What is the safety of interest-bearing assets: Will Solv Guard put the nesting doll risk into a cage?

Written by: Peng SUN, Foresight News

When it comes to this round of DeFi, what is your first impression? Of course, it’s nesting dolls! Nesting dolls! Nesting dolls!

But nesting dolls are just appearances, and the paradigm shift in the asset issuance layer is the real thing. In the past, when we played DeFi, the liquidity assets were all underlying native assets such as ETH. But today, the liquidity assets have been covered with a layer, and there are countless newly issued assets such as stETH, USDe, puffETH, rzETH, etc. In fashionable terms, they are called income-generating assets, and the underlying assets are used to provide economic support for Ethereum.Safety, and can also obtain income through other financial sources.SafetyThe question always hangs in mind: each protocol can issue new assets, but native assets can only be issued through multi-signaturewallet, it is managed by a centralized third party, and single points of failure still exist.

It can be said that this problem is the dilemma of today’s emerging mainstream DeFi protocols and users. So, is there any universalSafetyCan the solution be applied to the same type of DeFi protocols across the industry? Currently, the only solution is the universal DeFi protocol developed by the Solv Protocol team for full-chain revenue and liquidity.SafetyMechanism Solv Guard. Today, the author will start from the evolution history of DeFi asset management, unravel the mystery, and make an in-depth interpretation of it.

1. DeFi Summer: Purely Algorithmic Control of Assets

The DeFi Summer of 2020 is a Crypto myth. Uniswap, Bancor, Aave, Compound, and MakeDAO The foundation for the development of DeFi has been laid. AMM and "liquidity mining" have allowed traditional finance to see the revolutionary and rational nature of Crypto. From the perspective of user benefits and asset management, AMM and liquidity mining are based on a single liquidity pool. Users must manually interact with each pool and make deposits and withdrawals on multiple platforms. In this case, since each pool is independent, it is difficult for users to quickly allocate funds to the place with the highest yield. The isolation of the pool also makes user operations more complicated and the potential benefits are limited.

In the face of these problems, Yearn has brought a yield aggregator (commonly known as a "machine gun pool") to the industry. Users can use the yield aggregator as a smartcontract将资产自动分配至多个流动性资金池，以优化收益。收益聚合器说到底是一种被动资产管理模式，在这一时期，无论是 Swap、借贷还是机枪池，资金安全与收益率仍然受限于基础池的限制。换言之，收益聚合简化了用户的资产管理，但底层矿池的逻辑没有迭代。

2. Ethereum PoS Era: Income Generation and Active Asset Management

As Ethereum shifts from PoW to PoS, ETH staking has added new modes and gameplay to DeFi. Take Lido as an example. The Ethereum beacon chain was officially launched on December 1, 2020, and Lido was officially launched in the same month. Under the Ethereum PoS mechanism, running a node requires staking at least 32 ETH, but Lido aims to allow users who have less than 32 ETH to participate in staking. Lido is responsible for combining scattered funds into 32 ETH and staking them on the beacon chain to maximize the security of the Ethereum mainnet. Lido also has to solve the problem of insufficient liquidity caused by PoS. Since ETH staking will reduce the efficiency of fund utilization, some users are unwilling to stake, which is not conducive to the security of Ethereum's mainnet. Lido allows users to stake ETH in exchange for interest-bearing assets stETH, thereby solving security and liquidity problems.

The emergence of Lido has promoted a new asset management model, namely "active asset management". That is to say, users no longer interact with funding pools or passive income aggregators, but professional asset managers are responsible for user asset management. This model is ubiquitous in traditional finance, and Lido, which integrates interest-bearing income, has taken it a big step forward in the DeFi world. Lido can be understood as a kind of CeDeFi, because users hand over their assets to centralized components, and the semi-centralized and semi-decentralized approach can provide users with a higher quality source of income. However, Lido will also deploy the Simple DVT module on the main network in the near future, which will realize the decentralization of the staking method. It can be said that after 3 years of development, this staking and interest-bearing model that actively provides asset management services has become the mainstream in the DeFi world:

• At the end of last year, this staking and interest-earning model was expanded by Tieshun’s Blast, which attracted US$1 billion in funds in just one month with just one multi-signature.

• Not to mention the Restaking track, the volume of Restaking on Ethereum alone has reached 14.8 billion US dollars, and most projects have adopted multi-signature management from the beginning.

• BounceBit, the Bitcoin re-staking infrastructure, relies on "over-the-counter settlement" to entrust trust to third parties such as Ceffu, MainNet Capital, Antalpha, and Fireblocks.

