Since the 2020 DeFi Summer, the crypto industry has seen a whole new exploration of protocols for decentralised finance, including the emergence of multiple chains, various architectures of financial protocols, the DeFiisation of NFT and the GameFiisation of NFT, all highlighting the appeal of a decentralised world.
However, it is worth noting that the DeFi world still suffers from capital inefficiencies, the asset management layer on top of the protocol and application layers is not perfect, and the products on the market are basically in the exploratory stage. With the introduction of Uniswap v3, however, “centralised liquidity” has improved capital efficiency and provided a deeper trading system for other developers and protocols, hence the emergence of Multiple Protocol.
Cointelegraph Chinese sat down with Multiple Protocol CTO Tony Carson for an in-depth interview on how Multiple Protocol is using Uniswap v3 to improve capital efficiency for its users.
Understanding Multiple Protocol
In his introduction, Tony Carson states.
“In 2017, the team made a full transition to blockchain and started to build up their technology in public chains, wallets and exchanges, and made some smart contract projects on EOS and reached a global head position. The team has made some smart contract projects on EOS and reached the global top position. Last year, the team started to fully engage with DeFi and launched Burgerswap, BSC’s first DeFi protocol, followed by Clover Finance, which is now live on Coinbase and Coinan. It has the highest number of participants ever on Coinlist. The team also did some eco-projects on Ether with Bybit’s BitDAO.”
And Multiple Protocol came about based on the team’s appreciation of Uniswap v3, which Tony Carson saw as a very valuable thing to do with the centralised liquidity introduced by Uniswap v3. In fact, it’s what was mentioned above, greater capital efficiency.
But greater capital efficiency means a higher barrier to entry. Unlike Uniswap v2, where users simply deposit their money in an equal allocation, v3 requires users to be more proactive in choosing a strategy to enter the market. These strategies tend to be in the hands of traditional brick and mortar arbitrage market makers, i.e. concentrated within CeFi.
Tony Carson describes.
“Multiple Protocol is really a bridge between the average user’s money and a team of professional market makers.”
While introducing it, he likens Multiple Protocol to a FoF (Fund of Funds), which is a fund that invests exclusively in other portfolio funds.
Each market maker team is a fund on the Multiple Protocol platform, and Multiple Protocol allocates users’ funds based on the return of the market maker team, with the better the performance of the market maker team, the more funds it can manage. Basically, the top 10 market maker teams can manage 90% of the platform’s funds.
Also, Tony Carson gave a very relevant example. If we deposit $100 on the platform, there will be more than 10 or even 100 specialist market maker teams managing our funds, with the allocation of funds determined by the performance of the market maker teams.
Dive into Multiple Protocol
How do market maker teams specify strategies?
Tony Carson introduces us to two basic strategies.
The Multiple Protocol hedges against the volatility of losses on decentralised exchanges by providing liquidity on the centralised exchange. Unconstant losses are the losses that funds face in the liquidity pool. This loss usually occurs when the proportion of tokens in the liquidity pool becomes unbalanced.
Uniswap Grid Trading Strategy. Grid trading is a strategy that takes advantage of market oscillations to make profits. As the price of the underlying oscillates, a grid is drawn over the price of the underlying, and when the market price touches a grid line, positions are added and subtracted to take as much profit as possible.
According to Tony Carson.
“A diversified strategy allows for better management of the user’s money, including an increase in the risk tolerance of the money.”
Accordingly, users will be able to choose a team of market makers to manage their funds according to their risk appetite, which is the private equity feature offered by Multiple Protocol. The platform will also have the option of having a public fund – as mentioned above – where users deposit their funds directly and have multiple market maker teams manage them together.
Professional traders (GPs)
How does Multiple Protocol manage a team of multiple market makers?
Proof of Profitability, for ease of understanding, Tony Carson gives us the example of the Sharpe Index. The Sharpe Index measures the performance of an investment (e.g. a security or portfolio) relative to a risk-free asset after adjusting for risk, and Multiple Protocol generally measures the strength of a GP through Proof of Profitability.
