Dear reader!
Cryp2Gem team was honoured to host Spool’s Product Lead and DAO Contributor Philipp Zimmerer and get a chance to do a live interview with him in the open community forum in our Telegram Cryp2Gem chat on July 22 2021.
Many interesting and essential topics were covered during this live event, so we made a summary for all who could not attend the event or anyone who just wants to go through the content again. Enjoy the read and visit our group for further discussions.
Spool is building a permissionless middleware that simplifies access to DeFi, allows easy integration to other existing protocols. It will enable automatisation and optimisation of a risk-managed variety of yield strategies and customised risk to reward ratios. Completely free, available to anyone and 100% DAO!
Want to learn more about Spool? Read our recently published report:
👉 Spool — Research by Cryp2Gem
C2G: “Hello everyone! I would like to welcome and introduce Spool’s Product Lead and DAO Contributor, Philipp Zimmerer. Great to have you at C2G. :)
Phil, could you briefly introduce yourself and describe your role in Spool to our audience?”
Phil: “Hey guys! Great to be here, and thanks for the warm welcome! Sure. I’m Philipp; I’ve been involved in the crypto landscape since the early days but have only been truly active since 2017.
In the years since then, I have co-formed the Faculty Group, which has been a vehicle for me to work on some of the most interesting projects from all different angles: As an early investor, advisor, extended team member, incubator, and power user.
This experience and the network coming with it, coupled with the DeFi boom, has led me to identify some core issues that are holding DeFi back (or will in the future ;)). I’ve communicated my thoughts with trusted friends and partners in the industry, and from there, an organic conversation on multiple levels about the future of DeFi started, which led to the inception of the Spool DAO.
So to answer your question about my role: Spool is not a traditional company; it is a DAO formed through discussions that created an idea we jointly pursue. You could describe my role as the initiator of the DAO in that sense. Currently, I coordinate everything going on under the hood to ensure a smooth market launch that is followed up with immediate token utility.”
C2G: “To our knowledge, Faculty Group has incubated several great blockchain companies leading in this space and provides an end-to-end incubation solution for blockchain startups by supporting, advising, and architecting all aspects of emerging blockchain-based projects. It provides marketing, market-making solutions, and capital backing. And started the initiation of the Spool DAO.”
C2G: “We have another question regarding Spool DAO. Spool is entirely decentralised and governed by the DAO, but initially, the DAO will consist of the selected members (about 50 DAO Contributors). What were the criteria for the selection of the DAO Contributors? When do you plan to expand the DAO, and who will join in the future?
The core contributors come from the Faculty Group as yourself, but Spool expanded with additional founding DAO contributors.”
Phil: “Good question; this allows me to clarify some things:
The DAO is made up of everyone holding SPOOL tokens and voting with them. Currently, the DAO consists of the members listed on our website because the token does not exist yet. Once the token launches, this changes radically. If you hold SPOOL tokens and participate in governance, you are part of the DAO.
Of course, there is a method behind the founding DAO contributors. We’ve seen and observed many other DAOs and gotten advice from DAO experts like Tyler Ward (Barnbridge) and Kain Warwick (Synthetix) in our contributor group, who have experimented and learned a ton about how to launch a DAO.
Decentralization is definitely a process, not something you can just throw out. But you need a balance. Too much centralized control early on is an issue because it makes it hard to “give up power”. It simply crystallizes power structures, and the DAO becomes a prop more than an actual governance vehicle. But fully decentralizing something by throwing out tokens creates other problems of focusing on purposeful proposals and actually passing quorum.
So we decided to go the middle way. We will start with a core group of people from diversified backgrounds that can add their expertise in various fields, but a group small enough to keep individual accountability for participation!
We hope that this helps newcomers to governance adapt as they find a group of people working on core issues with a healthy discussion culture, which they can simply adhere to.
Of course, we are also wary of other challenges this brings, as it can be hard as a newcomer to enter a “closed circle”, so we need to pay close attention to welcoming new SPOOL governance participants.”
C2G: “Great explanation! You really have an amazing selection of DAO Contributors. The variety and expertise of quite a big number of selected contributors is also great merit on its own to see the interest and importance of the use case of the Spool risk optimised DeFi middleware.”
