secure operation will rise. Everyday a protocol survives and does not get exploited by hackers, strengthens the security assumptions around it. At some point in the future, DeFi infrastructure will be used to power financial applications of every-day users and businesses, perhaps even without their knowledge in the background. This technology is not even three years old but the direction to us is clear: DeFi as we know it has laid the foundations for the financial railway of the future.&nbsp;<h1>Origins of yield</h1>&nbsp;A question we’ve often received in the past is the question of sustainability. Where are all these returns coming from ? Some of the yearly percentages that can be earned sound too good to be true, there must be a catch right ?&nbsp;Yields in DeFi are of a dual nature. The first option is that you earn interest on a deposit, for example when you deposit assets to Aave, the leading lending/borrowing platform. This interest is paid by the borrower and a true economic activity is taking place. Funds are being lent at a certain interest rate and utility is created for the borrower. As a depositor, you enjoy your assets growing and the interest accrues to your balance.&nbsp;The second form of yield comes in the form of tokens. Here we can make a further distinction between token incentives and protocol revenue. Smart contract protocols usually have a token governing the protocol, potentially providing additional benefits for those who hold the token while using the application. This token is usually distributed according to a certain emission schedule as a reward to supplying liquidity to the protocol. Liquidity pools on applications such as Uniswap and Curve become more efficient the deeper the liquidity is. Attracting digital assets to populate these pools is done by offering token incentives for depositors. They earn the governance token of their favourite protocol which can then be sold off to more familiar digital assets or kept and used for its benefits. These token incentives are not entirely sustainable but rather serve as a growth tool to attract initial capital and grow to a stage where fees can sustain the protocol without the additional incentive. Paying for liquidity through token inflation without following up on that through additional token utility has led to suboptimal results for the protocols that tried this. Much more successful were protocols that added some form of revenue share to the token utility or rewarded their liquidity providers with a share of fees. We are seeing a shift to these type of models as we write this post.&nbsp;So yield can come from borrowing demand which is usually high when there is a lot of demand for leverage. When digital assets are in a bull market, speculators enter the space who leverage themselves in order to further expose themselves to appreciating assets. You can deposit ETH to Aave and borrow USDC, swap the USDC to ETH on Uniswap and deposit the resulting ETH to Aave again. You could do this a couple of times to gain increased exposure to ETH, which can be great when prices appreciate. When prices fall, losses are larger of course. This risky endeavour does not concern the lender, he just collects the borrowing fees by these speculators. So as a rule of thumb, demand for leverage and speculation is an important contributor to borrowing rates.We’ve said most yield comes in the form of token rewards. Higher token prices mean higher rewards as they can be sold off for more dollars. So yield is tied to the performance of the general market, specifically the asset prices of governance tokens that are being earned. As these go up and down, yield fluctuates with it.&nbsp;As you can see from the above explanation, there is a free market offering opportunities in return for tokens or interests rates. A DeFi liquidity provider takes what the market offers and tries to allocate as optimally as possible. At the current stage of the ecosystem, making assumption about yield percentages that span multiple years is not very accurate. Keeping a constant eye on the risk and reward of all available opportunities is a must if one is to outperform in this environment.&nbsp;<h1>Risks</h1>&nbsp;In the previous section, we discussed the possibility to earn returns on capital in DeFi. But of course, no free lunch exists. DeFi participants are exposed to a bunch of technology-related risks that we’ll go over here. We think it is absolutely crucial for DeFi users to be aware of these risks as the lack of clear risk understanding is one of the root causes of investor pain and disappointment.