We are building Warp Finance as a next-generation money market protocol that will serve the next phase of the maturing decentralized finance (DeFi) sector — dominated by narratives of regulation, risk mitigation, and collaboration, as well as being feature-laden. Warp will unlock new opportunities that have not been seen in DeFi before and will eventually become a core business-to-business (B2B) money lego. Powering our vision for Warp are its three core pillars — isolated lending pairs, Chisel, and veWARP.
Before we dive deeper into our core pillars, we are delighted to announce that the much-awaited Warp v2 Beta has been released!!! To commemorate the occasion, we are taking the opportunity to deconstruct the Warp vision. It is important to highlight that Warp v2 will broaden the horizons of Warp v1 while retaining its pioneering legacy as a stablecoin lending protocol that enables and optimizes yield-bearing tokens (e.g. LP token deposits) as collateral. Warp’s (v2) three core pillars will work hand-in-hand — of which the isolated lending pairs feature has been launched with Warp v2 Beta and the Chisel and veWARP features will be introduced during the upcoming full-feature launch of Warp v2. Read on to find out how!
P.S: If you missed the $WARP v2 Beta run-through Alpha, we have your back!
Isolated Lending Pairs
With a total value locked (TVL) of over $68 billion at the time of writing, the DeFi market has certainly picked up pace since the “DeFi Summer” of 2020 (of course, the total crypto global market cap has retraced from its high in November 2021!). Market leaders in the DeFi lending segment have traditionally only been able to offer a limited choice of assets to supply as collateral or borrow, as all assets hosted on a protocol are intertwined, hence the accrued risk of the platform is determined by the lowest common denominator. Therefore, if the price of an asset falls quicker than liquidators can react, all users and assets on these protocols are equally affected, regardless of whether a user had explicit exposure to the problematic asset. Essentially, the level of protocol risk grows with the addition of new assets — this is the primary reason why most existing lending protocols offer only a limited choice of “blue-chip” assets.
While the DeFi sphere has captured the interest of institutional investors who typically have access to significant capital but with lower risk tolerance, accurately quantifying the dynamically-weighted, risk-adjusted profile of all assets offered on non-risk isolated platforms at any given time is difficult. This has served as a barrier to institutional participation in money markets — especially given recent asset exploits on these platforms that have drained hundreds of millions off the market. Therefore, we believe that the next cycle of a maturing DeFi will favor next-generation lending platforms that provide transparent asset exposure and quantifiable risk profiles through the isolation of each lending pair. This trend is further evidenced by the institutionally-favored money market, Aave, which is now offering isolated lending pairs in their recently-launched v3.
Warp v2 intends to further advance this trend by providing a platform optimized around isolated lending pairs, focused on the value proposition and opportunities enabled by offering transparent risk with explicit asset exposure to both borrowers and lenders. Warp v2 isolated pairs will ultimately allow users to deposit any liquidatable collateral asset and take out a stablecoin loan, including long-tail and yield-bearing ERC-20 assets. Importantly, the stablecoin loan is not an endogenous algorithmic stablecoin minted by the platform, instead, it is an exogenous stablecoin provided by a counterparty user. Furthermore, this means that we are not using the “collateral” asset to collateralize a freshly-minted stablecoin, but instead, we can use the stablecoin to further collateralize the collateral (more on this another time! 🤫).
In all cases, users can use Warp v2 to free up locked capital by loaning against their collateral position, including collateral positions that continue to earn yield through strategies such as trading fees or liquidity mining rewards. Therefore, users can utilize each lending pool on Warp as a discrete, yield-bearing strategy of varying risk. Additionally, we have designed the system such that the market will automatically price the risk-versus-cost of capital between borrower and lender. This essentially means a better yield opportunity will result in a higher lending rate, thereby incentivizing capital assignment and benefiting both lenders and borrowers. That is, lenders and borrowers share in the yield opportunity generated by the underlying collateral in a symbiotic relationship — the lender provides the bulk of the capital whilst the borrower shoulders the bulk of the risk. In contrast to non-isolated platforms, each Warp user, therefore, molds their unique risk-versus-reward (R:R) profile, via selectively partaking in strategies according to their capital access and risk appetite.
To this end, Warp v2 “Beta” will test this powerful economic concept by initially supporting “Principal Tokens” from Element Finance, which hold significant and currently under-utilized fixed-yield potential — refer to this post for more information regarding the same.
However, one of the traditional downfalls of isolating lending pairs, is that they necessarily fragment liquidity along with risk. Hence, lenders have to be quick to match borrow demand and pairs often remain under- or over-utilized without a feedback loop. This is where Chisel liquidity and veWARP come into the frame.