Phil: “I’d like to think so, too. We really thought about including participants that may represent different parts of the ecosystem.”
🟢Did you know?
The term DAO stands for “decentralised autonomous organisation”. It can be described as an open-source blockchain protocol governed by a set of rules created by its elected members that automatically execute specific actions without intermediaries.
The DAO’s rules are embedded into computer code, which executes by itself based on the behaviour of the protocol. There is no need to interpret these program rules as they are automatically implemented when the specified conditions occur.
Both the program rules and subsequent actions are recorded on a transparent and secure blockchain ledger, which cannot be tampered with thanks to an immutable timestamp and the distribution of the information to the network participants.
The concept of a DAO was first proposed by BitShares, Steemit and EOS (Block.one) founder Dan Larimer in 2015 and further refined by Ethereum’s Vitalik Buterin in 2016. (source)
C2G: “You have already briefly mentioned why you have initiated Spool.
DeFi space had seen impressive growth since March 2020. This growth was followed by several new DeFi and yield farming protocols. Many of those protocols were exploited. Users are migrating to the next best APY option regardless of the risk involved.
Are some of the above facts amongst the reasons you guys started building Spool?”
Phil: “The growth equals opportunity, and while a DAO is decentralized, it is still a venture of sorts, so having a good opportunity is important.
Exploits will always happen in DeFi, especially as we constantly push forward and explore new concepts. Frontiers are dangerous, both in real life and in the blockchain.
I would not necessarily always blame protocols for being exploited; they usually expect it can happen and warn users not to invest funds they cannot afford to lose.
Unfortunately, users do not want to manage multiple positions in different yield generators due to its time-intensive nature and the gas costs that come along with DeFi.
So many just all-ins on the largest APY they can find and hope for the best — in this case, an exploit can wipe an entire account with no survivors.
In my chats with DeFi users, I found that many of them were aware of that risk, yet they still exhibited this behaviour.”
C2G: “It is in human nature. We are aware of some risks but still go for it. Yield farmers often chase the next best APY as it is more profitable.”
Phil: “Exactly! The thing is, we cannot complain. People will follow the past of least resistance unless you make it easy for them to do the right thing. This is what we are trying to build for with Spool.”
C2G: “ “Spool offers a mechanism by which users can mitigate risk and maximise returns without the need for technical knowledge of risk modelling and DeFi. Spool connects Capital Aggregators, Risk Model Providers, Yield Generators, and End Users to most efficiently deploy capital. The addition of Spool to the DeFi ecosystem will offer a trustless, End-Users governed, non-custodial and fully composable protocol that improves the DeFi end-user experience while providing better risk-adjusted returns.”
Could you briefly explain the procedure of making a Spool and yield strategy in the early stages after launch? ELI5 style ;) (to potential future users/Spool creators).”
Phil: “It works in a 5 step process:
Step 1: Choose your deposit asset. Initially, Spool will support DAI, USDC, and USDT as the most used stablecoins with the most Defi use cases.
Step 2: Select your Risk Model. Risk Models in Spool assign a “risk score” to every strategy selected within the Spool Vault a user creates. Think similar to https://defiscore.io/. Of course, the risk is hard to define in DeFi and quite subjective, which is why we are not constraining users to a single Risk Model. Instead, anyone will be able to create and propose Risk Models to the DAO. Once accepted, your Risk Model becomes available for selection, and you can earn fees off of anyone deciding to select your Risk Model for their Spool.
Step 3: Select Strategies. That’s really the bread and butter you pick and choose between the yield generating strategies you want to be exposed to. Once selected, we have an array of strategies with corresponding risk scores and APYs. We are almost there!
Step 4: Choose your risk tolerance. Usually, the decision of allocating capital comes down to “Am I willing to take on more risk in exchange for an increase in APR?”. This is where individual risk tolerance comes in as the last metric the user needs to give before his Spool can be created. As you move the risk score slider, you can see the expected allocation in the different protocols you’ve selected change as well.
Step 5: Name your Spool, set your creator fee (if any), and click create.
The UI is not finished, but I guess I can share a small WIP snippet showing an example of step 4, where you choose risk tolerance (image below).”
C2G: “Spool will launch on Ethereum blockchain at first but are there plans already to connect with other ecosystems as well; i.e. Cosmos where we see defi starting as well though IBC connectors?”