• The decentralized stablecoin protocol Ethena relies on "over-the-counter settlement" to entrust trust to third-party custodians such as Cobo, Ceffu, and copper.

• Needless to say, Ondo Finance, which does U.S. Treasury RWA, adopts a standard fund structure, and the funds are also handed over to regulated qualified custodians such as Clear Street.

• ……

3. From Compound to Solv Guard: How to manage assets?

Let’s first analyze what changes have taken place in the asset layer of the DeFi protocol, because the interest-bearing model has brought structural changes to the DeFi asset layer.

In the DeFi Summer era, DeFi protocols all rely on pure algorithmic control intelligencecontract，用户随时可将资产赎回，持有、赚取的都是底层原生资产。但这些都已经无法满足用户的收益需求，在规模化之后，各个 DeFi 协议的收益已经趋同，差异化则越来越小。另一方面，纯算法的 DeFi 协议更多是一种静态contract，无法应对复杂的生息模式。具体来说，收益生息资产呈双层架构，底层资产是 BTC、ETH、USDT 等原生TokenThe upper-level assets are stETH, USDe, and LRT TokenUnder this structure, due to the need for more income from users, the sources of income are constantly expanding. Therefore, compared with the traditional DeFi protocol, which only has basic income such as staking and mining, the difference in the underlying liquidity pool under active asset management will become larger and larger. As a liquidity layer, the price of interest-bearing assets is anchored to the underlying assets, and the redemption cycle is also different.

Based on this new two-tier asset structure, we will also encounter new counterparty risks. In essence, "active asset management" is to reuse the user's funds and issue an anchor token as a liquid asset. In this process, although there is a relatively safe way to manage funds, such as multi-signature, over-the-counter settlement, and centralized regulators, there is still a centralization gap. For example, user A sends funds to protocol B, and B uses these funds for Restaking, custody to a third party, and over-the-counter settlement in CEX, etc. Here, the right to use the funds is completely given to the project party and the custodian. In other words, these mainstream DeFi protocols that combine CeFi and DeFi all have the counterparty risk of "asset managers" in terms of asset management.

Then, this problem turns into the problem of supervising and restricting "asset managers". What are the feasible strategies on the market? At present, the only solution I have seen is Solv Guard, a universal security mechanism built by Solv Protocol, a full-chain yield and liquidity protocol. It is designed for the customization of personal trading strategies of different fund pools, and implements a set of customized authority operation ranges for asset managers, such as fund destination, purpose, operation authority, etc., which can effectively prevent funds from being abused in an opaque situation.

This idea and logic is not just something Solv came up with out of thin air. Compound in the DeFi Summer era was actually the original proposer. Friends who are familiar with Compound know that Compound's cToken mechanism is the earliest interest-bearing asset, and the Compound governance module also proposed a set of security solutions for the risks that the cToken mechanism may bring. v2,v3In the contract code, we can see the "Pause Guardian" component. It will only be activated when an unknown vulnerability occurs, and its function is to disable the minting, lending, transfer and liquidation functions. It is equivalent to a "referee". It will suspend the game when an emergency occurs, and it has no right to resume the game. In the USDC depegging incident caused by the bankruptcy of Silicon Valley Bank last year, it temporarily disabled the USDC deposit function in Compound v2.

Compound thought of providing a security restriction for assets, but did not take this out separately. What Solv did was to abstract the security permission mechanism of Compound, because DeFi has evolved to the era of active asset management, and interest-bearing assets will become the cornerstone of the next generation of DeFi. In this case, the source of income is not just a single mining pool, and traditional finance and so on will be included in this system. In response to this demand, Solv Guard has to become a universal security mechanism applicable to all similar models and protocols.

4. Solv Guard operating mechanism, functions and features

After so much background, we can finally get to the point. Let's talk about why Solv Guard is a universal security mechanism, how it works, and what functions and features it has?

If Solv Guard is to be positioned, it is an intermediate layer between the underlying assets and the user's assets, adding an extra layer of security mechanism to the smart contract. It is a tool and a product that can be used as a widely adopted industry standard security component.

Operation Mechanism

In terms of operating mechanism, Solv Guard is currently based on smart contracts.wallet Safe is built with multi-signature capabilities. This multi-signature capability is part of the Solv Guard security mechanism. All it has to do is limit Safe’s multi-signatures to a specified range.

In actual operation, Solv Guard configures a Vault Guardian for each Vault.Xiaobai Navigation Vault Guardian will specify the target address and target address permissions, and Safe and Solv Guard will check whether the transaction is valid and allow the operation if it is valid.