&nbsp;By far the biggest risk is smart contract risk. Smart contract protocols are complex pieces of software and software is written by humans and humans sometimes make mistakes. Mistakes in the context of financial protocols mean that real funds are at risk and can be extracted by an entity exploiting the coding mistake. Over the past years, we’ve seen tons and tons of smart contract bugs exploited for millions of dollars. Liquidity providers to these protocols usually take a haircut in their deposited funds. The good thing is that every bug exploited also results in a bug fixed. New protocols often have to go through this phase of launching with a certain code base, attracting liquidity providers that are not risk-averse and seeing if their security assumptions hold up in a real live production environment. The best way to reason about the confidence you can place in a protocol is seeing how much value it is securing over which length of time. Smart contract bugs will continue to exist and will continue to lead to losses for participants. Especially new and experimental protocols are vulnerable to this, which is why we look at them with extra scrutiny. Smart contract risk is one of those risks that we can not completely protect our depositors from. While the Everbloom code base has been audited and has multiple layers of security precautions, the funds we deploy through our strategies sit in third-party smart contract protocols. If an exploit happens there, our vault depositors will be indirectly impacted and might lose funds. If one is to capture DeFi yields, one has to accept this type of risk and deem it acceptable. That being said, some protocols have achieved an incredibly high level of trust. We focus our strategies to use these battle-tested as they provide the best risk/reward ratio for our clients.&nbsp;Other risks that are possible are custodian risk or counter-party risk. This happens when you use assets such as wBTC, a wrapped version of Bitcoin on the Ethereum blockchain. It should be exchangeable for real Bitcoin through its custodian, but this relies on the custodian being trustworthy and solvent. USDC and USDT also rely on custodians to back the one dollar peg of these assets.&nbsp;Another risky aspect of engaging with blockchains comes in the form of key management. To make transactions on blockchains, the user needs to sign these with a private key, which needs to be securely stored. Storing the key in a bank vault is not sufficient, as you will need it every time you make a transaction. In-browser wallets such as the widely used Metamask are popular and convenient but are a target for hackers and malware. We recommend usage of a hardware wallet always when securing any meaningful amount of value. This is one area where Everbloom can be used to mitigate these risks. An Everbloom users only needs to worry about depositing and withdrawing to Everbloom vaults. His funds are used by our software to procure yield, without requiring intermediate transactions by the end-user. So he can safely store the hardware wallet in a bank vault or hide it somewhere hard to reach. Everbloom separates ownership of the assets and execution of the strategies for those assets.&nbsp;In general, DeFi is not for the faint of heart. The traditional financial system also carries risks with bank deposits being secured only up to a certain amount. Banks can collapse and user funds can also be lost. Companies can fail and the stock can go to zero. To engage in financial activity is to be exposed to risks and everyone’s goal is to minimise the impact of negative scenarios and to reason about the risk to reward ratio. Everbloom is one of the more secure and safe ways to engage in DeFi activity, especially for normal users.&nbsp;<h1>Closing words</h1>&nbsp;We are convinced that DeFi will continue to grow and impact the world. We expect digitalisation of the financial world to happen over the course of the next five to ten years and we think public blockchains and DeFi are the prime candidate to be the supporting infrastructure. Everbloom prepares itself for a world where assets are increasingly tokenised and can be put to productive use in on-chain protocols providing some sort of value. Our expertise leads us to develop and maintain optimal solutions to make these opportunities available for clients and abstracting away all the complexities. Einstein’s eighth wonder of the world, compound interest, is alive and kicking in DeFi and we expect early adopters of this new paradigm to make outsized returns over the long term. And Everbloom will be the primary tool at your disposal.

