The trend towards "micro-primitives" creates protocols that are more extensible, programmable and composable. But it also creates greater vulnerability at a time when protocols are under increasingly hack-attack.
For the last few years, decentralized finance (DeFi) has emerged as a fundamental financial backbone of the digital assets space and as a parallel ecosystem to traditional financial markets. The space keeps evolving, creating new experiences and uses for participants.
The first few years of DeFi have been marked by the establishment of programmable financial primitives such as lending, automated market making (AMMs) or derivatives that could serve as building blocks of new financial services and applications. Lately, DeFi has begun powering more abstracted user experiences, building even smaller, more granular micro-primitives. This trend is happening everywhere in DeFi and challenges some of the established patterns in technology markets.
Jesus Rodriguez is the CEO of IntoTheBlock.
We are entering the era of DeFi micro-primitives.
DeFi micro-primitives are not an industry-acknowledged trend. I think we might be the first ones to have coined this term, but it seems to be happening everywhere. DeFi protocols are becoming more granular, more decentralized, more trustless and, yes, more complex. This trend seems a bit counterintuitive to the normal evolution of infrastructure technology and could have severe implications for the future of DeFi.
Conceptually, the idea of DeFi micro-primitives is extremely simple. Imagine taking the functionalities of an automated market maker (AMM), such as pool rebalancing logic, token swapping, and fees collection, and customizing each of these functionalities using different smart contracts. In this way, each functionality becomes its own micro-primitive.
Let's explore the notion of DeFi micro-primitives through the lens of familiar DeFi protocols:
Uniswap v4: The proposed architecture for the largest AMM introduces the notion of Hooks as smart contracts that can incorporate logic across the lifecycle of pools. Unlike the current versions of UniSwap that include a single approach for managing the lifecycle of pools, v4 changes that by introducing new micro-primitives. For instance, Hooks can execute post-trade arbitrage logic and auto-compound LP fees to change the rebalancing logic.
Eigen Layer: This popular platform that pioneered the restaking approach can be seen as a collection of micro-primitives for validators. Traditionally, validator clients encapsulate the entire logic of the validation process. However, Eigen Layer introduces the concept of an Open Marketplace that includes different security capabilities for validators. In this marketplace, validators can opt-in for each micro-primitive to enhance their capabilities.
Maker: In their recently published Endgame, Maker fragments its capabilities further by introducing the notion of SubDAOs. Before SubDAOs, all functionalities of the Maker protocol were governed by a single governance and tokenomics process. The goal of the Endgame is to allow each SubDAO to focus on specific capabilities of Maker and follow its own governance process and tokenomics.
Flashbots: The main MEV protocol is working towards the implementation of the Single Unifying Auction for Value Expression (SUAVE), which introduces new micro-primitives by unbundling the block builder...
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