VeradiVerdict - Issue #209
Over the past few years, DeFi has exploded in popularity as a form of democratized financial infrastructure. The ecosystem has evolved such that it is no longer constrained to spot trades, but rather supports complex financial transactions, with a plethora of composable DeFi protocols. However, with such a large number of protocols being developed also comes the problem of liquidity fragmentation—capital is distributed across many different protocols, which causes the entire ecosystem to be less capital efficient because margin requirements are isolated.
marginfi solves this problem by offering a unifying interface for trading on Solana, allowing users to share margin across different protocols and therefore minimizing capital inefficiency resulting from liquidity fragmentation.
Though most DeFi protocols are composable with one another due to how smart contracts are written, the sheer number of DeFi protocols means users must choose which of them to allocate their capital to for particular use cases. Though this results in healthy competition, it also results in capital from users being split across different protocols that may or may not have overlapping functionality, which decreases capital efficiency across the entire system since protocols, especially those involved in trading, do not share information on margin or collateral. In other words, users allocate large amounts of collateral which are locked up in isolated protocols instead of allocating smaller amounts to unified pools of collateral that would meet the same needs for protocol risk management needs – if only protocols shared information on user portfolio health with one another.
Aside from liquidity, trading infrastructure in DeFi is also highly fragmented in and of itself. Although dashboards exist that allow users to look at their assets in one place, users are still unable to seamlessly manage all of their trades from a single interface. It is even more difficult to build a complete picture of a portfolio when some assets are housed in a trader’s wallet, other positions are held in an account at the protocol level, and generally trading protocols have different methods of displaying position information to traders. All in all, these operational frictions actually pose a challenge in risk management, as users may face liquidation risks from a large number of protocols. In general, these problems can be solved using an appropriately crafted portfolio management protocol. Mrgn Labs, the team behind marginfi, is exploring data and analytics SaaS tooling around this issue – built on top of the marginfi smart contract – to help trading firms better understand market trends and exactly how individuals are using their services.
How does marginfi work?
marginfi itself is a DeFi-native global clearing house protocol. From the user’s perspective, marginfi is simply a holistic trading platform: USDC is deposited into their margin account and users can start trading from that account with different DeFi protocols within the Solana ecosystem. They also need to maintain sufficient margin depending on their open positions.
However, under the hood, users’ margins are in fact not isolated. They are pooled together such that deposits into accounts with currently positive net balances can be used to offset margin loans to other accounts. The mechanism used to shift balances to and from different accounts within marginfi is, in fact, a lending pool. Users with excess margin can lend their margin to others for an interest, leaving no margin unused. Those who borrow to take leverage collateralize their positions with their own pool of assets purchased on margin and any excess capital held in their global margin account. Importantly, the lending does not happen directly, but rather through the pool itself as in other DeFi lending protocols, which leads to a seamless user experience.
Overall architecture of marginfi. Source: marginfi
In general, marginfi’s mechanism allows users to trade more safely with higher leverage. marginfi’s platform can also be used to more effectively hedge user’s positions in various derivatives protocols that marginfi supports to produce more customized risk-return profiles.
A sneak peek at the marginfi interface. Source: marginfi Twitter
marginfi is led by previous entrepreneurs with experience in private equity and endowment advisory at Goldman Sachs, as well as early stage ML/AI, MLOps and DevOps in mission critical software. One of the team’s founders, Edgar Pavlovsky, previously founded Jia and has experience in many sectors such as machine learning, data science, and private equity. MacBrennan Peet is also a co-founder and leads marginfi’s growth team and institutional relationships. Peet started the hedge fund Katalpa Capital Management and has a background in traditional finance including at Morgan Stanley and MedEquity Capital. The team has strong experience across many verticals including private equity, institutional consulting, mid-market healthcare, enterprise SaaS growth equity, and corporate development.
Currently, marginfi v1 alpha has been launched to Solana’s Mainnet-beta, and an official mainnet release is coming soon. Until the end of 2022, the roadmap for marginfi is as follows:
Q1 2022 - $3M seed raise from Pantera, Multicoin Capital, Sino Global Capital and Solana Ventures
Q2 2022 — mainnet launch
Q3 2022 — Web, mobile, and institutional product suites in development
Q4 2022 — $250M volume target
marginfi is tackling an important problem in the DeFi space that has had no good solution yet. Though the protocol is directly suited to margin trading, the technology could be extended to other markets as well, especially permissionless lending markets which also require collateralization.
- Paul Veradittakit
Pantera Capital Puerto Rico Management, LP and its affiliates (“Pantera”) makes investments in crypto assets and in blockchain-related companies. Pantera and/or its affiliates or personnel may be an investor in, or have relationships or other business arrangements related to, certain instruments, companies and/or projects discussed herein. This article does not contain any advertisement for Pantera’s investment advisory services, or any other services or products, whether provided by Pantera or otherwise. The information and opinions presented in this article are solely those of Paul Veradittakit, and do not represent investment, legal, tax, financial, or any other form of, advice or recommendations. Neither Pantera nor Mr. Veradittakit is acting, or purports to act, as an investment adviser or in a fiduciary capacity with respect to any recipient of this paper. Information contained in this document is believed to be reliable, but no representation is made regarding such information’s fairness, correctness, accuracy, reasonableness or completeness. There is no obligation to update this document or to otherwise notify a reader if any matter stated statement or information contained here changes or subsequently is shown to be inaccurate. Nothing contained herein constitutes any representation or warranty as to future performance of any financial instrument or company. Opinions included here incorporate subjective judgments or may be based on incomplete information. This document does not constitute or contain an offer to sell or a solicitation to buy any securities or a recommendation to enter into any transaction, and no reliance should be placed on this document in making investment decisions.
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Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. I’ve been in the industry since 2014, and the firm invests in equity, early stage token projects, and liquid cryptocurrencies on exchanges. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.