In this blog post we take a closer look at the world of Decentralized Finance. 
We start with examining its brief history and the iterations that have led to the current state of the art. 

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DeFi Deep Dive

What happened?&nbsp;Last week, FTX, the second largest cryptocurrency exchange filed for bankruptcy. The timeline of exact events that transpired have been well documented in other writings and we will not dive too deep into them here. An almost complete summary of what happened can be found here: <a href="https://twitter.com/mrjasonchoi/status/1592502785873825794?s=61&amp;t=ix94x0RidRElW9Kryq1NMw">Jason Choi on Twitter</a>&nbsp;&nbsp;&nbsp;It has been amazing to see the story develop in real-time, with Twitter as the main source of new information. In total, FTX left a hole of around 10 billion dollars which means that clients that had funds at the exchange will most likely lose the majority of the value they had stored there. This is an absolute tragic event that has shocked the crypto community and has further damaged faith of the general public in the sector. One could say this is crypto’s Lehman moment but in this case, there is no government bail-out coming.&nbsp;In essence, FTX was a centralized financial service company that took custody of clients’ deposits. It operated in an unregulated market and dodged many of the strict rules that financial institutions have to adhere to after the 2008 financial crisis. The crypto industry has long been asking for clearer directives on regulation of these types of companies.&nbsp;&nbsp;Specifically, the SEC has held off on creating a general legal framework for cryptocurrency companies which has led to this type of situation. The lack of regulatory clarity pushes companies off-shore and into murky jurisdictions. There is very limited oversight and lots of room for fraudulent activities.&nbsp;&nbsp;This is exactly what happened at FTX. Sam Bankman-Fried, CEO of FTX and majority shareholder of Alameda Research, a supposedly wildly profitable hedge fund, built out a shadow empire in just three years. Again, I won't go into detail of what exactly happened behind the scenes but what we are now learning is that many forms of fraud were committed with unsuspecting clients paying the price. Other articles on the topic will surely explore the exact nature of the crimes committed and we are learning more every day.&nbsp;Centralized companies vs Decentralized protocols&nbsp;FTX is what we know as a CEX, which means Centralized Exchange. It is similar to an online stockbroker in that they merely offer a market place for users to trade assets in. In order to organise such brokerage activities, they need to hold custody of client funds. Combine this with loose regulations and a lack of transparency and you have the ideal molotov-cocktail to ignite the wildfire that we’ve had in the last few days.&nbsp;&nbsp;What happened at FTX reflects poorly on the whole cryptocurrency space. It is likely that regulators will use these events as an excuse to heavily crack down on all things cryptocurrency. The media will also have a field-day and many crypto-opponents are awakening again to bash the entire industry at a low point in its history.&nbsp;&nbsp;FTX shows exactly why blockchain-based systems are so vital to the future of finance. The demise of FTX is completely unrelated to the underlying technology of cryptocurrencies and blockchains. It is a brutal reminder to return to the roots of the crypto-movement with core principles such as self-custody, decentralisation, transparency and disintermediation. Don’t trust, verify, as the old saying goes.&nbsp;&nbsp;Luckily, the past few years, a large and diverse community of programmers has been building an alternative to these centralized intermediaries. Decentralized Finance is a parallel financial system built on blockchains, secured and operated by smart contracts. The role of an individual or company is of secondary importance, with the rules of the system existing in open-source code, enforced by the nature of blockchain execution and consensus.&nbsp;&nbsp;For example, it is entirely possible to substitute all the functionalities that FTX as a CEX provided by using a Decentralized Exchange or DEX. A DEX exists primarily on-chain in the form of a system of smart contracts that enable the transparent, fair and verifiable exchange of assets. You access it with a web3-wallet through a browser front-end. The DEX is merely a tool you use when you need it, your assets are at all times safely stored in your digital wallet. This means you, and you alone, hold custody of the assets. Nobody is able to move them for you when you store digital assets by owning your own keys. Anyone using DEXs is completely unexposed to the third-party risks when dealing with CEXs like FTX.&nbsp;&nbsp;What the future holds&nbsp;This is going to be a recurring theme in the coming years. Rather than trusting third parties to hold our funds for us, we should switch to self-custody and the usage of decentralized applications for our financial needs. Self-custody is non-trivial and much better solutions are needed in the future to support use cases such as social recovery, as errors with key management can happen if you are not careful. Many think it is a pipe dream that mainstream crypto users will self-custody with the current tools available. In any case, for serious participants in the technology, it should be clear that self-custody is the only way forward and the case of DeFi has never been as clear.&nbsp;&nbsp;Once again, we are delighted to be building for this future. This is further confirmation to us that a new way of doing financial transactions is needed. The collapse of FTX will be reflected on in the future as a turning point that has accelerated the adoption of on-chain financial applications. While it is a bitter pill to swallow right now, especially those that lost funds on FTX, we could not be more bullish on DeFi. We cannot imagine a different technology space to be building in and are continuing our efforts with increased conviction. DeFi offers the opportunity for anyone to become part of the liquidity used in financial applications. Everbloom will manage these liquidity deployments with its dedicated software framework. We are striving for a better future for all to participate in and are proud to be part of this revolutionary movement towards financial enlightenment.

In this post we discuss the consequences of the anti-climactic collapse of FTX and Alameda Research. We’ll explore what happened, what went wrong and how we can avoid the same mistake twice. You might have guessed it, Decentralized Finance is a big part of the solution.