As shown in the figure below, you only need to configure three elements to configure permissions: which contracts are allowed, which function operations are allowed, and whether the contract function requires ACL. In other words, you can limit who has the right to operate the funds, which contract address the money should be transferred to, which targets to invest in, and who has the right to withdraw the money when.

Take Uniswap as an example. If asset managers want to put our funds into Uniswap to provide LP to earn fees, then this fee is our source of income. So how do we define Solv Guard? First of all, we need to limit who has the right to invest and redeem the funds, and then limit the Uniswap smart contract address, because the funds are going to Uniswap; if you want to provide ETH/USDT liquidity, you need to limit the contract address of the LP pool and the ETH and USDT contract addresses, and only authorize ETH and USDT tokens, and managers cannot operate other tokens.

Of course, asset managers can also use our money to buy U.S. Treasury bonds, other targets, or do contract transactions, etc. Solv Guard's built-in Authorization now supports Uniswap V3, GMX V2, Compound, Lido, Ethena, PancakeSwap, etc.

Governance Mechanism

Like Compound's Pause Guardian, Solv Guard also sets up a governance mechanism to separate governance rights from usage rights.

As can be seen from the figure below, Solv Vault Guardian is responsible for execution, but the governance is given to the Governor, who can beCommunity, asset management, etc., and TimeLock can be added to ensure the user's right to know and right to choose. Governor permissions include upgrading Guardian. If the contract vulnerability causes the funds to be unable to be withdrawn, Guardian can be upgraded; adding or removing Authorization; allowing or prohibiting native token transfers and whitelist address management; transferring Governor permissions; if Authorization involves permissions that need to be managed, it will automatically inherit Guardian Governor; permanently closing governance permissions, etc.

Next Steps

应该说，到目前为止，Solv Guard 是最早受到 Compound 启发，同时又得益于 Safe wallet固有的安全模式，从而很快得到了应用。

Next, Solv Guard will further expand to general smart contract development, forming a standard framework for smart contract security, and providing security enhancements for the entire series of smart contracts. For example: the new version of Solv Vault will no longer rely on the Safe multi-signature wallet, but will still use the Guard framework to protect the asset processing process of smart contracts, improve contract security overall, and maintain flexible security policy definitions. In the future, popular smart contracts such as Compound can also adopt or refer to Solv Guard, making smart contract security control more standardized and transparent.

ERC-3525

Back to the interest-bearing assets, I have to mention ERC-3525, because the entire framework of Solv Guard is closely related to ERC-3525. ERC-3525 is a semi-homogeneous token standard proposed by the core members of Solv Protocol, which integrates the features of ERC-20, ERC-721, ERC-1155, etc. It is particularly suitable for currencies, securities, tickets, bonds, options, futures, insurance strategies, etc., and has strong composability.

The ERC-3525 structure is divided into id, value, slot and address. Each slot can have many ids, and each id has a different value. In layman's terms, each slot is a main account with different sub-accounts, and sub-accounts can transfer money to each other.

* Regarding ERC-3525, it is recommended to readThe Underestimated ERC-3525, the Road to Web3 Mass Adoption?》

Solv Guard currently mainly supports assets issued by the ERC-3525 protocol, because ERC-3525 can manage countless underlying assets (ERC20, etc.) through one contract. As mentioned above, the assets under the active asset management model have a two-layer structure, so the underlying assets under the unified liquidity layer will enter countless fund pools. As long as the slot is defined as a fund pool, countless fund pools can be managed through an ERC-3525 smart contract. For different user requests, such as different users have different redemption cycles, ERC-3525 can complete the management of different tasks through one contract.

Overall, ERC-3525 is very suitable for active asset management and income-generating assets, with lower code development costs and stronger security. However, Solv does not require all project parties to use the ERC-3525 protocol, it is also compatible with ERC20.

in conclusion

After reading this, you will find that the Solv team is developing a universal industry security standard and framework, and this is not out of thin air. On the contrary, this is a rigidly needed productized suite abstracted from the history of DeFi asset management. After all, interest-bearing assets are indeed becoming the mainstream paradigm of DeFi. We can neither eliminate the significance of centralized third parties for DeFi, nor completely hand over trust to centralized third parties. But what we can do is to put fund managers with similar models/protocols into the cage of "Solv Guard" to add a security layer and provide security for the entire DeFi ecosystem.

The article comes from the Internet:What is the safety of interest-bearing assets: Will Solv Guard put the nesting doll risk into a cage?

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