Transforming DeFi with Interoperable Money Markets with Alex Melikhov from EquilibriumJun 21, 2021
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HOST: Hey everybody, welcome back to the Unstoppable Podcast. I'm your host, Diana Chen, and I'm here today with a guest Alex Melikhov. He is the CEO of Equilibrium, which is an Interoperable or cross-chain money market, where you can earn, lend, borrow and raise equality and synthetics decentralized stable coins all in one place; very exciting stuff. Thank you so much, Alex, for being here.
ALEX MELIKHOV: Thank you so much, Diana, for having me here. I'm super excited to be on the Unstoppable podcast, and touch base on everything related to Polkadot and to - - DeFi.
HOST: Awesome. So before we dive in to all that good stuff, I want to know little bit more about your background. So take me back all the way to the beginning of when you first heard about crypto. What was it that caught your attention and then how did you start learning about it initially?
ALEX MELIKHOV: Is actual was quite a long time ago. The first time have heard of Bitcoin was 20—I believe '12. I'm actually engineer in applied mathematics by training, that's why the environment when I was growing up is comprised of decent engineers and specialist in different technologies and severely talented engineers in mathematics as well.
And the friend of mine he was deeply involved in that back in the days and he told me about Bitcoin. I'm quite regretting that I didn't take Bitcoin that serious that days because apparently, actually most of us are a little bit regretting about that. And actually I was taking Bitcoin more serious a little bit later. That days in—back in 2012, I was focused on Fintech projects, and at the end of the day in 2016 when the blockchains space was very well developed. I understood that it was the great time to jump on some blockchain development and to start my own projects.
And so actually the first projects that I was professionally involved in crypto was the instant exchange called Changelly. Its currently quite established one, and one of the biggest instant cryptic exchanges on the markets.
However, then I had actually discovered for myself the capability of Ethereum and smart contracts, and so I decided to get focus on building decentralized applications. I've put together quite a decent team of engineers and financial specialist who are currently working with me together on various DeFi projects. Back in 2017, we're building the first lending application on Ethereum I believe. It was even before Compounds released its white paper.
So the idea behind that project was to basically put together platform for partial agreements, I'm sure of that our reviewers are actually familiar with this financial instruments for institutions. And I'm sure that everyone knows that the partial agreements markets is not that well-structured, and obviously, there is a batch of different intermediaries and actually they make all these partial agreements operations quite expensive, from the perspective of commission these and stuff.
So definitely like the decentralization, would be for goods for this - - agreement markets. And so Ethereum smart contracts seem to be quite visible solutions here. However, eventually we figured out that institutional demands was not there, and so we decided to shift our focus on more retail markets than we're building DeFi on various other more platforms so were always looking for the platform with the highest capacity in terms of, you know, conjunctions and so obviously, for achieving transactions on blockchain. And so back in the days in 2018, we decided to switch to developments on EOS, and to build the first DeFi application there which was the centralized stable coin. It's called USD its currently up and running. One the biggest DeFi applications on EOS so far. And now were developing Polkadot kind of expanding our public line into the full flashes of interoperable money market.
HOST: Awesome, awesome. Yeah. So I think we going to be talking about a lot of different components of DeFi, but in order to get into that, let's set the stage and give anyone who is listening, who is new to the space a little primer on what DeFi is, and how DeFi is better or different from traditional finance.
ALEX MELIKHOV: Sure. So behind the concept of DeFi, there is the concept of smart contracts, and the main idea here is that all the codes that we have in place that its basically written in the code of smart contracts, can be executed without any assumptions and so we can always rely on blockchain and make sure that everything is decentralized and there are no central counter parties who are involved in the execution of a particular codes. So efficiently, no one can affect this codes execution, and the results of execution of the application.
So you can think of that as of some vending machine, when there is the algorithms which is designed to accept money from the user, and according to the user's choice to deliver a particular product. So this exactly the same how this smart contract works. And actually, all the DeFi is based on smart contracts and its kind natural way for managing assets and its kind natural use case for the blockchain technology.
So in nutshell, DeFi is the sort of implementation of different financial instruments on smart contracts. And certain operations with the quick to access based on algorithms, which are encoded in this smart contract. So the main advantage of DeFi compared to centralized finance is that DeFi is not relying on any third parties, and it actually eliminates any additional cost on any kind of intermediaries. And on another hand, you can be sure that your assets cannot be stuck on any stage of application execution. It cannot be blocked, or it cannot be seized by some third parties, and everything that you can - - in advance in the codes will be executed as it's actually, defining the codes. So this is maybe one of the main advantages of DeFi.
