Matthieu Gavaudan joins the show to talk about Infinity Pools over a two hour conversation. Frax will most likely integrate infinity pools into its architecture at some point in the future. 

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Timeline

GM, everyone, welcome to Flywheel, your number 1 source for fracs, DeFi, and everything in between.

If you wanna know what's going on in the world on Chain, well, you've come to the right place.

This is DeFi Dave, here with Capital K, and we're here to help you harness the power of the flywheel.

And today we're levering up, we're going deep, and we're diving into Infinity Pools.

We have on Matir, the CEO of Infinity Pools, and we go in depth, we go like literally infinitely deep about the structures and the mechanisms and the ramifications of such a new capital P primitive on chain.

Or word of caution to the listeners, grab a notepad and a pen and literally listen and take screenshots and really understand this.

Cause this could be a definitely new thing in the space and you've heard it here first.

we went deep for you guys on this 1 because when I was doing my prep work for this podcast, I recognized the importance of what this primitive could be like.

So you guys enjoy because I definitely, We definitely went deep.

And he reveals some things that haven't been revealed before in previous podcasts.

true meat of this is like probably halfway through.

If you want to stick around and keep up with everything we're doing at Flywheel, hit that bell button.

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And you can follow me on Twitter at defi Dave 22.

You can follow me at 0xcapital underscore K.

And I started early because let's get the flywheel spinning.

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I'm your host, DeFi Dave, here with Capital K.

And this week, We're taking a deep dive into Infinity Pools.

We have Mathieu, or Mathieu, who is the founder.

It's funny because if you tell anybody outside of DeFi, I'm the CEO of Infinity Pools.

They think of like literally like some like mansion with like, you know, with a pool overlooking some crazy view.

But Mathieu, thank you so much for joining us.

So let's right into it because Infinity Pools is quite the novel concept for the world on chain.

And I'm just wondering from first principles, how did you come up with Infinity Pools?

You know, so the way that we kind of like came up with InfiniPool, and like it was definitely a group effort, right?

Like this is by no means like me on my own, just kind of like grinding at night.

Like this has been very much like an iterative process over the course of months of research that like, you know, we eventually got to like the current, like, you know, state of Infinity Pools.

But really, like the reason that we started working on InfiniPools is because originally we had launched another protocol called Lemma Finance that was stablecoin, actually the first stablecoin ever built on top of like perp DEXs.

And, you know, there was like definitely like some appetite there.

Like there's a lot of excitement around DeFi derivatives.

But as we built on top of perp DEXs and perpetual futures, you know, we kind of like became intimately aware with all the problems that perpetual futures as an instrument, as well as, yeah, really just perpetual futures as an instrument had.

And the fact that with their current implementation, there would not be a Uniswap moment for DeFi derivatives, right?

Because in the end, even if Perpdexes, you know, were terrible instruments and like hard to build on if you had like, you know, crazy growth on top of perpdexes, we would have still been able to build some interesting use cases and instruments on it.

The problem is that Essentially what we saw was that most perpdexes were just a simple copy and paste of what was already existing off-chain and without any 10x improvement.

The reason that Uniswap is so popular is not because it's trading on the chain.

It's because it offered a 10x improvement over its incumbents.

It allowed people to trade 10x more assets via permissionless listing.

But more importantly than that, it actually allowed traders to trade those assets 10x faster.

So like there was no like listing process that, that, you know, essentially reduced reduced the speed of trading.

And so far we hadn't seen anything like that for infinity pools, for like, sorry, DeFi derivatives.

And so that's kind of like when we started like, you know, thinking through, you know, first principles, how could we offer leverage on the long tail of assets?

And that's kind of like how, like the mindset that we first started, you know, think about, like not even like thinking about perps, right?

Because we knew that like perps rely on oracles and oracles and long tail assets don't mix.

There's simply no way around that, right?

So like, how do you offer leverage without oracles?

