Summary
In April and May, 2023 the Inverse Finance went through a holistic strategy, planning and prioritization exercise. This post summarizes those outputs to clarify the intention for the next 6 months and seek further community input into the proposed approach.
Topics to be covered include:
- State of the DAO
- North Star
- Success Levers
- Key Metrics
- Increase product adoption
- Customer segmentation
- Product roadmap
- Maintain Product Security
- Increase Profitability
State of the DAO
Since inception, Inverse Finance has grown and matured. Key successes include:
- Launch of FiRM
- $16.21m DOLAs lent out via FiRM, the 3rd largest fixed rate lender on Ethereum
- $3.06m of bad debt paid down in 2023 (up to EOM July)
- Much improved security process & posture
- Published a detailed Financial Status Report in April.
- 3rd largest veVELO holder, amassing 15.27m veVELO (worth $1.67m)
- INV tokenomics update: DBR streaming
- Strengthening bonds with a number of bluechip DeFi protocols (Convex, Curve etc)
North Star
We are proposing alignment of activity at Inverse Finance around the primary objectives of reduced $DOLA bad debt
This would have the following impact:
- Reduce risks of holding DOLA and corresponding broader risks to the Inverse Finance DAO
- Reduce liquidity costs maintaining DOLA,
- Currently 10m DOLA bad debt requires $16.7m of AMM liquidity to be incentivized, at a cost of 12% this is an additional yearly cost of $2m
- Reducing the risk premium of DOLA by paying down DOLA bad debt will reduce the disincentive to hold it, resulting in reduced liquidity spend.
- Increase the profitability and sustainability of the DAO.
Success Levers
To drive the reduction in bad $DOLA debt we identified four main “success levers” which the core team can pull to drive the success of Inverse Finance.
- Increase product adoption
- Increase product profitability
- Raise external capital
- Maintain product security
The success of the Inverse Finance core team and communities ability to successfully drive bad debt reduction and profitability will be monitored, tracked, assessed and reported across each of the success levels on an ongoing basis by AWG (for Product Adoption), TWG (for increased profitability and PWG (for maintain product security) Key Metrics respectively.
Key Metrics | North Star
By Sep 29, 2024, we are targeting bad debt reduction based on the following market condition scenarios. Current DOLA bad debt is 9.04m
Market Condition Scenarios*
| Poor | Moderate | Strong | |
|---|---|---|---|
| $DOLA bad Debt Reduction | 500k | 1 million | 2 million |
Key Metrics | Success Levers
To track these success levers will be holding ourselves accountable via the following metrics
Key*
- Poor
- Market conditions deteriorate from where they are now.
- Price of ETH under $1399
- Moderate
- Market conditions remain broadly as they are now.
- Price of ETH $1400-$2999
- Strong
- Market conditions improve notability from where they are now.
- Price of ETH $3000+
Increase Product Adoption
Increasing product adoption is driven by the following:
- Customer segmentation
- Market Positioning
- Product Roadmap
These are explored below:
FiRM Customer Segments
Becoming familiar with our user’s borrowing behavior and continually refining their segmentation is an essential element of our strategy for improving the UX and finding market fit for fixed rate DeFi lending on FiRM.
We have identified what are currently the three most attractive customer segments for FiRM today. More details on these are provided below.
Sharks
Inverse has a multi-year history of attracting DeFi users who, while not qualifying as “whales”, are nonetheless sophisticated users whose opinions and behavior will help form the long-term foundation for FiRM success. Sharks tend to be motivated by yield opportunities that are above or significantly above industry norms, aka “degen.” Sharks, on average, are more sensitive to transaction costs than whales and are seen as likely users of a FiRM deployment on lower-cost L2’s like OP or Arbitrum. Sharks on average appear to be more sensitive to DBR costs than whales and also more sensitive to ease of use/user experience issues in the FiRM application. Included in this segment are INV stakers, many of whom have been loyal INV holders and community members for years, who now receive streamed DBR rewards, fueling more borrowing on FiRM. We currently believe that deposits from Sharks in FiRM will on average have shorter durations than those of whales.