And obviously there are no single points of failure, and from the technical perspective, DeFi also delivers a lot of capabilities for application viewers. Because efficiently, you are not building any kind of bank accounts for your applications; everything is on chain and you can consider block chain as your back accounts for your applications. Is just kind exiting.
HOST: Very cool. So now that we have set the stage, tell people what Equilibrium is? I'm sure my one sentence intro didn't do a nearly enough justice at all.
ALEX MELIKHOV: Absolutely. Equilibrium is, as you have said, is the first interoperable money markets. Efficiently, it's the conglomerate of DeFi products, and actually it's comprised of the full-fledged lending platform, and the professional ranges decentralized exchange which is cross chain and the audible paste.
So the main reason why we're working on Equilibrium, is that we are aiming to solve three main challenges for the current DeFi space. So we envision them as, first of all is the fragmentation. We all know that the current DeFi space is literally scattered across multiple platforms and applications. And the users they need to interact with the multiple DeFi primitives in various user interfaces to make use of the current DeFi.
And actually, it also means that not the only user experience is actually fragmented across this multiple product, but also liquidity is also fragmented across multiple applications, and even across multiple block chain protocols. So we're aiming to solve this fragmentation.
And secondly, we are aiming to solve the lack of interoperability, which also makes sense. Its actually one of the main reasons of the current fragmentation of the overall liquidity, 'cause the most of assets are currently locked in DeFi; these assets exist on Ethereum primarily. However, Ethereum is just 12% of the overall crypto markets. While the—I believe that the over 90% of the currents are working on DeFi is currently based on the Ethereum.
And the third challenge that we're aiming to solve by building Equilibrium, is the inefficiency of debt management. And we're solving that through introduction of the innovative debt management system, where we're taking the risk based approach to borrowing cost assessment first of all, and also introducing the advanced system for debt liquation in case of merging cause. I'm sure we'll have a chance to touch on that more details in the cause of the conversation.
HOST: Yeah, for sure. That's a great initial overview of Equilibrium. So one thing that I know, that you're super passionate about and you just alluded to this too, is that the problem with interoperability and how there is a lack of interoperability in the DeFi ecosystem at the moment.
So I'm just wondering why is interoperability so important for you and why was that such an important feature for Equilibrium to have? And then, I guess try to like explain it in a way for us maybe some of our non-technical listeners to understand why interoperability is so important like from a user perspective, what is interoperability allow the user to do that they wanted to be able to do if the DeFi platform was only built on a single block chain for instant?
ALEX MELIKHOV: Sure. So from the user perspective, when you're interacting with certain application, you usually do that on just a single blockchain. So for example, if you are working with some Ethereum based DeFi protocol, you're able to send assets only within the Ethereum network. All right? And if it comes to accessing some other assets which are currently not represented on Ethereum, so we obviously know that you definitely can do thing with some rep on Bitcoin. Like WBTC or RENBTC and some others.
However, there is a lot of other assets which are currently not present on Ethereum, however, I'm sure that there is a batch of use cases for them as well. So one of the solutions here is obviously interacting with some centralized platforms, right? For example, with centralized exchanges when you can simply deposit funds from your exchange accounts and reduce operations. However, these kinds of approach have definitely certainly draw back. The obviously draw back here is that's single point of failure, which is the centralized exchange, because eventually funds could be, for example locked so falls on the exchange something can happen to their custody, you always taking risk of this interest counter party.
So another options here is to interact with the system which is cross chain interoperable, which means that the application can actually work with different other block chain networks without relying on any kind of third parties in a decentralized manner. So to the dates, we don't have that many blockchain platforms that can do that, and obviously the cross chain that probability is the hot topic for now. So we think that Polkadot specifically, which is down to line platform for Equilibrium, and Kusama which is the underlying platforms for our Canary network; - -.
These two platforms are truly cross chained interoperable. Which means that they have bridges which are operated by independent counter parties in decentralized way, and many, many other blockchain networks are interconnected with the Polkadot and Kusama through these bridges.
And this is crucially important, obviously, for the developments of DeFi space, because the decentralization is the cornerstone for all DeFi applications. And for sure if we are aiming to achieve this decentralization, and to achieve the maximum equipped DeFi protocols, we need to became eventually cross chained interoperable and to get access to various other blockchain networks which are currently unattended by the current DeFi protocols.
So this is something we're aiming to solve in Equilibrium and also in - -. And so we believe that this will maximize the potential liquidity in the DeFi space overall.