And, you know, we kind of like came up with Infinity Pools then.

And what we realized is that unlike Uniswap that, you know, offers 2 really, really nice 10X improvements, Infinity Pools offered like 5 different 10X improvements that were like pretty crazy.

So, as I mentioned, right, like it's 10x more assets, 10x faster lead of, 10x faster, like listing, right?

So like, just because you, as soon as it's available and transferable, you can trade them on InfiniiPools.

But the other free 10x improvements are, number 1, 10x more leverage, right?

So in our V1, we expect that we're going to be able to offer anywhere from 1000 to 5000X leverage.

We actually managed to bump it up even more on high market cap assets.

So like, you know, Ethereum, you know, basically the top 10 coins are like top 50 or something.

And then, you know, 10 to 20, 000 X on Forex pairs and then potentially

So we're talking USDC, USDT or, you know, STE, ETH.

I'm thinking ETH and SFRAX ETH right now.

You know, we've got some really, really cool stuff coming.

And so this is actually way more than 10x, right?

It's like a thousand x improvement, but yeah.

That one's a little harder to like quantify, but really the way that we think about it is in terms of liquidation penalties.

So for perps, what happens, and this is actually super interesting, right?

And like something that I haven't talked enough about, but think about it this way, right?

With perps, you've got traders, you've got market makers, and then you've got liquidators.

And essentially, you've got $100 in the system.

The $100 is gonna be split between these 3 parties, which means that liquidators, they get some significant amount of money through liquidations and liquidation penalties.

Because there are no liquidation penalties on infinity pools, the money stays in between traders and market makers, right?

So essentially it's just like a much more, you've got to ask yourself, right?

Like, well, if the money goes to liquidators, where does it come from?

Well, the money comes from traders, which is why, like, usually expected returns for traders on perpetual futures are actually quite bad.

But Yeah, we have an article talking about expected returns on everything.

And for infimum pools, it's actually as you crank up the leverage beyond 15x, the expected returns on infimum pools for traders are 10x better, like, or even by several orders of magnitude.

And the fifth 1 is the fact that it's what we call counterparty risk.

And once again, this is very hard to quantify, But basically the fact that we don't use oracles, the fact that all positions are always settled, you know, in a predetermined, like mathematically guaranteed way, means that there is no counterparty risk.

And like all perpetual futures today, even the ones on DEXs have insane amounts of counterparty risk, right?

That's why like, and like, even if you think about Mango, right?

Like, It wasn't strictly like a perpetual futures hack, but like it might as well been.

Just essentially manipulating the spot markets to like, you know, then like, you know, make money off of like the synthetic or like a loan.

So yeah, so those are kind of like a high level of the 5, 5 different 10x improvements or 5 to 1000x improvements.

Yeah, I watched the Dan Elitzer interview on Bankless the other day about making DeFi more resilient.

And, you know, the number 1, 1 of the number 1 things he said was that Oracles are such a big dependency in DeFi and we want to create protocols that don't have such big dependencies.

And I feel like you guys are going along that path.

And where do you think Infinity Pools fits within that context?

Obviously, you know, like I'm a big fan of Dan Elitzer.

I think he's 1 of the smartest investors in the space.

And like really the way you need to think about it is, okay, well, what is a primitive and what isn't a primitive, right?

Like a primitive needs to be something like Uniswap, right?

Which is almost immutable, you know, governance like light or like less completely.

And yeah, it can essentially survive no matter what happens.

Unless you have essentially like 0 to like extremely low counterparty risk, I don't think you should be able to call yourself primitive.

Because they are really like the building block of everything else.

And when you have oracles, you're really creating vulnerabilities on 2 different axes.

So, you know, an asset that might be liquid today is not always going to be liquid tomorrow, right?

Which means that, you know, if you're trying to liquidate an asset today and it goes really well, well, liquidating that same asset tomorrow using an Oracle actually might not work at all.

