2020, so far, has been undoubtedly the year of DeFi. New models, new primitives, and new incentives schemes came along with the Cambrian explosion of newly devised DeFi use cases.

Along with the research group of the Bocconi Student Blockchain and Cryptocurrencies Association, a long time friend of Lemniscap, we stepped back for a moment and turned our attention to the mechanisms of those cryptonetworks, their business models, and their long term sustainability. The full report can be downloaded here.

To better analyse the various networks, we divided them into “use cases”. This research is the result of our first work for our first chosen use case: Options on DeFi. Many others will follow hopefully. The pipeline of research includes networks deploying decentralized Automatic Market Makers (AMMs), Oracles, Futures, and many others.

The actual scheme will vary depending on the use case but the scope remains the same: starting from a general framework of the DeFi application where we look at the main participants of the network, we then study the current architecture present in the market (live or yet to be launched). We analyse their challenges and when possible we propose solutions. We pay attention to how architecture and business models interact with each other, evaluating the current incentives present in the cryptonetwork designs.

We look at the existing token model for each network in the analysis (where possible), trying to push the conversation forward by broadening the applications for their tokens, especially as a tool for risk mitigation and bootstrapping. We notice that the major and most intuitive challenge is reaching critical liquidity to make the network economically viable. However, as DeFi tackles more and more complex financial payoffs and derivatives, the token can be a versatile tool to temper critical financial risks of participants of the cryptonetworks.

The end goal is to start a conversation that could be picked up by token engineers and cryptonetwork designers to improve the usability of a network, advance its sustainability, and strengthen the alignment between users (often traders) and stakeholders of the network.

Dan Dubokovič, Leonardo Malighetti, Daniele Montagnani, and Matteo Montani are the students of the Bocconi Student Blockchain and Cryptocurrencies Association who took part in this research.