Whales
Most notably, since launch FiRM has attracted high net worth individuals and founders of DeFi projects who are seeking an affordable fixed rate alternative to unpredictable variable rate markets. These “Whales” are often themselves innovators, having founded or been early participants in other DeFi projects, so being among the earliest adopters of other DeFi projects for them is not unusual. In addition to providing valuable product feedback, this segment provides an initial layer of “innovator” endorsement that a new project like FiRM requires, providing the essential reference users and borrowing activity required to validate FiRM for other users still evaluating FiRM. In our 1:1 conversations with them, whales indicate they are drawn to the innovative design of FiRM, our unique collateral options, and the ability to retain governance rights in staked collateral. We believe that deposits from these users in FiRM are likely intended for durations of greater than one year, where the use of DBR is well-suited. Whales currently show lower sensitivity to gas and DBR costs than other segments. While the Whale segment represents critical early stage sources of borrowing as well as important reference users, our marketing to this segment resembles something more akin to private banking services than that of a permissionless DeFi protocol. To build a scalable lending protocol that attracts a larger number of early adopters, our targeting is best aimed at the Shark segment above. I.e. for purposes of marketing communications, new product development, and filtering new collateral recommendations, Sharks provide the user segment through which we will operate in 2023 and into 2024.
DAO Treasuries
A third segment we have identified are DAO’s seeking to make their treasury holdings more productive. Those treasuries may include collateral already enabled on FiRM or in other circumstances, we may collaborate with a DAO to add their governance token as collateral should the DAO intend to stake a significant amount of that token on FiRM or show high probability that their community will try FiRM. DAO’s holding tokens like cvxCRV or gOHM are without good options today for making those assets productive and in some cases, the ability to retain governance voting rights in deposited tokens is attractive as well. This segment typically requires multi-month (direct) sales cycles. A limited number of preliminary conversations with DAO treasuries leads us to believe there are opportunities with this segment within Season 1.
The addressable fixed rate DeFi lending market is more vast than the three segments identified above, and includes the following segments which may be further prioritized over time.
-
Institutional Investors. These are crypto hedge funds, family offices, and other institutions who, like DAO Treasuries, represent an attractive opportunity for FiRM but require a dedicated business development effort and specific marketing programs.
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Retail users. These are users who may be new to DeFi, bring relatively low amounts of capital to FiRM, and typically require greater amounts of support and UX enhancement. As FiRM grows in popularity and is deployed on L2’s, we expect these users to consider FiRM as an alternative to traditional finance fixed rate lending options for cars, home down payments, or college tuition.
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Partner lending protocols. The market for variable rate DOLA lending, while not a discrete user segment and more of a distribution channel, it’s nonetheless worth noting as as an additional opportunity for the DAO. While users of variable rate lending protocols represent an important long-term growth driver for Inverse, our current focus on FiRM, the current lack of a Chainlink oracle for DOLA, and our conservative risk posture leads us to de-prioritize this market for the moment.
FiRM Market Positioning
FiRM is a lending protocol that reliably provides a fixed rate for the leverage you need to help your portfolio reach its goals, trusting the security of Personal Collateral Escrow accounts. FiRM’s unique fixed rate mechanism and its unique array of collateral options puts FiRM in a league of its own compared to competing fixed rate lenders.
Product Roadmap
Over the next 6 months our focus will be on increasing FiRM adoption, building on the success we’ve already seen. We will accomplish this by leveraging our strategy of targeting underserved users and markets which bigger competitors aren’t looking at, while exploiting the unique capabilities of FiRM.
Ethereum Mainnet
Ethereum mainnet is currently our bread and butter, and will continue to be the main focus of our efforts. As the nexus of DeFi, Ethereum remains a hub of both liquidity and innovation, and will naturally be the network with both the highest borrow demand assets, and the most amount of interesting assets to consider for collateral. We’ve seen large scale success with CRV and CRV ecosystem related tokens, and plan to explore that fully while also expanding into similar niches. Collateral assets that are currently under consideration include, but are not limited to:
- StakedCVX on ethereum
- CRV derivatives
- Staked eth derivatives
- Tricrypto & LP tokens
- Convex & Aura positions
- RPL
- LP tokens as collateral
We plan on enhancing FiRM further by making it simpler to interact with the protocol. By expanding our helper functionality, we will allow complex interactions to be accomplished in a single transaction.
