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Thinking beyond a “winner-takes-all”

Liquidity has become a “mortal sink” for the survivability of new projects within the DeFi ecosystem, and control of that liquidity is being aggregated by a few key protocols (Curve, Tokemak, Convex etc). Given that the governance tokens of these protocols are the routers behind emergent liquidity-as-a-precious-resource projects, DeFi projects are looking at them like the US ogles at oil.

While the enablement of even more liquidity for liquid currencies certainly adds value to DeFi, efficient liquidity for illiquid assets (Metaverse capital assets, or NFTs) creates a perpetual-motion hyperstructure where entirely new digital economies can be spawned. The requirements to get to that level, however, will require some new abstraction protocols (hint - MetaStreet).

Additionally, the current liquidity aggregation strategies are not without their critics. There are concerns around a “rich-get-richer” plutocracy forming from the winner-takes-all end game seen in DeFi today. It’s not just DeFi (where the Curve “bribe wars” appear like PAC donations for web3) that is suffering this fate, we see it in the Metaverse narrative as well, where land baronship blocks demand from new users and sets the stage for “digital feudalism” (come on guys, we can be better). Emergent players are tackling these structures within the public forum but in a gamified way: with multiple win conditions.

For example, Nifty Island questions the land baronship of digital land scarcity with creative creation (creative destruction?) & footfall: land should be free and you should be free to create what you want. The idea is that this enables creative exploration rather than corporate ploys. In the Metaverse, a “winner takes all” determinism and pre-established hierarchies will only create the dystopia we are attempting to evolve out of. This month’s MetaStreet Journal explores ways that the Metaverse Capital Markets can get to the same level of robustness as DeFi’s liquidity wars, and perhaps even improve up on it.

Before jumping in, lets outline what we’ll be discussing today:

• Curve governance

• How does NFT liquidity catch up to DeFi?

  • Fitting chunky NFT debt terms into “Tetris blocks”

  • The goal of MetaStreet’s abstraction protocol (& experiments)

• How to think beyond Curve’s flaws for Metaverse Liquidity: Plurality

Curve governance: Curve is making headwinds, but is it the correct way forward?

Why is Curve’s gauge-weight voting system favored? Simple answer: it’s very efficient in governing, its non-binary (yes/no), it actually aggregates value to the token - you can even calculate how much each X token routes Y of value. They are essentially token curated registries with continuous parameter voting, which appears to be well designed for liquidity-focused products (summarized as the infamous “gauge-weights”)

Curve’s governance processes (veCRV) is starting to emerge as the winning governance strategy across the DeFi ecosystem because it aligns the incentives of all participants in the ecosystem - LPs earn CRV → CRV holders vote which LPs get CRV → CRV holders earn fees in the form of LP shares. Everything that CRV does is meant to incentivize LPs, retain LPs, and turn LPs into CRV holders.

• Yearn is looking to adopt the strategies: https://gov.yearn.finance/t/proposal-evolving-yfi-tokenomics/11994

• Tokemak’s governance process is heavily influenced by the infamous governance system: https://www.tokebase.org/the-liquidity-wars-arrival-of-the-tokemechs/

• New apps are adopting the strategy quickly: https://ribbonfinance.medium.com/ribbonomics-b070e269fbb3

• Evolving into other smart contract platforms, such as on solana: https://twitter.com/SunnyAggregator/status/1485404894374744064?s=20

• MakerDAO and DYDX are starting to explore these strategies

With so much at stake, DeFi has found another economic “exploit” through the anonymous introduction of Convex Finance. Even further, there are optimization processes on top of these composable “hacks,” such as Votium or Bribe Protocol. As one can expect, these platforms are getting increasing criticism with the “end-game” of DeFi: it is plutocratic politics. In a single-winner race, only the top protocols are optimized. Read more here:

https://decrypt.co/90276/defi-bribes-are-on-the-rise

How does NFT liquidity catch up to DeFi? NFTs are chunky things. Making NFTs as digestible as a Tetris game to catch up to DeFi liquidity governance.

• By definition, NFTs don’t perfectly “fit the box,” Because NFTs are chunky, their debt is also mostly chunky.

https://makeagif.com/i/w85B4S

https://i.makeagif.com/media/4-04-2015/Z8kYgt.mp4

Underwriting debt sucks, especially in the meatspace. It’s a terribly, mind-numbingly boring process and not usually worth the time. But why does it take so long? It’s because each asset is unique (equipment, legal, mortgages), but these loan “qualities” are typically explained through multiple parameters of the debt: loan proceeds/value (LTV), interest rate, term (tenor), loss-given-default, debt paydown / cash generation, collateral value discount. The reason why NFT debt hasn’t scaled isn’t because P2P isn’t scalable & “retail is dumber than institutional”, it’s really because retail is smart enough to know that it ain’t worth their time to do this menial work.

