In the last couple of articles (Hello Derby.finance and Derby.finance in the DeFi landscape) we introduced Derby.finance as the layer 2 liquidity optimiser of DeFi. In this article we will present an in depth overview of how Derby.finance implemented its liquidity management, through an investment management game.

Derby.finance has developed an investment management game. The goal of the game is to determine the optimal capital allocation for the Derby vaults between a whitelisted set of DeFi applications. The Derby vaults will contain solely liquidity pool tokens from these whitelisted DeFi protocols. Just to remind, Liquidity Pool tokens (LP tokens) are digital “receipts” with which you can reclaim your investments plus yield back from a DeFi application. By owning a Liquidity Pool token you are essentially exposed to the risks and rewards of that underlying DeFi application. Our Derby vaults are where DeFi investors will ultimately invest their money into and via the liquidity pool tokens in the vaults they get a diversified exposure on DeFi yields from various DeFi applications. The list of DeFi applications which are suited for our game is determined by the Derby DAO in a monthly whitelisting process. The capital allocation determined by the game is not static, it will rebalance bi-weekly. The allocation also doesn’t concentrate on a single Blockchain like Ethereum. The underlying mechanics of the Derby vaults will automatically bridge value between blockchains and layer 2s if the allocation determined by the game requires it. This all leads to a liquidity optimisation solution for DeFi where the Derby vaults always follow the latest and best yield trends in the DeFi market. A detailed description of this game will be given below.

First of all, to play the game you need to buy Derby (DRB) tokens (ERC20). There is a fixed amount of Derby tokens on the market. Each token can be locked into our Derby game contract and for each token locked the player will receive a vote. The Derby game player can allocate this vote to one of the whitelisted DeFi protocols within one of the Derby vaults. The vaults are multi-chain. This means that each vault is implemented on multiple chains and layers, but over these chains and layers it will act as just one vault for investors and game players. It’s good to note here that Derby.finance will offer a different set of vaults for DeFi investors with different risk characteristics and different currencies. A clear description of how the Derby vaults work is given in the article: Derby.finance, the vaults. The more tokens a player has locked in the game contract, the more votes it can allocate to the whitelisted apps. This basically leads to each player creating a custom portfolio of DeFi protocol allocations. If we sum up all of the allocations from all the different players by just adding up all the votes we create a complete and diversified portfolio consisting of a wide variety of different DeFi protocols. This is the basic idea, but this will only work as long as all players behave somewhat rational. To set the incentives in a correct manner, 10% (t.b.d. by the DAO eventually) of the performance of the underlying Derby vaults will be reserved for the game players as a reward for playing the game successfully. These reserved yields will be divided among the game players as a function of the amount of tokens locked and the underlying performance of the game players. So, if a game player has made a lot of profit with his or her portfolio it will receive a relatively large reward. Also if a game player has locked a lot of tokens it will receive a proportionally bigger share of the reserved rewards. The formula to determine the specific rewards is roughly equal to:

share of tokens locked compared to total locked in game * player’s portfolio gains * reserved capital for game players (based on vault performance)

To penalise bad behaviour, game players receive a small penalty in the form of slashed Derby tokens if the performance of their underlying portfolio is negative.

In the last part we have described the Derby.finance investment game on a high level. The ultimate goal of the game is to manage the liquidity provided by the Liquidity Providers in an optimal way. This of course depends on the performance of the game players. We have come up with a way to keep track of the past performance of these game players that can act as a reputation system.

When game players lock their tokens and determine their optimal capital allocation they receive an NFT, which functions as a receipt to at any point in the future to unlock their locked tokens and built up rewards. It makes sense to use the NFT standard here, because it represents the underlying portfolio track record per game player, which is unique. Apart from that, the NFT standard offers a nice way to incorporate gamification like cool avatars etc. Unlike most of the NFTs in the market today, these NFTs will actually represent real value because of the tokens and rewards that they can unlock. Game players can rebalance their portfolio as often as they want, but the rewards will only build up during a bi-weekly snapshot that is taken on all the allocations. This is also the moment that all of the Derby vaults will rebalance their allocations. With this system of rebalancing in place, the NFTs, which resemble user profiles, can build up a certain track record which acts as a decentralised reputation system.

We expect that some players will, over time, systematically outperform other players when looking at realised yield percentage, not taking into account the amount of locked tokens. To incentivise “lazy” token holders to still use their tokens to build up a yield, game players can also delegate their votes to successful players. They will pay a small fee to those players and in return they will also build up rewards on their NFTs, which will be proportional to the realised portfolio gains their delegated player has made. With this system we hope to further incentivise the smartest players, and not necessarily the ones with the most Derby tokens.

In the next article we will discuss the Derby.finance vaults.

