Introducing Orbs Liquidity Nexus — Liquidity as a Service

Tal Kol
Tal Kol

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6 months ago

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The Orbs Liquidity Nexus introduces CeFi sourced liquidity to DeFi.

CeFi players are showing massive interest in the potential returns of DeFi. DeFi positions are thirsty for the boundless liquidity of the CeFi world. Orbs Liquidity Nexus is a decentralized protocol for facilitating the bridge between the two.

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CeFi returns are shrinking

The majority of businesses around the world manage their capital in fiat. Consider a company like Apple, which ended Q1 2021 with $196 billion in cash reserves. This money doesn’t stand still, and is managed by subsidiaries like Braeburn Capital using traditional CeFi instruments to make returns and protect against inflation. There are countless other hedge funds in CeFi that perform this task professionally.

How well can your cash reserves perform in CeFi? As interest rates are dwindling globally, it becomes harder than ever to produce returns and protect cash reserves against inflation. Here are recent market numbers taken from Fidelity for relatively low-risk investment avenues — treasuries and corporate bonds:

DeFi returns are high, but also the risk

The last year is showing somewhat unbelievable figures for investment yields in DeFi positions. Note that we are not measuring performance of volatile crypto assets, but what returns can be achieved over stable assets like USDC.

Orbs is usually focusing on EVM-compatible ecosystems, Ethereum being the largest one (EVM stands for Ethereum Virtual Machine). DeFi vaults such as yearn.finance and harvest.finance, which act as decentralized hedge funds, provide some indication on potential returns:

Binance Smart Chain is another EVM-compatible ecosystem we’re focused on, having similar products like autofarm.network and acryptos.com which show comparable numbers for stablecoins:

These avenues perform in an order of magnitude better than their traditional centralized counterparts, but they are not without their risks. A quick look at the rekt leaderboard reminds us that DeFi is a sector that requires significant expertise to participate in and suffers from many growing pains.

DeFi — hype or fundamentals?

The returns in DeFi are somewhat higher than what most traditional finance experts would anticipate. Many skeptics ask whether these numbers are sustainable or are just a byproduct of the sector’s explosive growth and hype mixed with the bull run of the crypto industry as a whole.

This is an interesting question and out of the scope of this post, but I will say that I believe that there are fundamental reasons which help DeFi perform better. These include the elimination of many middlemen which are abundant in the CeFi world (banks for example) and the increase of transparency and fair play, which levels the playing field for all players to enjoy numbers that are traditionally reserved in CeFi for the select few.

The bottom line is simple — DeFi is an emerging competitive avenue for CeFi players. And this trend is only expected to grow.

Room for growth?

Living and breathing DeFi every day makes it seem that DeFi is everywhere. It is actually humbling to look at the numbers and see how tiny DeFi is in comparison to the outside world.

The entire crypto market cap is currently valued at $1.7 trillion. Even if all of it was attributed to DeFi, it is still a small fraction of the global economy. According to SIFMA, the global bond markets outstanding value in 2019 was $105.9 trillion and the global equity market cap in 2019 was $95 trillion.

The bottom line here is also simple — there’s a lot of money in CeFi and only a tiny part of it is currently exposed to DeFi.

Liquidity as a Service

Like any bridge infrastructure, the decentralized protocol has two sides:

CeFi side

  1. Company Inc. is a real-world enterprise business interested in using its USD capital
  2. Using a licensed financial manager, they convert capital to USDC
  3. The manager reviews applicable positions on the Liquidity Nexus protocol
  4. USDC is transferred to Liquidity Nexus contracts and routed by the protocol to relevant DeFi positions (on Ethereum or Binance Smart Chain)
  5. DeFi positions generate yield on-chain
  6. Company Inc. can withdraw its capital to receive the yields

DeFi side

  1. DAO is a DeFi project interested in attracting liquidity for its on-chain platform
  2. Contributors to DAO integrate the platform’s DeFi positions with Liquidity Nexus contracts
  3. Company Inc. can now offer its liquidity as a service according to previously defined terms

Bridging blockchain and the real world

One of the historic differentiators of the Orbs project is its ability to bridge the chasm between the decentralized world and the centralized one.

On one hand, Orbs is a public and permissionless blockchain, with a PoS incentive layer built on the ORBS token and operated by a decentralized community of Guardians and Delegators. On the other hand, Orbs has a history of operating in enterprise markets and experimenting with real world for-profit businesses, which are embedding the potential in blockchain for the very first time.

This expertise makes the Orbs project well positioned for the task at hand — creating the protocol to bridge the gap of liquidity between DeFi and CeFi.

The product challenges are plenty, since DeFi is not an easy pill to swallow for most CeFi players. Several layers can be addressed by the protocol for them to participate more freely, such as:

  • Lowering the barrier of expertise required to navigate DeFi positions
  • De-risking DeFi positions from the volatility of crypto assets as CeFi players often do not hold crypto portfolios and avoid long-term exposure to assets like BTC and ETH
  • Bounding secondary capital risks such as slippage and impermanent loss
  • Automating curation and discovery for matching DeFi positions as the industry is fast-moving and difficult to keep track of
  • Automating the routing of capital between positions and overcoming the manual work often involved with operating DeFi wallets
  • Streamlining risk assessment for easier analysis of DeFi position risks to scale comparison between competing routes
  • Supporting a regulatory framework by bringing in relevant ecosystem partners that hold the appropriate licenses to manage funds
  • Supporting accounting and auditing requirements for high-frequency operations that are normally involved with DeFi operations

Learn more

Learn more about the Liquidity Nexus protocol (when the time comes) in:

https://nexus.orbs.com

If you’re curious about what we’re working on and don’t mind seeing work-in-progress that hasn’t been properly announced yet, feel free to follow us on Github:

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Notes

This document details a project which is currently being researched by the Orbs team and ecosystem contributors. The project is currently in concept mode and is being portrayed herein as currently envisioned by the Orbs team.

Orbs is a decentralized project driven by community contribution and guidance. The product and functionality detailed in this document therefore constitute a mere proposal assembled from community feedback and are subject to change continuously as new requirements arrive. This document provides no guarantee that any offering, product, or specific feature will become fully or partially developed.

The information contained in this document shall not form the basis of, or be relied upon in connection with, any offer or commitment whatsoever in any jurisdiction.

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