So essentially protocols that use Oracles, as their TVL grows and you can borrow and borrow more assets or like, you know put on bigger size that actually is also like a exploitable surface or like a attack area, right?

Because what it means is that you've got more gunpowder to manipulate markets, et cetera, et cetera.

So, as soon as we're talking about using oracles, you've got plenty of surface attack area and any decks or any protocol that uses them should not really be able to like call themselves a primitive, just because there are simply too many exploits and vulnerabilities introduced when you start, you know, messing around with oracles.

Yeah, I like what you said earlier about if there are dependencies, if there's oracles, if there is counterparty risk of any sort, then you can't call yourself a primitive.

And these primitives are the building blocks of DeFi and this economy on chain.

I mean, you know, we're trying to build a resilient financial system, you know, that will last and, you know, that's 10x better than like the traditional finance system.

And I think that like, the only way we can do that is by making sure that we build extremely robust, strong and efficient, scalable primitives.

Let's get right into, uh, how the whole process works.

Uh, can you walk us through step-by-step what it's like to be an LP and then what it's like to be a trader and how that flow works?

The experience for LPs is actually extremely simple Also, can I share videos here?

Yeah, so this can maybe be like a bit of an exclusive for-

We like recently filmed like a demo on Loom.

I mean, I've watched, you know, I've read 2 articles, watched 3 videos preparing for this.

So I'm very familiar with how it works and your example of always using the

I'd love to see how it looks like in the UI form.

So this is like specifically for like the, the LPA, but, okay.

You're going to have like, you know, like a supply like dashboard where you can like go in, see your active positions with like a WEF USDC, you know, you've got like some liquidity deployed.

There are still like some changes that are going to happen, but essentially when you have, actually, let me show you how to like provide liquidity first.

Basically, when you get to a website and you click on whatever, like lend out or start earning yield, you get 2 options.

The first 1 is lending out your Uniswap LP.

And the second 1 will be providing liquidity directly.

So if we click on lend out your Uniswap LP, and you have your wallet connected, it'll directly or automatically detect all the NFTs that you actually have in your wallets.

And based on that, you can just scroll through, select which 1 you want to lend out, click continue.

And then it kind of gives you some details.

You confirm that this is in fact the 1 that you want to lend out and then boom, it's done.

It's literally a one-click process and this is how you get some initial liquidity.

Of course, you can also provide liquidity directly through the protocol.

And this is also extremely straightforward.

The only difference is that you don't have a fee tier, right?

So when you're depositing liquidity in a pool, this is a few tier less, which makes it a little simpler.

You know, you prove your deposits, start earning, Boom, there you're done.

And then, you know, coming back to this, like you can see your active positions here.

You can click in it and then you can kind of see, you know, how much liquidity you have, like your unclaimed fees.

And then, you know, you can, let's say you want to close your position, right, you can choose like how much of it you can close, you can withdraw now and we're going to change some of this stuff.

But like, basically, like, there are free main perks, or there are actually a bunch of different perks, like providing liquidity on infinity pools.

The first 1 is essentially that you're getting higher yields simply because on top of spot fees, your liquidity is being lent out to leverage traders.

And what that means is that there's also volatility arbitrage that you can do to get the pool yield to be at a certain level.

Essentially you're almost always going to be making higher yields.

The second thing is that you're making yields, right?

Like even when your liquidity is not in range, right?

What that means is that like if you've got liquidity between 800 and $900 and the market price of the asset in the pool is $1, 000, you're actually still making money, right?

Because your liquidity is being lent out, right?

Like, it doesn't matter that like, it's not near the market price, it's still being lent out, and therefore you are getting paid for it.

So basically, there's no, and this is like, also part of like the the drawback, which is that when you deposit your assets, you're essentially lending out a part of your assets.

You're, and the way you can think about it is that you're lending them out for 1 day.

And what that means, right, is that if I lend you out a hundred dollars, right, for 24 hours, right.