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The case for DeFi in a post-FTX world

In a previous blog post we articulated our vision and understanding of Decentralized Finance, a novel paradigm for finance on public blockchain infrastructure.&nbsp;We are a group of researchers, programmers and blockchain enthusiasts who share the fundamental belief that public blockchains and its applications will transform and improve the lives of everyone around the world. They hold the potential to create a more egalitarian system without excessive barriers of entry and without censorship, enabling global economic participation. One of the leading drivers towards this positive future is the Decentralized Finance movement in which Everbloom boldly participates.&nbsp;While it is still growing and developing, DeFi offers a bunch of opportunities for investment. Primarily it gains in size through the offering of economic incentives to its participants. Your digital assets that used to sit idle in secure cryptographic wallets can now be put to use productively as a Liquidity Provider in a plethora of financial applications. All while still being secured by public key cryptography and blockchain consensus, facilitated by smart contracts.&nbsp;Liquidity Providers (LPs) provide necessary capital to smart contract protocols that enable them to operate more efficiently and expand their offering. In return, LPs receive a share of the fees that such protocols generate. These protocols are often run in a non-hierarchical way, spreading voting rights to its participants through token ownership. These tokens carry the power to vote on proposals that could influence the direction of the protocol. This form of community-based consensus on how the application evolves and adapts is completely new and a big shift away from centralised, top-down control that is omnipresent in normal businesses.&nbsp;Because of the ease of integration and re-usability of financial primitives, a flourishing world developed in the two and a half year lifespan of DeFi. Our view is that this proces will continue to accelerate and gain more traction. Once a certain maturity is reached, we will see more traditional financial assets and players participate in this superior technology. We are anticipating this massive inflow into blockchain-based systems by acquiring in-house expertise and creating a product that has strong product market fit in an expanding market.&nbsp;Everbloom offers specialised containers of assets called ‘vaults’. Each type of vault takes a different asset for which it will find the optimal way to deploy this asset in DeFi. Everbloom writes one or multiple strategies for each asset and manages the execution of transactions that need to happen to make these strategies work. The end-user is completely shielded away from all the complexities of managing such strategies and just enjoys the end-result, which is an increased balance of the token he deposited. Everbloom is a set-and forget solution for long-term investors who want exposure to digital assets while simultaneously capturing the best return on investment for these assets.&nbsp;DeFi opened up this world where your assets can always be earning a yield and Everbloom offers this as a product and service without taking custody of your assets. Vaults are smart contracts that hold your assets transparently and move it around on-chain to other smart contract protocols. At no point can the team behind Everbloom take ownership of assets, nor do they need to. When the users wishes to withdraw his assets, the vault will automatically unwind the position and deliver what the user is owed. All accountancy happens on-chain and is verifiable and fair. We believe this approach to managing capital is fundamentally different from traditional models and we have the power of inter-operable smart contracts to thank for that.&nbsp;In a first iteration Everbloom targets three main assets; Bitcoin, Ethereum and stablecoins (USDC).&nbsp; In recent months we’ve seem the demise of what has been dubbed ‘CeDeFi', or a centralised version of participating in DeFi. Parties such as Celsius gathered user deposits and started lending, investing and sometimes straight up gambling to get the fixed yield they promised to users. This model is fundamentally broken and resulted in the collapse of Celsius, leaving many users behind with empty hands. We were happy to realise that we had taken the sustainable route of optimally capturing the opportunities that are present in the market instead of creating false promises and presenting an opaque system based on cheap marketing.&nbsp;Everbloom is betting on the long-term future of DeFi by taking on the challenge of providing a hybrid version of yield farming optimisation and private banking. We do not hold assets for our clients as we believe this a crucial pillar of crypto’s security and confidence paradigm. Using public blockchain infrastructure and the guarantees that come with smart contract execution, we can deliver a non-custodial service without counter-party risk that manages assets efficiently and transparently.&nbsp;The future is bright for a product like ours. While the world we operate in moves fast, our researchers are on top of their game. The development expertise we gather by creating and operating our product puts us in an excellent position to corner the market, especially once more traditional asset managers wake up and start realising this monumental shift towards on-chain finance. This experience and knowledge is difficult to acquire and even harder to buy. We are ready.

In this essay, we introduce Everbloom Finance, a research and development initiative based in Antwerp, Belgium. Everbloom develops a DeFi yield farming service that automates and optimises the deployment of digital assets in smart contract protocols. 

