Hakka Finance and I

Huh? 🦪

Before DeFi

Hakka Finance is not like other DeFi brands on the market, which are normally a single protocol or project. As for Hakka Finance, we don’t offer a main product or protocol, rather a series of seemingly unrelated products. After making several observations about the blockchain industry, I came to the conclusion that setting a roadmap is highly risky.

I founded my first and only company, Pelith, back in August 2018, when I was still in college. Pelith back originally had nothing to do with DeFi and was a freelance technical team that took on jobs as they arose.

At the time, we were fulfilling the needs of the clients’ desire towards opportunity in the blockchain space. There are two takeaways from this experience: 1. Most of the projects are dead and gone, which should tell you what people thought were “blockchain use cases” were either in the early development stage or fake. 2. 70% of the company’s human resources budget was spent on open-sourcing, R&D, and experimental products, which created zero revenue for the company. This indirectly impacts our company today. The high margin of blockchain-related outsourcing cases allows us to make a living through our work.

How it started

In 2019, DeFi started to appear with its astonishing 18% annual return with stablecoin lending.

In August of the same year, I made my first DeFi app: EasyDAI, while graduating from college. The product itself was pretty simple, but the concept of composability for decentralized finance had already taken shape.

And in September, Pelith participated the first DeFi Hackathon: the Kyber DeFi Hackathon, and won the prize with our project Crypto Structured Fund, the winner of the hackathon is also a big name in DeFi today, which is DeFiZap (Zapper.fi)

Later we participated in several more hackathons and met some very early DeFi developers.

We originally planned to use CSF as a project and issue a token to raise funds, which would make Pelith from a project-based team to a product-focus company, but the (relatively) low-interest rate in early 2020 was blasted out of the water by Compound’s liquidity mining. (the so-called DeFi summer)

This was the moment when I realized it’s too risky to work solely on one protocol or one product. I had to slow down the launch of CSF and spread the risk. We need to start a completely different path: a DeFi ecosystem with multiple products.

BlackHoleSwap and $HAKKA

As you all know, the launch of Hakka is rather amazing. Some ideas worked as we planned, but this is worth writing a separate article. Before that, I would like to focus on our first product of the Hakka ecosystem, BlackHoleSwap.

When first designing our first product, Ethlend was reborn into AAVE. I first heard of AAVE from the previous DevconV (awesome T-shirt, too bad they ran out before I can get one). Back then, I thought it was just something similar to Compound, but as “Flashloans” went viral, I found out it’s the same concept as Instadapp has done. It was at this moment I realized the importance of naming and the unique meme trading culture of the crypto industry.

The first thing about my DeFi ecosystem is its name which should be trendy and catchy.

On the other hand, I’m also looking into Curve’s whitepaper and realized there’s something interesting about how they deal with its liquidity and capital efficiency. Curve improves its system by adjusting its parameters based on the volatility of each stablecoin and integrating with lending protocol to create extra yield.

I came up with a way to prevent liquidity drain without sacrificing efficiency, which is for the pool to borrow money if it ran out of a token, then it can deal with trades that are even greater than its liquidity. I shared the idea in Curve’s telegram group but did not receive much response besides the “Interesting” comment by its founder Michael.

Later I decided to make this “interesting idea” into an actual product: BlackHoleSwap. I named it after the principle mentioned previously, mematic, and positioned BlackHoleSwap as a stablecoin exchange with basically infinite liquidity.

Besides the naming part, I also have some different thoughts about our whitepaper. I noticed long ago that people in the crypto industry, myself included, prefer those whitepapers that are complex but not incomprehensible; a result that can be delivered. In particular, we used the math from high school class to first-grade class, including linear algebra and calculus, which are connotative but still understandable.

This “complex but understandable” content gives people an illusion of being more intelligent and are thus more willing to share and explain it to their friends, making BHS whitepaper a perfect meme-project: It’s a proof of IQ for Hakka Finance and those who understand it.

Product-wise, do I consider BlackHoleSwap as a successful product?

I would say it had its moment. On 3/12 2020, the market collapsed, the crypto price dropped by 50%, tons of ETH liquidated, leading to low liquidity on DAI, and DAI has a substantial premium to USD, up to 1.07. I did the math. Curve finance liquidity will drain when DAI:USDT/C comes to 1.04 while BlackHoleSwap will remain functional due to excess liquidity from lending protocol.

This incident did happen…

Once.

From the images above, you can see a large number of transactions during 2020 9/13 to 9/15 on BlackHoleSwap because DAI price increased up to 1.05 and drain all liquidity on Curve, forcing 1inch to redirect their transactions to BlackHoleSwap. It proves that the concept of creating infinite liquidity by borrowing money actually works.

But not for long, MakerDAO onboarded more centralized assets as collateral, including USDT, USDC, and WBTC, and introduced PSM to further stabilize its price. A larger price gap was not seen on DAI ever again.