Chisel and veWARP
Chisel is a pooled ‘sea’ of liquidity unique to Warp that can be dynamically allocated between lending pairs to balance demand, thereby fueling capital fluidity and efficiency. Users can therefore either supply assets directly to the lending pairs they want exposure to or to the Chisel pool which will then supply liquidity to select pairs and weighting as voted by veWARP holders. As each lending pair presents a unique R:R, Chisel will therefore provide users one-click access to a varied portfolio of R:R strategies.
veWARP is the governance token of the Warp ecosystem, and token holders can vote to:
- Direct Chisel liquidity
- Direct Warp emissions
- Add new lending pairs
- Add Chisel assets
In addition to the governance powers above, veWARP stakers will also share in the fees generated by platform users. This provides underlying value to the WARP utility token, much like the profit dividends of company stock. These fees will be collected via the exogenous token repayments of lending pairs and then used to buy WARP from the open market. This means any fees generated by the platform will act to increase the market value of WARP in relation to the exogenous asset (for example, USDC). When claiming their fee share, veWARP users will be presented with the option to re-stake their earned WARP as veWARP, to compound their governance weighting and fee-sharing percentage of the revenue earned by the platform. Those who do not compound their rewards will increasingly fall behind their peers in the share of future rewards delivered by the platform, thereby providing a strong incentive for users to remain active in the governance and success of the Warp ecosystem.
Further to the WARP token accruing value from fees, the governance power of veWARP becomes increasingly valuable as TVL scales. In most DeFi platforms, the native token of the protocol is used to drive incentives through allocating emissions to behaviors voted by governance as ‘desirable’. In such cases, users are only incentivized to participate in governance to assign more future reward emissions to themselves, regardless of whether this is beneficial to the platform or not. This is one reason why native tokens of such money market platforms have traditionally underperformed as they are being excessively inflated and thus, debased to reward participation — these rewards become increasingly worth less leading to diminishing effectiveness over time. In contrast, veWARP holders directly allocate Chisel liquidity to different lending pairs, thereby bypassing the typically inefficient and indirect faux incentive layer.
Directly giving veWARP holders control over exogenous collateral (for example, real assets like USDC), brings tangible value to governance and thus accrues quantifiable value to the WARP token. It can therefore be said that the value of veWARP governance may be quantifiably derived from its direct control over platform TVL. That said, Warp will still use an emission layer to incentivize behavior (for example, adding liquidity to Chisel, borrowing, or providing liquidity), however, the inflation rate can be significantly reduced in comparison to other such platforms, due to the actual value accrued by the WARP token through buybacks from fees, and genuine underlying value through governance.
Therefore, as the TVL within Chisel liquidity grows, so too do the “assets under management” of veWARP, thereby attributing greater value and importance to governance. Considering most other protocol tokenomics still rely on inflation of their native token to attract liquidity, it is expected that they may recognize the potential to use veWARP governance to direct TVL from Warp’s Chisel to their platform without incurring a cost of inflation to their token. This liquidity supply can therefore effectively be rented from Warp (B2B) and through the use of leverage farming, can minimize the number of rewards needed to be offered by a third-party protocol to attract users to their pool. There are several B2B applications powered by Warp (more on this too another time! 🤫).
Each of these applications will increase the value of veWARP governance as third parties seek to gain control over the liquidity through the accumulation of WARP or by bribing existing veWARP holders. All this while simultaneously driving borrowing and lending through the Warp platform, resulting in the open-market purchase of WARP from collected fees. Therefore, the Warp team believes that the combination of isolated pairs, fed by Chisel liquidity, and governed by veWARP presents a unique value proposition that currently does not exist in DeFi. We believe this combination accrues significant tangible value towards governance and therefore incentivizes continued participation in the ecosystem from our community as we scale out the Warp protocol.
Here is what Simon Telian, CEO of Advanced Blockchain, had to say about the Warp v2 Beta launch:
“Each of us at Advanced Blockchain AG is excited about the Warp v2 Beta release and the upcoming full-fledged v2 launch of Warp. Warp will unlock several never-before-seen DeFi use cases. We’ve allocated the best resources towards Warp’s development and are delighted to see the progress the team has made thus far. We hope the Warp community enjoys the fruit of our hard work!”
The combination of Warp’s (v2) core pillars will enable Warp to serve as the next-generation money market platform it is being built as — regulated, risk-averse, collaborative, and feature-strewn. Isolated lending pairs will isolate risk to individual pairs, Chisel liquidity will power capital fluidity, and veWARP will enable governance, control, and fee sharing. Having released Warp v2 Beta, we are itching to release the full-fledged Warp platform, complete with Chisel and veWARP! Development is underway and we will reach out to you as soon as Warp v2 is ready for launch, so gear up and as we always say:
Let’s Warp things up #WarpCommunity! 🚀
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