The Accelerated Leverage Engine (ALE):
The ALE will initially allow users to lever up positions, automatically selling borrowed funds to deposit further collateral multiple times in a single transaction, saving our borrowers both transaction fees and time.
Similarly, the ALE will also allow borrowers to reverse the process using a DOLA flash minter, allowing them to liquidate collateral and pay back their loans to make existing a position a single smooth transaction.
Various helper contract functionality:
While the ALE will be the biggest user experience improvement, we’re also planning more specific helper functionality related to specific collateral assets. These include
- Allowing users to increase their collateral position or repay debt in any market with Convex Curve Rewards, in one transaction.
- Allowing users to increase their INV or repay debt in any market with DBR rewards earned from INV staking, in one transaction.
- Allowing users to enter any market with almost any asset, automatically handling the necessary transactions under the hood.
FiRM V2
FiRM has been a big success for Inverse Finance, but as with any product, you eventually discover improvements and features that you wished would have been in the product from the start.
For FiRM, we’ve accumulated a list of improvements we’d like to see. The big user facing features will be:
- Making FiRM cross network capable.
- Allowing xINV stakers to claim DBR on any network FiRM has been deployed to.
- Allowing for the incentivization of borrowing.
On the backend of things, there’s a number of improvements planned that will improve FiRM’s ability to mitigate risk. The primary features for this will be:
- An updated liquidation engine to facilitate both softer liquidations, and to make liquidations more gas efficient.
- Minimum debt per account per market, making it unlikely that there will be positions that are unliquidateable due to liquidation incentive being below gas cost
FiRM on L2.
We believe that a roll-up centric future is inevitable as adoption of crypto and DeFi increases. Having established a strong footing for FiRM on Ethereum mainnet, it is only natural to look at the upcoming networks to expand our fixed rate lending activities.
Optimism
Inverse Finance has found a lot of success for DOLA on Optimism, primarily in the form of a strong partnership with Velodrome, which have made Inverse Finance one of the biggest veVELO holders and DOLA is often the largest stablecoin liquidity pools on Velodrome. With strong DOLA liquidity follows a strong foundation for borrowing out DOLA, making Optimism the logical next step for FiRM to expand to. Optimism is made further interesting by their retroactive public goods funding and grants programs, which would be a welcome addition to cultivate further DOLA liquidity and FiRM utilization. Our goal on Optimism will be to build out our multi-chain architecture, and make sure we have a winning L2 expansion playbook, before starting looking to other L2 networks.
We’re looking at launching FiRM with the following assets on Optimism:
- OP
- Velo
Arbitrum
With the technical architecture in place, and a solid grasp of what it takes to succeed on an L2, the natural next expansion for Inverse Finance will be Arbitrum. This network presents challenges, since we not only have to deploy our codebase, but also cultivate enough DOLA liquidity to ensure that users can borrow meaningful amounts of DOLA on the chain. Arbitrum is definitely generating a lot of excitement though, so we expect overcoming those challenges will be more than worth it.
We’re looking at launching FiRM with the following assets on Arbitrum:
- ARB
- GMX
Base
While still speculative, we believe that Coinbase’s Base L2 may make for an interesting expansion candidate. Coinbase is sure to invest heavily in making this network a success, and since the technology used will be identical to the Optimism stack, expanding FiRM to this network makes strategic sense. Finally, our large veVELO holdings may help us cultivate DOLA liquidity on the Velodrome sister fork, which will be launching on Base.
Liquidity operations
A cornerstone of Inverse Finance’s business is ensuring thriving DOLA liquidity, and part of FiRMs success is highly linked to DOLA liquidity, as poor liquidity operations will limit the amount of DOLA the protocol can lend out, even if there’s willing borrowers. The product working group will be working tightly with the treasury working group to continue developing and maintaining efficient Feds. This will be especially important for expanding to L2s, where there’s not currently adequate DOLA liquidity. At the same time, we will explore new ways to spur DOLA demand to allow further borrowing.