As a relatively young protocol, TVL for BlackHoleSwap is low, with the gas price on ethereum rising like crazy. BlackHoleSwap, as a protocol integrated with Compound, made the gas fee even crazier and could no longer compete with Curve, leaving us with only some arbitrage robot traders.

The trading volume for BlackHoleSwap on its starting month was over 100 million USD, proving this “solution” works, but with the “problem” gone, the solution was worthless.

3F Mutual

DeFi insurance, 3F mutual, was introduced a month after BHS launched, which is a “solution” to another problem.

Nexus Mutual is a universal insurance model. Almost any risk event can form insurance on it, simplifying insurance life cycles and leaving it to the community to govern, which created a significant weakness: people. The system required KYC, which is neither permissionless nor composable. Additionally, whether the insurance settlement is claimable or not also relied on the underwriter, which is an obvious conflict of interest.

Two questions are involved here: 1. Can DeFi insurance be claimed and solely rely on the mechanism on the blockchain? 2. Is there another insurance model besides “Insurer — price — Insured”?

The answer for Q1 is a definite yes. For example options; Opyn is insurance for price change, and the prediction market is like an insurance for the future.

As for Q2, the answer is not as intuitive as Q1. It can be done by some sort of rainy day fund pattern: compensation = insurance premium.

It seems difficult to start because if there’s only one user in the system, the user will only get his own fees back when the incident occurs, and if the incident didn’t happen, he gets nothing back, which would be a guaranteed loss situation.

To solve such an issue, 3F mutual only places part of the funds to a compensation pool and the rest goes to the previous insurance buyers. This means an insurance buyer also becomes a shareholder of 3F mutual and will be receiving profits from future insurance buyers even after their insurance was out of date.

Due to this special mechanism, 3F mutual needs to focus on incidents with a low possibility of incidence and high impact. It needs to be a black swan event, the kind of incident that “It could happen someday, any day might be the day”, such as things like “Will WWIII ever break out?”, issues that have a low chance of occurring but will cause a significant impact.

Photo by Dušan veverkolog on Unsplash

Our team and I picked “the collapse of the fundamental block of DeFi: MakerDAO”. This is, of course, a big issue. The direct and indirect impact is incalculable, the kind of impact that can never be covered by traditional insurance.

Just like BlackHoleSwap, 3F Mutual had a great start. With its semi-FOMO model, we acquired a huge amount of funds at the beginning, and the project quickly cooled off. But compared to BHS, 3FMutual is still a successful and functional product up until now. The funds in our pool still provide great hedging ability. Especially when insurance is outdated, the compensation increases, which will benefit the latest users. I highly recommend everyone to purchase regularly.

DAO：Tokenomics, governance, Community improvement

Hakka Finance itself is also a DAO, The foundation and I might be the one to run it for now. But eventually, we still have to hand over control to the decentralized governance. For Hakka Finance, community development is as important as product development.

As you can see, our initial tokenomics and governance system was not perfect. To be fully decentralized, there needs to be ultra-high inflation at first, but high inflation will inevitably impact the price. And with different motives with different token holders, leading to a significant reduction in liquidity mining, which totally delayed our distribution plan.

When we’re designing Hakka DAO, we built it based on how GuideBank works, the slowly increasing intrinsic value of HAKKA allows holders to tend to think in the long-term. Short-term price volatility should be irrelevant.

However, we have to admit that price volatility does hinder long-term goals. Those who make money have left, and those who lost money are the ones that stayed. And they’re just staring at you, urging you to do something to help with the price and only the price.

Unless the price never falls, it’d better not pump.

The first thing Hakka has to solve is the selling pressure, which is from liquidity mining. The token must be distributed, or else we could never achieve meaningful decentralization, but we don’t want it to become a death spiral. So we came up with the idea of vesting: to delay the distribution of the rewards. You might think it wouldn’t make much difference, but actually, it does. Funny enough, postponing the distribution of mining rewards would make the program less appealing to short-term participants ( normally, they’re the dumpers) and lose interest in participating in protocol mining, allowing those tokens to go to the right person.

Next, for currency prices fluctuating with the market, a control mechanism is needed. We hope to form a self-correcting mechanism.

This forcing mechanism does not need to be very strong. As long as people know that it does exist, the public’s expectation will strengthen the model itself.

Normally “buyback” is a common approach to do so, if we invest a fixed amount of money to acquire tokens in the open market, we will buy less when the currency rises and buy more when the currency falls, balancing it out. However, for a token that’s constantly inflating, buyback seems to be pointless.

That’s the reason why we launched Hakka Harvester, which allows the community to provide funds and to be managed by the protocol. The revenue generated is used to purchase tokens and then are sent to participants to generate continuous buying pressure with zero budget.

