bZx is a lending and margin trading protocol built on Ethereum. Now the 12th largest project in the decentralized finance sector, the protocol’s smart contracts currently account for more than $4 million in total value locked (TVL) according to tracker site DeFi Pulse.
bZx notably rose into the spotlight earlier this year, when on two separate occasions an attacker or attackers used a new DeFi technique called flash loans to exploit the protocol and make off with a small trove of ether (ETH) in the process.
In the wake of those episodes, bZx’s builders have taken emergency maneuvers, issued a mea culpa to the community, and charted a path forward for the protocol that includes audits and a transition to governance via a decentralized autonomous organization (DAO).
Accordingly, the DeFi project’s backers are looking to rise stronger and make the bZx ecosystem better than before. Blockonomi talked with Kyle J. Kistner, the co-founder and chief vision officer (CVO) of the bZx team, to dive deeper into the project and see where it could be going from here.
In Future Traders May Use bZx Without Knowing It, Says Kistner
William Peaster, Blockonomi:
Lending has been a breakout sector for the fledgling DeFi ecosystem. And with the $1 billion locked in DeFi mark recently touched for the first time, it looks like there’s plenty of room for more growth in the future.
bZx’s front-end Fulcrum is interesting here because, unlike some other top DeFi lending projects, it also directly offers decentralized margin trading. Could you speak a little bit on pTokens and how they work within the context of the Fulcrum margin system, as well as what you see as being the main advantages of decentralized margin trading?
Kyle Kistner, bZx:
Fulcrum pTokens are pooled positions that allow you to join others in leveraged or short positions. These positions are tokenized, which opens up a variety of interesting use cases, including using the pTokens as collateral or bundling them to create structured products.
From a user perspective, decentralization has two primary benefits: custody and transparency. Users can trade straight from their wallet, and the transparency of the blockchain allows a much greater appreciation of platform risk. From a developer perspective, pTokens allow DEXs and exchanges to create whitelabel margin solutions with minimal overhead.
One of the things I found compelling during my research on Fulcrum was its insurance fund, which is structured to cover lenders through some of the interest paid by borrowers via bZx’s smart contracts.
As BZRX is the governance token of the protocol like MKR is in MakerDAO community votes, do you guys envision the parameters around things like this fund will be subject to future governance from bZx and Fulcrum stakeholders? Or is the insurance fund in particular more of a hard-coded design choice to ensure a floor of minimum survivability? What other kinds of things might Fulcrum users be keen on voting on in the future?
We do envision that the fund will be subject to further development by governance. We think that there is still a lot of thinking to do around value capture.
The ecosystem is full of unexpected circumstances, and we believe that much of the governance will be focused on the evolving challenges the protocol will face.
Recently, Gelato Finance released the alpha version of their “personal Ethereum bot,” which among other things can be used to automate the opening of leverage positions on Fulcrum.
That kind of development makes me think of the saying, “A rising tide lifts all boats,” insofar as both Fulcrum and Gelato’s alpha become that much more attractive and useful precisely because they (and other dapps) can be linked together readily in this win-win way. Is the sky the limit when it comes to DeFi composability? Does the Fulcrum team expect to see many similar melds to come?
Absolutely, we are only seeing the beginning of all the different ways protocols can compose.
We’ve seen an explosion of activity around tokenized loans like iDAI, but we’ve yet to see the same cambrian explosion of activity around tokenized trades. Gelato represents the vanguard of this coming wave of innovation and experimentation.
The concept of Fulcrum’s iTokens being used as collateral in DeFi is really interesting. Could you touch on some of the related possibilities of that dynamic?
If MakerDAO added iDAI as a collateral type, or AAVE added iDAI as a collateral type, it would allow you to borrow against your iDAI while still earning interest.
This sort of composability would of course introduce some dependency risk into the other systems. That’s one of the risks with composability. It’s powerful, but introduces compounding risks into the system.
What’s on the horizon for the Fulcrum project? Any short-term happenings of note that are coming up, and what about longer-term plans? How might Fulcrum look a few years from now, for instance?
In the short term, the platform is going through another series of audits. We will be releasing some exciting features like limit orders and stop loss while creating a PRO interface for more experienced users.
Medium to longer-term, we are working at the protocol level to provide a more efficient mechanism of interest rate discovery beyond our current AMM [automated market maker] design. We see many people using the protocol without knowing it as it powers their favorite DEX or CEX margin backend.