Maintain Product Security
Inverse Finance is committed to maintaining product security throughout Season 1 and beyond. We will achieve this by doing the following:
- Deeper implementation of the Nascent simple security toolkit into development processes.
- Continuous use of loss mitigation logic in deployed code like: Daily borrow limits, global borrow limits, etc.
- Continuous focus on reducing key-man risk and wallet compromise risks.
- Increasing bug bounty payouts in-line with increases in TVL of the protocol.
New process initiatives:
- Red team exercises: Try to push harmful changes through our governance process that should have been caught.
- Mock war room exercises: Test our incident response time and preparedness.
Increase Profitability
At present, Inverse Finance profitability is driven by the following factors.
Lending Market Revenue
The Inverse Finance Treasury receives DOLA revenue from the depreciated Rari Fuse 6 lending market, often claimed monthly.
For FiRM, while the Inverse Finance Treasury does not receive revenues directly, FiRM revenues can be considered as the DBR’s burnt; this can be tracked on the Transparency Portal here.
Treasury Ops Revenues
For the non-arbitrage strategies, revenues are usually only collected during period of very high bribe efficiencies. During periods of lower bribe efficiencies, the focus shifts from generating revenue to reducing INV costs on liquidity, enabling for a greater take from Treasury Transfers (ie bonds).
| Action | Description |
|---|---|
| Velodrome | Harvesting of rewards from the Velo Fed and the DAO’s veVELO voting power, selling into DOLA and sending to the Inverse Finance treasury. |
| Convex/Curve | Harvesting of CRV and CVX rewards from the Convex Fed and also bribe income from the DAO’s sdCRV voting power, swapping into DOLA and sending to the Inverse Finance Treasury. |
| Balancer/Aura | Harvesting of BAL and AURA from the Aura Fed, and also bribe income from the DAO’s vlAURA and sdBAL. Swapping into DOLA and sending ot the Inverse Finance Treasury. |
| Arbitrage | Arbitrage on DOLA liquidity pools carried out either by the TWG or AMM Feds. |
Treasury Transfer
DAO Bond Strategy
The DAO works with our partners at Bonding Protocol to offer INV token bonds in return for DOLA. This allows for users to purchase INV at a discount using DOLA, with the INV token being vested for 28 days.
DBR OTC
Current and potential future FiRM users are approached to buy DBR OTC using the terms outline in this proposal, with 100% of proceeds going towards DOLA bad debt repayments.
INV OTC
Users looking to acquire INV in size do so in stablecoin, with 100% of proceeds going towards DOLA bad debt repayment. Deal/terms are flexible depending on the situation.
As key influencers of Inverse Finance’s ability to raise external capital is the existence of a legal entity. Presently discovery is ongoing to identify the best possible routes. At some point within Season 1 these findings will be played back to the community so they can input into a final decision on how Inverse Finance wants to handle its legal entity.
Capital Outflows
Costs can be viewed in the most recent Financial Status Report. Inverse Finance is committed to retaining its high impact contributors whilst continuing to maintain a streamlined and nimble team. Costs are in stablecoins and relate to: operational costs (contributor salaries), security costs (audits, reviews and bug-bounties), and ad-hoc stablecoin expenses (short term contractor).
Close
The growth in FiRM TVL and borrows in Q2 and Q3 2023 has been a major success for the DAO and new product features and collateral options outlined in this proposal point to continued healthy growth.
Additionally, our growth strategy focuses on the user segments that have proven most successful for us though with an eye to expanding to new segments like DAO treasuries. We therefore have an optimistic outlook for the future of Inverse Finance, and our dedicated core team will continue to go above and beyond to ensure the success of this protocol. Despite facing challenges caused by past exploits and the burden of bad $DOLA debt, Inverse Finance will continue to push the boundaries of what is possible for fixed rate DeFi lending and decentralized stablecoins.