The Intersection of Filecoin and DeFi

During Filecoin Liftoff Week, Colin Evran of Filecoin led a conversation with Aave founder and CEO Stani Kulechov, Ren Protocol CTO Loong Wang, and ConsenSys Codefi Head of Product Corbin Page to discuss Filecoin’s position in the DeFi ecosystem. Here are some highlights from the conversation to better understand what Filecoin’s mainnet launch means for the rapidly-growing world of DeFi.

What do you think about the intersection of Filecoin and DeFi? What are the immediate use cases you think Filecoin will open up?

Loong Wang, Ren Protocol

A long time ago, there was a meme circulating about decentralized applications and the ability to take those dapps and put them on-chain. The idea was to replicate the Web2 ecosystem in the decentralized Web3 world. Pretty quickly, that idea was tempered by two things: the massive on-chain costs of (1) data storage and (2) transactions. Filecoin solves half of that problem, the storage part. Other chains are also beginning to address the other part of the equation, the cost of transactions.

Today, we’re seeing the best kinds of dapps are financial applications. The reason for that is the cost of transactions on-chain. If you’re going to have to pay a couple of dollars every time you want to take an action, you want to ensure you’re extracting value from that action in a very direct way. You want to be trading or lending or yield farming, because you want to ensure you recuperate the loss you incurred from taking the action in the first place.

I think big datasets in finance are an obvious use case for the intersection of Filecoin and DeFi. A lot of trading capability and investment knowledge comes from having access to and analyzing large datasets. For its part in the Web3 ecosystem, Filecoin really helps open the opportunity for a new class of DeFi applications that can take advantage of huge amounts of data that have not been able to live on a decentralized protocol until very recently.

Corbin Page, ConsenSys Codefi

Ethereum’s state is bursting at the seams. With the Filecoin launch, we can now move storage over to Filecoin for some of those heavy tasks like payout schedules and token bonding curves. Most importantly, those heavy data tasks become accessible to and from DeFi applications. I think we’re going to see a whole ecosystem of oracles back and forth between the Filecoin storage network and the Ethereum DeFi ecosystem.

And I think one of the most short-term use cases for Filecoin and DeFi is simply hosting frontends. A lot of these DeFi and Web3 applications are totally permissionless on their backends, but their frontends still have to be hosted on AWS or Azure. With Filecoin, you can now have a permissionless frontend that matches the permissionless backends of these DeFi applications.

The closest analogy I’ve come up with is that owning FIL is like owning an IOU to internet real estate. If you own FIL, you know you can upload data to the Filecoin network at any point in the future. That is first of its kind, and makes it unlike any other crypto asset on the market today, which naturally makes it incredibly interesting to DeFi.

If you tokenize FIL on Ethereum, you can now put that in a bucket with tokenized BTC, tokenized ETH, governance tokens, or any other kind of crypto asset. Over time, these assets are going to be completely uncorrelated. So, for example, if you have tokenized FIL in an Aave lending market, it is going to behave differently from some of the other assets in that market. For those of us in DeFi, that is a very exciting opportunity.

A part of the Filecoin protocol is the requirement for miners to buy and post FIL as collateral in order to run their mining operations. How do you think DeFi might be able to help miners access that FIL liquidity?

Stani Kulechov, Aave

Collateralization is the bread and butter of a DeFi protocol. It’s the best way to unlock liquidity. Lending and borrowing in existing DeFi applications has been powered by users pledging assets with value as collateral to unlock liquidity. In other words, any asset with value in a protocol can be borrowed and pledged in a highly usable system. In this particular case, that usable system is Filecoin mining. I can imagine that could be an interesting use case in terms of lending and borrowing. Actually, I could see that coming through quite soon.

Recently, we’ve seen tons of liquidity pools like Uniswap emerge as viable alternatives to centralized exchanges. What changes do you think initiated this migration of liquidity from centralized to decentralized exchanges, and what similar changes do you see happening in the overall crypto landscape going forward?

Loong Wang, Ren Protocol

What it boils down to is ease of use and composability. If you want to participate in centralized exchanges (CEXes), you constantly have to balance your liquidity across those platforms. They will likely have different deposit times and withdrawal times, and there’s the added concern of trusting your data to someone who may not be trustworthy. CEXes may seem like a better experience; you likely get tighter spreads, deeper liquidity, faster transactions, and more traditional trading mechanisms like limit orders. Ultimately, however, there’s still higher friction working with a CEX. If you hold crypto in a wallet, the “distance” from that wallet to a CEX is greater than from that wallet to a decentralized exchange (DEX).

CEXes are actually quite limiting when compared to entirely-decentralized transactions. You can execute a number of different financial actions within a single on-chain transaction. That type of composability is a huge leg up for Automated Market Makers (AMMs), DEXes, and other Web3 applications.

What I think we’re going to see in the future is DeFi activity spilling over into multiple blockchains. Different chains are going to develop and specialize in unique capabilities. They’re going to make tradeoffs, and consumers are going to choose between those tradeoffs for different reasons. As a result, you’re going to need interoperability between chains to keep that composable nature of DeFi alive. Just as we are seeing a migration of liquidity from CEXes to DEXes, we’re going to see liquidity disseminate and grow larger across multiple chains at once.

Corbin Page, ConsenSys Codefi

Composability and usability is a huge leg up for DEXes and other Web3 applications. A lot of people call them “money legos” because of the different combinations you can plug together. It’s an engineer’s dream to figure out how you can merge a lending platform with a flash loan system, for example. Mechanisms like flash loans aren’t even possible in centralized crypto platforms like CEXes.

Now, we’re adding the information and data side of the internet to the existing internet of value. Because we are developing more and more building blocks every day, we are going to progressively have more unique applications that can only live on blockchain protocols; there will not be centralized alternatives available. We’re going to have all these types of new experiments and applications because of this unique feature of composability, and it’s what gets us developers really excited about these systems.

A large number of DeFi builders are thinking about DeFi solutions on and around Filecoin. What advice do you have for those developers as they start exploring the intersection of Filecoin and DeFi?

Stani Kulechov, Aave

I’d like to emphasize that building tools to support the network is super appreciated. That’s how the Ethereum ecosystem has grown so much compared to a few years ago when it was extremely difficult to build things without these tools and libraries. So that is my advice; I recommend building tools and libraries to help other developers and users.

Loong Wang, Ren Protocol

Embrace the composable nature of Web3. One unique thing about composability is that it’s ultimately better for the users, because you cannot keep users just by building moats. So you have to build something _fundamentally better. _

With FIL, for the first time we see the tokenization of an asset that is not fundamentally a financial instrument. FIL is actually a functional instrument. Developers can and should think about it in a fundamentally different way and build applications we cannot even think about today. What does it mean to lend storage? Is that functionally different than lending a financial asset? These are the types of questions developers should be thinking about in order to build and offer something categorically different than what we see today.

Corbin Page, ConsenSys Codefi

My advice is two-part:

1. Build the things that aren’t possible today. The crypto and Web3 ecosystem moves so quickly that you should have your head 6 months out to really understand where things are going. I encourage developers to be _unrealistically creative _with the solutions they’re coming up with.
2. It seems contradictory, but I also recommend solving real problems. Our ecosystem spends a lot of time in the ideas space, which is fun and amazing. At the end of the day, however, if we want this stuff to be impactful, we have to solve real people’s problems; and a lot of those people live beyond our crypto sphere. There are plenty of problems to solve, so make sure to ground all these fantastically creative ideas in reality to build solutions people actually want.

(Responses from panel attendees in this post are paraphrased. The complete video can be found on the Filecoin YouTube channel).