HOST: Gotcha. Okay, that makes a lot of sense. And so another feature that you mentioned earlier that Equilibrium is trying to solve for is the inefficiency for debt management and the DeFi ecosystem right now.
So can you dive into that a little bit deeper maybe for people who aren't familiar like what are some of the inefficiencies and debt management that you see? And can you get into those specifics more about how Equilibrium helps to solve for some of those inefficiencies?
ALEX MELIKHOV: Sure. So here, basically two things that's worth emphasizing. So first of all, if it comes to debt management, we need to talk about the debts liquidation. If it comes to merging codes and some—wherever those defaults. Actually, there might be two approaches here. So first one is the most common one for the current DeFi space. It's the liquidation of debts through auctioning and through selling out the liquidated collateral.
And we obviously know that the most of the loans in the current DeFi are over code - - right? And if it comes to liquidation, usually platforms are seizing the collateral assets from borrowers, from their wallets and selling them off to the open market in order to cover the liquidated debts.
So this approach also has certain draw backs, and the certain issues were experienced by - - during Black Thursday, a year ago when over $7 million were simply extracted from the protocol, and that happened because of the combination of certain instances, including the clock on Ethereum network first of all and the lack of counter parties to participate in the auctions.
And so actually here we have the second approach, which is more common for the world of traditional finance. In this approach, the debts is not efficiently liquidated, but the debt obligations are simply transferred from the borrowers to some flip parties who are acting as insurers for this debts.
So at Equilibrium, we are taking this second approach which is quite innovative for the current DeFi space. So how exactly we do that? So first of all, we have introduced the specific role. The new user role called the bailsman [phonetic]. And actually in bailsman, they're acting like liquidity providers. We assume that this role will be more relevant to more professional market players who are familiar with management of diversified portfolios. And so actually these bailsman, they're taking the most of risk of liquidations in the system.
So efficiently they are providing liquidity in advance into the bail outputs, and when it comes to liquidations or merging codes, there are no force actions required which makes the system more balanced and has less applied risks in case of some significant of market turmels.
So in other case, the debt obligations, as I said, they are transferred; simply transferred from borrowers to bailsman and they're taking over this obligations. And so they can repay these accumulated debts whenever they want and not necessarily the moments of actual liquidation. Which means that there, again, no forced actions required and these set up definitely has less implied risk and actually system becomes more sustainable in case of difference market crash or whatever.
Another advantage here, that's we efficient of not hedging the risk of slippage in case of this type of liquidations, how it's implemented in other DeFi products, whatever maker now compounds offer and other protocols that are acting to liquidations by auctioning or selling out the collateral. And actually in our case the system as you said becomes more, more sustainable.
So another thing that I wanted to outline here is that compared to other lending platforms, we are approaching the assessments of borrowing costs in a very different way. So for example, most insurance money markets like Avik [phonetic], Compounds; they're assessing cost of borrowing via assets retaliation. Which means that the more assets bought from the particularly liquidity pool, the more expensive loans become for borrowers.
And in our case, we are inheriting the approach from the institutional clients and this approach is a risk based. Which means that we are constantly assessing the overall system salience, rather than asset utilization. And so the more - - the system is, the more reliable the particular user risk profile, the less cost applies on the particular loans.
And actually this means that, for example, the particular user can affects the borrowing costs for their position by providing either more collateral or less volatile assets as collateral to the system.
HOST: Gotcha. So one thing that I am always curious about, and I'm asking this because I've already learned so much just from listening to you on this episode. So I'm wondering about user education. I'm sure there's a lot of education needed in order to get across to your users like what Equilibrium can do for them.
So I'm wondering like what has been your experience with user education and what have been some of your most successful strategies in terms of educating the market and helping them understand how DeFi works, and more specifically how Equilibrium can help them with their DeFi; anything that they want to do in DeFi?
ALEX MELIKHOV: Yes. For sure. I think that the DeFi concepts are quite sophisticated for the average users. And actually, a lot of education required to familiarize users with DeFi concepts. And we're also paying very close attention to education of our community to let them know of what exactly we're building, and which advantages are behind our product line, and particular technical solution and financial solutions that we have in our platform.
So on our sides, we are actually producing quite a lot of contents, which goes into more detail of what exactly we're building and explaining everything in sort of explain like I'm five approach to the sort of concept creation. And so actually, you can find quite a bunch of articles in our medium blog, which explains our system in very, very tiny details. And so actually, I think that most of users, they can learn almost everything about our platform in a very simple terms.