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Introducing Everbloom Finance

“Decentralized Finance”&nbsp;This idea of DeFi sprouted at the beginning of 2020 and took root with the development of smart contract protocols that provide certain financial utilities, initially developed on the Ethereum blockchain . Important is not to purely focus on ‘what' is being done, but rather to dig deeper and inspect ‘how’ it is executed and which properties these system are able to achieve.&nbsp;Let’s zoom in on the “Decentralized” aspect of this new and exciting world. “Decentralization” must be one of the biggest keywords when thinking about cryptocurrency technology. This idea to not have single points of failures but to distribute control and verification across the whole network is extremely powerful.&nbsp;We have Bitcoin to thank for this incredible new paradigm. While Bitcoin focusses on payments and utility as a form of hard money, other project were inspired to replicate the properties of the Bitcoin system for other use cases, such as arbitrary code execution. Ethereum was the earliest and most successful layer-1 blockchain to offer decentralized execution and birthed the concept of smart contracts.&nbsp;“Smart contracts” is another one of these poorly chosen terms that has taken hold over the years. They are not really contracts and are also not particularly smart. A smart contract is a piece of code that has been deployed to a blockchain and that offers some sort of functionality for users or other smart contracts to interact with. This enables new and exciting properties for smart contract based systems. For example, smart contracts offer “verifiable and secure execution of code”, without censorship or manipulation by external entities. Smart contracts build on top of the consensus layer of the underlying blockchain, meaning that the security and absoluteness of the smart contracts is as strong as the security and decentralisation of the blockchain itself.&nbsp;In short, smart contracts allow you to execute a piece of code without anybody stopping you from doing it, without anyone manipulating the result. And best of all, anyone can verify those properties about your code and its execution. This enables a bunch of interesting use cases, especially financial applications as they greatly benefit from these properties.&nbsp;As such, Decentralized Finance became this container term for a parallel financial world that exists purely on-chain. While ownership and governance over these smart contract protocols is not always truly decentralized, the fact that the code runs on a public blockchain with sufficient decentralisation properties led to the naming. Perhaps “on-chain finance” would be a more accurate description.&nbsp;The building blocks of DeFi are smart contract protocols. Protocols are a collection of smart contracts, providing reliable and verifiable execution, that offer a specific financial utility function to users or other smart contracts. Key ideas here are composability, re-usability, transparency and open-source code. Settlement happens as fast as the speed of the blockchain allows and smart contract protocols replace traditional financial middle men. We see protocols focussing on specific verticals in finance, such as lending and borrowing, digital asset collateralization or token swaps. They work together and complement each other while extending the power of DeFi. Protocols revolutionise the value creation process of financial applications. Instead of having very top-down hierarchy in terms of decision making and ownership structure, protocols are often community-driven and community-governed. Users are not merely clients but can be full-on participants in protocol governance or earn fees and incentives from using the protocol or supplying valuable liquidity.&nbsp;It is no surprise that DeFi aims to improve our current financial world. The status quo of traditional finance is a slow and opaque system with lots of costly regulation and huge barriers of entry for innovators. It takes a long time to settle simple transactions and middlemen extract a lot of value in return for providing a subpar service. High fees and rent-seeking plague banks as they are moving away from offering consumer payment services to focussing on clients who have assets they can manage to claim their management fees.&nbsp;The financial system has known the least amount of innovation out of all industries. We are still using credit card technology from the 1960’s for the majority of our online payments. Thanks to blockchain infrastructure we now have the tools to reshape the way we engage with our financial assets.&nbsp;This is the true promise of DeFi, an ever-growing and ever-improving experiment happening in plain sight for all to observe and learn from. We are still so early in the adoption phase of this new technology. It has its growing pains but the open-source nature of the system makes it so we document and learn from past mistakes. It certainly has shortcomings in its current iteration. None of these are fundamental problems of the paradigm but rather short-term technological and sociological constraints that will phase out over time.&nbsp;We truly believe that a novel financial paradigm was born and is growing everyday. The properties of this technology are vastly superior to the old legacy financial system. This movement which captures the heart and minds of ambitious developers is simply too strong to ignore. While the old paradigm has failed us in leaving billions of unbanked people around the world, DeFi holds the promise to allow fair financial access for everyone on an unprecedented scale.&nbsp;Given more time and development, DeFi or blockchain-based finance will replace our old trust-based financial system and become the global financial rails of the future. This is what Everbloom is betting on.

According to us at Everbloom, Decentralized Finance is one of the biggest innovations coming from the cryptocurrency technology space in the past few years. We explore what Decentralized Finance, or “DeFi”, really means as the term is often misused and quite frankly, poorly understood. We articulate our vision for this future of finance made possible through public blockchain infrastructure. 

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Everbloom's Vision on DeFi


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