Phil: “Long story short: Yes, we will definitely be launching on other chains. Now let me explain why we start on Ethereum. Spool is about risk management, and a big part of that is diversification.
At this point, Ethereum features the broadest, most battle-tested DeFi ecosystem out there, which makes diversification viable (e.g. if there are only 3 viable DeFi options, diversification becomes tricky)
However, we are watching the evolution of DeFi on other ecosystems, and the speed is impressive.
Spool is a DAO, and the DAO derives value from value routed through Spool. I am sure the DAO will seek to expand to any ecosystem where it can provide value to users that in turn helps the Spool DAO.”
C2G: “Do you mean the speed that other chains are exploring DeFi?”
Phil: “Yes, naturally. Ethereum was first, but the things done there can be ported and iterated on in other ecosystems, as we live in an open-source community. So it would be foolish to count out other ecosystems just because they “were not first”. The reason we have so many DeFi protocols is not that there are so many unique concepts. It’s because concepts are easy to fork and change a bit to iterate on, then launch them as a full product.”
🟢Did You Know?
What is a “vault” in DeFi terminology?
DeFi apps need users and their assets, and for them to grow and scale, they offer yield farming pools to incentivise users who provide liquidity, lend and borrow on a platform. Vault functionality goes beyond putting coins into a protocol. A vault is essentially a smart contract where users can store their cryptocurrency and get tokens that may be later used as collateral. They work like pools of funds that use particular strategies for maximising returns on the assets therein. They were created to address yield farming and liquidity mining problems by implementing a more complicated approach than simply switching between various lending protocols. Representing an advanced approach to yield farming, DeFi vaults might be a better solution for the long-term storage of crypto assets. They integrate complicated strategies and connect to the most profitable protocols for maximising depositors’ revenue. (source)
C2G: “Essential to the Spool Mechanics are Custom Risk Models and Risk Profiles. This makes Spool unique and extremely valuable for DeFi users and yield farmers out there, lacking proper tools for vital risk management.
What will a Risk Model offer to a particular user that wants to customise it while creating a Spool? Is the best option to create a model for specific DeFi protocol used (e.g. Compound Risk Model)?”
Phil: “A Spool Risk Model can be described as an “interpretation of risk” covering all available strategies. There are many ways to judge risk in DeFi; for example, there are arguments that a higher TVL would correlate with lower risk or time on the market, decreasing implied risk. But you could also tackle it from an “efficient market hypothesis” angle where you simply state that, on average, higher APY means higher risk.
The point is, my idea of risk might not be yours. So we cannot force a certain risk model down the throats of users who have a different idea of risk.
That’s why we allow for the creation of different risk interpretations. Risk models will be curated on multiple levels.
First, you create it and make documentation that explains it.
Second, you present it to the DAO, who checks if it adds a new “idea” of risk that is of value and not yet represented.
Third, you need to convince the user to actually select yours by making it clear to him that yours is the idea of the risk they seek out.”
C2G: “Besides creating a risk model, are there any other benefits for the creator like management fees, etc.?”
Phil: “A Spool Vault creates multiple benefits for depositors:
- Time saved due to automation
- APY optimized due to efficient rebalancing to capture the best risk/reward ratio among chosen protocols
- Risk recognized and minimized due to expert Risk Model providers
This value created can and need to be monetized to keep stakeholders of Spool incentivized to maintain and optimize the network constantly.
That’s why performance fees are paid out to risk model providers, Spool creators (if they wish to charge), and the Spool DAO.
So to answer your question, yes, there are performance fees set by the DAO for value-adding participants in the Spool ecosystem.”
C2G: “That can really be a large timesaver. Do you see interest from parties like family offices for your product? Are you reaching out already?”
Phil: “We are already reaching out and have a large interest in Spools, especially from sides you would not expect (more traditional players).
Stablecoin yield farming is the perfect entrance to crypto for these parties, as the risk is limited, and the payoffs are still big.
These institutions also care much more about risk than APY. Usually, the largest questions revolve around risk while the reward is secondary.
That being said, we are also pursuing traditional crypto business development, which comes naturally if you look at our list of contributors.”
C2G: “Indeed, that's what I see as well. While crypto people scoff at yields around 6%, there is a large market for that with traditional investors.”