So another thing is very important from my perspective, is the creation of the comprehensive implementation for the protocol. And actually, it's very much helpful not just for average users, but for those third party providers who are considering integration with their protocol, and efficiently, it results in more adoption for your system overall.
HOST: Gotcha. So in terms of just like forecasting a little bit. When you look at the DeFi ecosystem, what are some things that you expect to see in the next year? Or what are some things that are really exciting to you that you would love to see come out of the DeFi ecosystem in the next year?
ALEX MELIKHOV: Obviously, I think that interoperability is the hottest topic right now. And we know that even Pokaldots and Kusama, with the all it's amazing developments is not there yet. Parachains are not launched yet. The network has not obtained its full capacity in terms of interoperability. So Parachains auctions, they're on their way, and specifically, Kusam auctions are kicking off on June 15th. And it's tremendous advance for the overall ecosystem. And it's very, very important for all Parachains based projects. So I think that this will be the key topic at least for the Polkadot ecosystem and Kusama ecosystem and their communities overall.
So maybe another topic that is very important is the creation of integrated platforms, which are taking their - - conglomerates; we see the tendency here, and the Equilibrium is one of these platform which unites a bunch of use cases—DeFi use cases in a single interface. Specifically, like full - -, synthetic asset generation and trading, as we already mentioned. And we see that this is the trans for overall DeFi space.
So for example, synthetics, they've been creating something similar. They started off with the creation of synthetic asset platform, but now they're turning into the full flash DeFi-1 stop shop. So the same to - -. They have started off with decentralized stable coin. Currently they're also building the decentralized exchange. And actually, there's quite substantial amounts of products in there for the client now. So we understand this is a trans, and we are also taking this approach as well.
HOST: And then specifically for Equilibrium. What are some things that you're working on right now that you're able to share with the listeners about things that they can look forward to in the future?
ALEX MELIKHOV: Sure. So first of all, for us at Equilibrium and - -, it's important to obtain five chain slots, and to become an integral part of both Polkdots and the Kusama networks.
So for now we're in the process—sort of fundraising, for getting the slots, because actually becoming the Parachains requires quite a bunch of funds. So for example, if they project wants to become Parachains on Kusama, it needs to spend roughly 100,000 Kusamas in the Parachains auction, which is currently right about $40 million. It's quite substantial amounts of money. And obviously, each project has some strategies to get there. So we're currently implementing the strategy.
And if some of our viewers is actually interested in participation, they can find all the information on our website. Its Genshiro; like it's on my t-shirt, and you can find all the information there.
So obviously, we're also rolling out the same strategy for Equilibrium. We already have actually conducted the first piece of operation with Oframe, we have collected 250,000 dots which will be a fraction of our bit of our Parachains on Polkadot. And as soon as our Parachains will introduced on Polkadot, we will be also participating in the Parachains auctions as well.
So another thing which is important in terms of our roadmap is obviously a launching our products into production. So we have already implemented everything related to our lending platform. Specifically, we have implemented the - - lending functionality of decentralized stable coin, we have the native stable coin on our platform, which is called EQD. Which is - - dollar and backed to buy true basket of collateral.
And actually, the second thing is the decentralized exchange, we're already approaching it's developments. Building a sport markets, which will have the margin trading functionality out of the box. So expect we will be able to show some of our developments in terms of our DAX, quite soon.
HOST: Super exciting stuff. I'm very excited to see all of the new features that come out of Equilibrium, and most importantly, I'm excited to try it out for myself. So before you go, Alex, just tell people where they can find you if they want to connect with you personally. And then also tell people where they can go to use Equilibrium, and what are some of the initial cool and easy and fun things that people can do as their first point of entry into Equilibrium?
ALEX MELIKHOV: Sure. First of all, you can find us at equilibrium.io, and genshiro.io. These two websites are for our Polkadot based projects and Kusama based projects respectively.
So the first, maybe the coolest functionality that we'll be rolling out into production is obviously the liquidity farming, because we believe that good strapping liquidity is crucial for every DeFi platform. And actually, we have prepared the very interesting liquidity farming program for our users where they can earn quite distance numbers of our major tokens, respectively EQ for Equilibrium and Gens for Genshiro.
So you can visit our website and find all the information related to our further launch and about our liquidity farming program as well.
HOST: Perfect. Thank you so much again, Alex, for taking the time to come on the podcast. Thank you everybody for tuning in. And we'll be back again soon with another episode of the Unstoppable Podcast.