We recently launched the staking program as well, and this is relatively easy to understand. For token owners, those who are willing to lock their tokens for a year have double the profits and voting power. With the same interests, voting results should be closer to aim towards long-term development instead of short-term profits.

Over time, we understand that price fluctuation is the main reason why the community deteriorates, an issue we are working hard to solve. With a more positive question, is there a way to “upgrade” our community? Is there a way to consciously improve the quality of our community?

For a DAO, what are the virtues of community members is an open question. Long-term vision might be one of them. Next? I’m not sure, but I assumed it’s market sensitivity. That’s the reason why we created Haaka Intelligence.

It’s a price prediction platform. Users predict the future price and bid with tokens and can claim rewards by way of their scores, distributed proportionally according to their prediction accuracy. The long-term trend is that people with better market understandings will eventually “win” more tokens from others. The participants might come and go, but even if they’re the same group of people, supposedly their average strength, number by tokens, has also improved. But after a few rounds of Hakka Intelligence, the scores were pretty close because the score counting system was not well designed, meaning we can’t really identify those with the right view. This is something that we will work on improving in the future.

The logos of a DAO is what kind of people hold the most token of it.

I never felt that way until Hakka token went on Binance Smart Chain. Then, I started to realize the relationship between DeFi protocols is more complicated than I imagined. Even though DeFi builders claimed that the protocol should be open, modular, but in reality, we are somewhat in an adversarial relationship. It’s not just the competition between protocols. Aggregators and liquidity farms are basically using each other.

I often ponder about one day retiring for Hakka Finance to be fully decentralized and for me to deliberately avoid affecting decision-making. If I step back, can the community really make the best decision for themselves? When encountering situations like PancakeSwap’s proposal of cooperation in the future, do those who participate in decision-making and those thought leaders in the community know how to evaluate the pros and cons?

Of course, there is no way to guarantee this. After all, there are no guidelines for such things. All I can do is set up the environment and see if the community can follow the breadcrumbs and go in a better direction.

Other products

Coming up next for Hakka Finance: CSF and iGain. They are “problem — solution fit” products as well.

CSF, Crypto Structured Fund

Crypto structured fund is a complex financial product. The reasonable explanation for its existence is because DeFi currently lacks the diversity of risk levels. Thanks to cross-chain technology and synthetic assets, there are tons of opportunities for investors. Currently, diversity is a little limited due to DeFi being a recent innovation, but there’s still room for risk diversification.

Traditionally, the risks for investment ranging from safe to risky should be cash deposit > bonds > funds > stocks > options. As for DeFi, there are only very low-risk options such as lending and super high-risk crypto investment or even leverage, and there’s a lot to fill in the middle.

CSF uses asset tranching to simulate medium-risk products like bonds with a slightly higher return than market interest rates. This is especially useful in an industry with a short history like cryptocurrency. The average reward here is too high, making it impossible to hedge. Reallocating the risk premium within investors can make a difference.

iGain

Strangely speaking, there is no good two-sided market mechanism for prediction market and option-based products in the industry (the solution that Synthetix provides doesn’t count). Perhaps they all focus on the data source of the index or on-chain arbitration. In short, an efficient synthetic asset market mechanism is a problem to be solved.

It seems that most of the problems lie in the leverage of synths. But if we can limit the payoff to a range, we can avoid uncapped seller losses. In fact, it can simply be done with fully collateralized. It simplifies the situation: a fixed sum of money is distributed proportionally between the two parties, and iGain is just such a platform.

The main issue here will be in the choice and design of the index. One possibility is that we map an infinite range of indicators to between 0 and 1, but this may cause problems with low utilization and index passivation. The other is that the choice is inherently a capped indicator, for example, put options. At present, iGain first plans a very DeFi-flavored indicator, the impermanent loss of liquidity providers. In the future, it also plans to be a derivative of interest rate.

Decentralized Workshop

The ultimate goal for Hakka Finance is to become a DeFi DAO, but for now, it seems more of a project spearheaded by an individual. I think it’s important to overtly express our goals and intentions in the early stage.

I believe it’s not hard to tell that I’m not interested in running a large corporation. Instead, my passion lies in focusing more on solving more technical problems (puzzles). I find it fascinating to solve or create puzzles, and I also believe it’s an excellent path to make a different but better way to deliver value in DeFi.

To summarize, I believe DeFi will eventually lead to diversification in formats and scales for corporations. I’m not saying all the whales will disappear: instead, there will be places for all kinds of players on the stage. For example, in the gaming industry, there are triple-A companies, and there are small indie studios, even individual developers.

When the day comes that not all financial products are backed by big institutions, Hakka Finance will be the fast, flexible DeFi studio that can always keep up with the market and provide in-demand products.

Pelith

HakkaFinance