Tony Carson explains that early market makers are early stage investors, as well as deeply tied market makers, such as Quick Andvance.
For professional traders, Multiple Protocol issues a working certificate, the NFT, which allows transfers in limited circumstances only and documents the full performance of the GP and is the most visual representation of Proof of Profitability.
The security of capital and the risks it entails will always be a topic that cannot be avoided in the development of protocol operations, and Tony Carson believes that protocols can address this issue at both a macro and micro level.
Macro: Similar to the Bitcoin mining algorithm, 51% attacks were easy to occur in the early days when fewer mining nodes were involved, as well as the inability of the network to produce blocks due to some nodes going offline. However, as the number of nodes, or GPs, on the Multiple Protocol platform increases, the loss of funds from a single GP committing mischief cannot affect the overall funding position of the platform. The majority of the funds are managed by the best performing teams and are less likely to commit mischief than the lesser performers.
Micro: Multiple Protocol risk manages the positions of all GPs in a manner similar to the role of the Liquidator in Compound or AAVE – when the total value of a GP is less than a certain percentage of the total value he brings in from the LPs (liquidity providers), anyone who is not a liquidator will have to pay for the liquidity. Anyone can liquidate his position if the total value of the GP is below a certain percentage of the total value of the LP. The liquidator is also the whistle blower and the whistle blower is rewarded.
Secondly, there is the smart contract risk; the Multiple Protocol team had worked with a number of security companies and after a number of options, Multiple Protocol chose to work with Certik to audit the smart contracts.
For Multiple Protocol’s token MUL allocation, Tony Carson explained for us in three areas.
Early in the project, Multiple Protocol token MUL will be used as a Pioneer Program fund to incentivise early stage GPs, and MUL will compensate GPs for the cost of the Gas they need to pay in the process.
It will be sold at seed and private placement rounds to institutions that can help Multiple Protocol grow, such as Jubi Labs, Hotbit, and the aforementioned team of professional market makers who can provide liquidity in the early stages.
In the mid to late stages of the project, the core of Multiple Protocol’s token, MUL, is profit sharing.
In the future, the Multiple Protocol team envisages MUL in three main ways.
In the future, as the volume of LPs increases, the system will periodically add GP work passes, which will need to be purchased with MULs in a bidding process. The MULs received will be locked in the Multiple Protocol platform as “treasury funds”.
Multiple Protocol initially sets a parameter – 5% of all transaction fees, i.e. 5% of the overall platform profit, will be distributed to all users who hold MUL tokens on the platform. A further 5% will be used to buy back and destroy.
Decentralised governance. Users of the platform Stake will be given voting rights based on the number of tokens pledged and will participate in governance.
Interestingly, Tony Carson also mentions the incentives for GPs: “We have 50% of MULs.
“50% of our MULs will regularly reward good GPs based on performance, and we will primarily reward two types of GPs, those whose performance rises particularly quickly and those who deliver quality strategies over time.”
Vision for the future
“We feel that the DeFi marketplace has an increasing responsibility in the overall decentralised world. With the launch of Uniswap centralised liquidity, the curtain has been pulled back on the second half of DeFi. How should we understand the second half of DeFi? I believe that the second half of DeFi will move closer and closer to real-world finance, and it will become more and more specialized in terms of being able to provide strategies in the middle of DeFi, something that DeFi native users do not have the ability to do as well as provide strategies. So the vision for Multiple Protocol is to provide more retail investors in the future with specialised, all aspects of various strategies, whether it’s hedging, liquidity provision, lending, or in the future, GameFi and so on.”
Tony Carson says with affection, concluding by adding.
“We can also use a real-world comparison, where Multiple Protocol is really a decentralised brokerage, reducing the risk associated with increased capital efficiency by introducing specialist market-making strategies.”