And you pay me $10, right, in interest up front to have lent you that $100.

And then I go like, hey, actually, I want to, like, you know, take my assets out of this loan 12 hours in, right?

So like 12 hours in, I'm like, hey, actually, I don't want to make this loan, which is, you know, what withdrawing liquidity from the pool is like, right?

You're essentially taking back your assets.

Well, you can do that, but you need to pay to essentially borrow back your assets for the remaining 12 hours, right?

So like in this case, If the interest rate stays the same, then I would pay $5.

That's basically a penalty if you withdraw early as a liquidity provider?

Um, and, and, and once again, this is just like, in case, like you think that like things are going to go to shit in the complete immediate future.

And you just want to pay a fee to take out your assets.

And so once again, if I got paid $10 for a 24-hour loan, there's 12 hours remaining on that loan.

Essentially, what I do is that I just borrow from anyone else.

And so that's what the withdraw now thing is.

And like, obviously, there's like an outrageous price here.

Like it's just, like not actually true, but like, you know, we're just kind of like operating with fake data.

And then the other option, right, which is the free option, which is just you can withdraw your assets gradually, right?

So like essentially you get 50% of your assets back the first day,

And actually, like it's even more than that, because you get, you know, if the utilization ratio is like, I won't get into it, but you get a lot of your assets back, like essentially like immediately, and then you get an exponential unlock.

So by the time it's like the sixth day, you only have like 2% maybe, or less assets left in the pool.

So yeah, basically it's a pretty fast withdrawal, right?

It's just that it unlocks over the course of a couple days.

When you first lend your LP position into the protocol, do you get to select a duration or a term, or is it just

It's kind of like you lend once and then it like does it automatically for you.

Okay, so you guys just drop it in there and then whatever, then this gradual withdrawing thing, is it always going to be fixed that like by the sixth day, pretty much everybody, pretty much you're fully out?

Or can that be dragged on if like, say, there aren't enough liquidity for me to borrow that liquidity to pull it back out?

So you've got the utilization rate that's at 30% in a pool, right?

So that means that like 30% of the assets are currently being loaned out.

As a liquidity provider, if I've got $100 in this pool and I click on withdraw gradually, so, you know, just kind of like over a period of time, what that means is that I get back $70 immediately.

So I get back $70 immediately and the remaining $30 that are on loan essentially get unlocked exponentially.

And so for the remaining $40, then yes, it's because all loans are the exact same in terms of maturity, they will all like, you know, Like it always takes essentially like 4 to 7 days till I get to like

Let's say, cause you know, you mentioned earlier that you want this to be that any tail asset, just like how Uniswap, The moment is transferable, you can have this market.

Let's say it's super early and it's just us 3 in this pool.

And let's say, you know, we all own a third evenly pro rata.

So now let's say the utilization rate is like you said,

All 3 of us decides to hit withdraw gradually, then we'll each obviously get the pro rata of our 70.

But then if the traders who borrowed it didn't close their position, how do we get the remaining balance out?

So basically, the way you can think about it, right, is that these loans are negotiated up front, right?

So essentially, if there is no liquidity left in the pool, then the interest rate, which is based on the utilization ratio, shoots up to infinity, and then the trader can no longer afford it, right?

interest rate shoots to infinity, trader can no longer afford it.

Right, but by themselves right they they have to pay it on their I thought the interest rate was paid up front So what what happens when the utilization rate, you know maxes out after the interest is paid?

So once again, all this stuff is pre-negotiated.

So in this case, the trader would pay the same rate that they would have always paid with free LPs in the pool.

And then when free LPs simultaneously withdraw, then the next interest rate is essentially infinity.

But the current loan won't be over, right?

Because I could technically just hold this position and never pay back the loan.

All these loans like stay locked into protocol, right?

So like, they can't just like decide not to pay it back.

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Infinity Pools 100,000X Leverage? w/Matthieu Gavaudan - Flywheel #57