Community: “This is one of the points that will bring a lot of adoption from traditional markets to crypto. APY in crypto is huge wrt traditional markets, but we need to keep working on minimise the risk of losing funds.”
C2G: “What are you most excited about Spool that is not launched/introduced/implemented yet?”
Phil: “I think I am most excited about our Early Adopter Program coupled with our token economics/emissions model that aims to make a farmable token not just worth to farm, but also worth to hold despite the dilution farming introduces.”
C2G: “Could you also elaborate a little on what would be the expected behaviour in a situation where the market has a substantial downside movement? Would positions be liquidated, creating a cascade effect?”
Phil: “No, Spool is not leveraged and, for now, will only support stablecoins. The expected behaviour would probably be yields shrinking down low, as a big part of yield generation are token subsidies paid out to liquidity providers. In a downturn, those tokens would be losing value relative to the stablecoins Spool users deposited, which would decrease their APY.”
Community: “I wish other projects would have followed this path; build in silence and only then come to us. I see we are super early adopters, but Spool work is basically done behind the curtains.
In Europe, banks are starting to charge for money in the back about a certain amount. i.e. negative interest is already being applied to individuals, not just to banks. Many of my friends are already looking for alternatives like SPOOL for low-risk gains. Anything above 0% is already a gain for them.”
Phil: “Thanks. Truth be told, I was often disappointed as an investor by roadmaps extending endlessly followed by promises that never quite materialize. Hence, we wanted to follow a different approach where we delay the launch of the token until it has an actual use!”
C2G: “Spool will create an initial Genesis Spool (GS) to enable farming of SPOOL for early participants at launch. Who will be able to join and use GS, and which features will be available? When can we expect the full launch of Spool governed by the DAO?”
Phil: “We want to make SPOOL widely available and distributed. For a limited period, our Genesis Spool will yield high SPOOL rewards to create attention and allow anyone early to get their hands on some tokens. “Traditional yield farming”. (Phase 1)
Afterwards, we are mellowing out the reward structure. We will instead seek targeted liquidity spread over Early Adopter Spools, where we will work with communities, funds, exchanges, wallets, KOLs and more to help them to create their own individual Spools with our team. “Incentivized Business Development”. (Phase 2)
Lastly, we will launch the beta of Spool, where anyone can freely create their own Spool Vault with no restrictions. “Beta Launch”. (Phase 3).”
C2G: “Could you give us some use case examples? Who do you see using Spool?”
Phil: “Sure, there are lots of examples:
- Funds may use it as a management tool for their portfolio
- KOLs may use it as a branding tool for their community + a potentially small source of revenue
- Apps as a product they can market (think personal finance apps on the phone. There are already “Robinhood for defi” type of apps out there, but they lack the products, which they could easily create and integrate with Spool)
- Projects to manage their treasuries (large interest there)
- Communities to strengthen the bond internally by jointly creating a strategy and creating a single point of entry that everyone can use trustlessly. Everyone in the same boat.”
C2G: “Are there any limits to how many people can use a single Spool? Is there any amount depositing limits (how much funds can be deposited to a single Spool)?
(e.g. A fund makes a custom Spool, sets a performance fee and offers it to its clients).”
Phil: “No limits at all. It’s a smart contract, after all, and there won’t be any whitelisting. But if you wanted to discourage others from depositing into your Spool, you could simply set a very high creator fee to tank their APY.”
Phil: “We are building this for the guy who wants to help his beginner friends with farming by making a Spool for them, but also for the founder that has an amazing idea to get people to “save money” through his phone app, who wants a place for the money to go so he can focus on acquiring users.”
🟢Did You Know?
DeFi Exploits Total $284 Million Since 2019 based on Messari’s calculations! This figure represented about 0,65% of the Total Value Locked of the Ethereum DeFi space.
In 2021, Alpha Homora and Cream Finance suffered the single-largest hack in DeFi history, losing $37.5 million.
Those are just the statistics for Ethereum DeFi, while many exploits happened on other chains as well. One of the biggest hacks happened on BSC based Uranium, which was exploited for $50M! (source).
This only proves that risk management, security and diversification are essential for DeFi users, and DeFi vaults and other middleware can help a lot!