In the last couple of articles (Hello Derby.finance and Derby.finance in the DeFi landscape) we introduced Derby.finance as the layer 2 liquidity optimiser of DeFi. In this article we will present an in depth overview of how Derby.finance implemented its liquidity management, through an investment management game.

Derby.finance has developed an investment management game. The goal of the game is to determine the optimal capital allocation for the Derby vaults between a whitelisted set of DeFi applications. The Derby vaults will contain solely liquidity pool tokens from these whitelisted DeFi protocols. Just to remind, Liquidity Pool tokens (LP tokens) are digital “receipts” with which you can reclaim your investments plus yield back from a DeFi application. By owning a Liquidity Pool token you are essentially exposed to the risks and rewards of that underlying DeFi application. Our Derby vaults are where DeFi investors will ultimately invest their money into and via the liquidity pool tokens in the vaults they get a diversified exposure on DeFi yields from various DeFi applications. The list of DeFi applications which are suited for our game is determined by the Derby DAO in a monthly whitelisting process. The capital allocation determined by the game is not static, it will rebalance bi-weekly. The allocation also doesn’t concentrate on a single Blockchain like Ethereum. The underlying mechanics of the Derby vaults will automatically bridge value between blockchains and layer 2s if the allocation determined by the game requires it. This all leads to a liquidity optimisation solution for DeFi where the Derby vaults always follow the latest and best yield trends in the DeFi market. A detailed description of this game will be given below.

First of all, to play the game you need to buy Derby (DRB) tokens (ERC20). There is a fixed amount of Derby tokens on the market. Each token can be locked into our Derby game contract and for each token locked the player will receive a vote. The Derby game player can allocate this vote to one of the whitelisted DeFi protocols within one of the Derby vaults. The vaults are multi-chain. This means that each vault is implemented on multiple chains and layers, but over these chains and layers it will act as just one vault for investors and game players. It’s good to note here that Derby.finance will offer a different set of vaults for DeFi investors with different risk characteristics and different currencies. A clear description of how the Derby vaults work is given in the article: Derby.finance, the vaults. The more tokens a player has locked in the game contract, the more votes it can allocate to the whitelisted apps. This basically leads to each player creating a custom portfolio of DeFi protocol allocations. If we sum up all of the allocations from all the different players by just adding up all the votes we create a complete and diversified portfolio consisting of a wide variety of different DeFi protocols. This is the basic idea, but this will only work as long as all players behave somewhat rational. To set the incentives in a correct manner, 10% (t.b.d. by the DAO eventually) of the performance of the underlying Derby vaults will be reserved for the game players as a reward for playing the game successfully. These reserved yields will be divided among the game players as a function of the amount of tokens locked and the underlying performance of the game players. So, if a game player has made a lot of profit with his or her portfolio it will receive a relatively large reward. Also if a game player has locked a lot of tokens it will receive a proportionally bigger share of the reserved rewards. The formula to determine the specific rewards is roughly equal to:

share of tokens locked compared to total locked in game * player’s portfolio gains * reserved capital for game players (based on vault performance)

To penalise bad behaviour, game players receive a small penalty in the form of slashed Derby tokens if the performance of their underlying portfolio is negative.

In the last part we have described the Derby.finance investment game on a high level. The ultimate goal of the game is to manage the liquidity provided by the Liquidity Providers in an optimal way. This of course depends on the performance of the game players. We have come up with a way to keep track of the past performance of these game players that can act as a reputation system.

When game players lock their tokens and determine their optimal capital allocation they receive an NFT, which functions as a receipt to at any point in the future to unlock their locked tokens and built up rewards. It makes sense to use the NFT standard here, because it represents the underlying portfolio track record per game player, which is unique. Apart from that, the NFT standard offers a nice way to incorporate gamification like cool avatars etc. Unlike most of the NFTs in the market today, these NFTs will actually represent real value because of the tokens and rewards that they can unlock. Game players can rebalance their portfolio as often as they want, but the rewards will only build up during a bi-weekly snapshot that is taken on all the allocations. This is also the moment that all of the Derby vaults will rebalance their allocations. With this system of rebalancing in place, the NFTs, which resemble user profiles, can build up a certain track record which acts as a decentralised reputation system.

We expect that some players will, over time, systematically outperform other players when looking at realised yield percentage, not taking into account the amount of locked tokens. To incentivise “lazy” token holders to still use their tokens to build up a yield, game players can also delegate their votes to successful players. They will pay a small fee to those players and in return they will also build up rewards on their NFTs, which will be proportional to the realised portfolio gains their delegated player has made. With this system we hope to further incentivise the smartest players, and not necessarily the ones with the most Derby tokens.

In the next article we will discuss the Derby.finance vaults.