In finance, there’s a phrase that the “interest rate tells the story.” Debt market automatically rebalance across different worlds and universes to reach compatible risk telemetry systems, so that your Metaverse horse-breeding loan could suddenly be compared to meatspace equipment financing. If there’s a common language we could speak with aliens, it could be about interest rates (Arrival def got it all wrong)

What these loan parameters are: they are tetris blocks, and they are all composed together to get you that dopamine hit of the 4-block tetris slam. Back in TradFi, members of MetaStreet DAO had the misfortune of staying up until 3am repricing corporate bond interest rates from L+425bps to L+415bps, or about 0.10% interest of savings, and no dopamine was generated/recorded.

To get to Curve’s level of a fluid governance system, NFT debt markets must become more parameterized & abstracted, while respecting the nonfungibility of the underlying asset. The most immediate comparables to the real world are existing “hard-asset” debt capital markets: equipment financing, art financing and real estate financing.. very different assets, yet you can easily compare the “risk” between each of these via the interest rate, default rate, LTV, and other parameters.

By making these risk qualities clearly outlined, MetaStreet has focused on making the entire underwriting process of debt easily digestible to govern via a “Tetris-like” debt protocol at the most basic level. Making NFTs “liquid” and scaling debt is simply an aftermath of decentralized coordination through this protocol.

MetaStreet’s Goal: Why decentralized governance is the most efficient method of parameterizing & optimizing for market risk

The objective of MetaStreet’s protocol is not to simply to create “NFT liquidity” - this is definitely a smol picture thinking kind of goal. It’s one of our personal issues with a few of the emerging NFT P2Pool lending protocols: they’re not looking at risk, they’re simply looking at the NFT’s collateral value - this makes it hard to figure out a proper interest rate system and almost always depends on oracles. We are looking at what’s being created, the debt itself. Slapping an oracle on something doesn’t mean it’s solved. While not related to debt or NFTs, Primative’s options RMM product (oracle-less) definitely has the big-brain thinking of antifragile designs.

Our goal is to achieve the minimum threshold of creating liquidity levers that the normal person can understand & use. Much like how Tetris shapes are formed around reliable and repeatable shapes, governance users will be able to naturally navigate the parameters of the NFT loan (no matter the shape) to understand what their votes are directly doing. This feedback system is what enables users to have the tactile feel of how their votes affect the NFT debt markets, the capital markets at large, and the GDP effects on the Metaverse for which they opened the liquidity faucet in the first place.

Concepts in traditional finance don’t often even give a voice to the people. They are doctrines that are passed down and misalign a lot of interests: LIBOR, fed funds rate, Fannie Mae/Freddie Mac. In the metaverse, if these concepts are understandable, then they may be governable, as Arthur Hayes alludes to in Dao Lay Lo Mo : “In the metaverse, avatars can organise themselves into banking DAOs, with different metaverse societal goals. These goals can be programmatically expressed via lending standards. These lending standards are completely transparent, so there is no question as to how banking DAOs originate loans.”

MetaStreet has scaled to be the #1 liquidity provider on NFTFi (for DAI) by utilizing these conceptual “tetris blocks” to underwrite the NFT debt risk parameters of each asset class using a self-organized structure. As MetaStreet begins to further democratize its underwriting process and protocol, the goal is that the users will allocate risk in a very effective & competitive manner, similar to what is seen within the DeFi ecosystem.

In the future, we hope that economists & denizens from different Meta-universes, with their own communcation, capital and labor will determine their 1) rates, 2) subsidizes and 3) “sovereign debt/metaverse debt credit ratings” through the open-sourced, decentralized protocol that we are building. This starts with abstracting for digesting.

How do we not fall into the same trap of the “rich-get-richer” that Curve has been criticized for? Plurality over Plutocracy in the Metaverse.

One of the largest issues with Curve is that it is currently a winner-takes-all in a limited-resource strategy.

• In Settlers of Catan, longest road, resource hoarding and development card accumulation can all be winning strategies

• In Civilization, domination victory isn’t the only way to win: there’s Culture, Tech, Religion, etc.

This is where nonfungibility’s deficiency in upfront liquidity (a bug) can actually be a feature. As there are multiple parameters to modify and levers to control, there is a natural plurality of win conditions. These are the same metrics we’ve discussed in previous posts: LTV, interest rate, term, discount etc.

MetaStreet aims to create a plurality of win conditions for the Metaverse liquidity game, building further on what Curve & Tokemak have curated for DeFi. Plurality of win conditions creates a very interest game theory, as the winner can only win 1 or 2 categories, but not necessarily all. This all starts with making underwriting a digestible and mildly entertaining process, because current onchain voting certainly feels like work (no flak to Snapshot, but it sure ain’t “fun” - just necessary). See a sneak peek below of the shipbuilding game element.

Are you hooked yet? Want to understand more about how you, a common Metaverse participant, can master the game and direct capital flows to the projects that deserve it? In our next post we will dive deeper into MetaStreet and our full governance & capital allocation process, as well as take a peek into our closed beta!

Thanks for reading! We would welcome discussion on this or any other related topics on our Discord. Thank you for being a member of the MetaStreet community!

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