C2G: “Can we talk briefly about the risk of using the Spool protocol?
Spool is supposed to be permissionless & non-custodial middleware with DAO curated risk models, and by using Spool, users spread and lower the risk, right?”
Phil: “Exactly. There are, of course risks involved in using Spool that need to be mentioned. One of them is glaring: You are using the Spool smart contracts to diversify funds, introducing another single point of failure.
We are countering this with our phased rollout and making the core infrastructure of Spool non-upgradeable.
Over time, Spool will be seen as more robust as exploits are attempted and become a “safe staple” for many people, similar to how Compound or Aave is being seen.
Once Spool is seen as secure, we will still be taking on the constant influx of new “risky” protocols that you can diversify between.”
C2G: “Spool simulator could lower the threshold as well, starting with some faucet to see how it works.
Are you thinking of providing such educational tools?”
Phil: “Definitely, though we have a phased rollout, and we fully expect people to be wary at first. Initial users will be power users, and we will be observing to draw learnings from their behaviour.
In the long run, educational tools will be key for beginners:
- Surveys that help you find your risk tolerance
- Simulators that train you in creating and depositing
etc.
Many options, and we are always open to suggestions.”
C2G: “How will Spool help their users in case of yield farming exploit? How will the exploit reflect on Spool?”
Phil: “Well, the first step of helping users is prevention. Spool is being built while conducting running audits, after which independent audits will be conducted, in addition to a large, ongoing bug bounty program.
Should a black swan event occur, the Spool DAO has a treasury intended for insurance to reimburse loss of funds. However, it needs to be said that if the funds lost are too large to cover, there is not much we can do to reimburse everyone fully. Any exploit will naturally reflect badly on the project, but some of them come out of the left field and catch even the best of the best unawares.
If an exploit in an underlying protocol occurs, we have emergency withdrawal features that automatically send back user funds from Spools exposed to the exploited protocol. Security measures are in place, and we prepare for the worst while simultaneously doing everything we can to prevent anything from happening.
But it would be foolish and unethical of me to promise 100% security to anyone because in DeFi, you just never know.”
C2G: “Do you expect traditional finance players to use Spool? You briefly mentioned already that you are!”
Phil: “Yes! We are doing everything we can to pursue that. Liquidity in crypto is expensive and hard to please. As already mentioned earlier, a stable 6% promise will cause vastly different reactions from someone in DeFi and someone in TradFi.
The large blocker for TradFi are the perceived risks of DeFi; since we tackle that, they are a source of potentially sticky liquidity that is comparably easy to please!
We are taking steps towards tackling TradFi on a large scale and will have a special announcement about this in the coming months that you all should be on the lookout for.
Also, if you look within our DAO, we have people like Rachid and Johannes from ALBT, the Blockpit/DAIC gang, Sean Lippel, Walter Kok and more who all have ties and ambitions into TradFi on board. A LOT is going on internally as all of us recognize the potential of working together to make a broad move happen.”
Community: “When I tell my non-crypto friends that Spool is their solution for low-risk investment, they keep asking me how can they know they will not lose their money by “software accident” as they call it. What can we tell them, non-crypto-experience people, to get confidence to start using Spool?”
Phil: “Spools built by someone with experience like you, with them specifically in mind, would probably consist of a low-risk selection of strategies where you personally think the risk of loss is low. Then, the risk model further defines risk, and jointly with a low-risk tolerance will create a low-risk portfolio for them to deposit in.
Now your friends are exposed to something curated by you, their expert friend, the third party risk model (which was curated by an expert DAO), and they are diversified as well, so they cannot experience a total loss.”
C2G: “Phil, is there anything else you want to address or share with our community?”
Phil: “I think if I closed this with a statement, this would be the one: When evaluating a project, I look at opportunity, means, and motivation behind it. That’s how we tried to lay out Spool. When creating the foundation of the project, we made sure all the puzzle pieces are there. Now it’s about putting them together. Get yourself some SPOOL tokens, join our Discord, and let’s go on this journey together!”
You can reach out to any of us at the below links:
cryp2gem.com
Cryp2Gem Community Telegram
Cryp2Gem Twitter
spoolfi.io
Spool Medium blog
Spool Twitter
Spool Telegram Anyone who wants to help with that is welcome.
