Bringing DeFi to the low-cap altcoin market — Part 2

Part one of this article describes what DeFi is, and explains some of the main concepts that make up the DeFi tooling set as well as the main risks involved. If you are confused by the terminology in this article, I advise to start with part one. This part describes the concrete SingularityDAO project, its collaborations and their potential impact on the DeFi scene.

For those that are not yet familiar with SingularityNET: This is the global, open (blockchain based) marketplace for AI services that lets anyone create, share, and monetize AI services at scale. Read more about SNET

DeFi by SingularityDAO and AutoNIO

Let’s start by pointing out that AutoNIO and SingularityDAO are two separate things. In summary:

AutoNIO is a fully independent project that was founded in 2017 and incubated by SNET in 2019. The main product of AutoNIO is a trading platform with integrated AI functionality that is accessible to create/buy/sell novel AI trading algorithms. It is part of a suite of products that goes under the name of ‘NIOX’ that feature:

1. An Intelligent Market Making solution that is capable of making trades, currently based on 3 different algorithms, each with their own focus and benefits.
2. A terminal that enables the user to create one or multiple of these ‘Intelligent Market Makers’ by assigning an algorithm, in index, one of many possible trade pairs, liquidity and the required configurations.
3. A smart Decentralized Exchange

In the future some fascinating additional features are in the pipeline:

> The NIOX Terminal will enable users to:

• Create new algorithms, using set of 20+ variables including market sentiment
• Monetize successful algorithms by ‘leasing’ them to other participants without disclosing their inner workings.
• Learn about and lease interesting algorithms

> NIOnet: A tool that conducts complex market sentiment analysis on a wide array of trading pairs, to be used by the algorithms (or their users).

SingularityDAO is also an independent project, but a full spinoff of SNET, that started under the radar medio 2020. It is an infrastructure that uses AI to create, manage and trade collections of (mostly) low liquidity, high quality crypto utility tokens, such as the AGI token of SNET and potentially many others.
Each bundle of tokens (called a ‘DynaSet’) is represented by its own token. The collection of tokens in the DynaSet and their relative weight can be changed at any point by the controlling entity (the ‘DynaSet Asset Manager’ or ‘DAM’). This can be an AI algorithm, manual operations or a combination. It is also possible to bundle multiple DynaSets in different weights, creating a ‘MetaSet’.

On top of this layer with all sorts of token-bundles, there is a possibility to earn rewards by lending out your tokens to liquidity pools. This is simply done by locking your DynaSets and/or MetaSets in a vault. The underlying tokens can then be loaned to ‘optimizers’, governed by smart contracts of the SingularityDAO liquidity pool that search for the best opportunities to earn interest. The stake of each user in this pool is represented by a special token, the ‘SingYield’.

The liquidity pool will grow as a function of the interest paid in the same currency that was loaned out. (So only tokens that are actively sought after by the optimizers will generate revenue). This means that the value of the SingYield tokens will grow relatively to the growth of the liquidity pool.
An Example: Say, I have a very simplistic DynaSet only containing 100 AGI. I lock It in the vault and SingYield tokens will be created. Over a period of time a 10% gain in AGI tokens has been established by lending out the assets. When I retrieve my DynaSet from the vault, the SingYield tokens are burnt (so they won’t collect anymore revenue) and my DynaSet will have grown 10% in size.

Finally, there are/will be additional layers of complexity to the SingularityDAO ecosystem that will enable smooth operations:

• The SingularityDAO itself may be participating in market making activities by buying and selling assets on DEXs to provide liquidity in the market.
• When the liquidity pools are sufficiently matured, there is the possibility of creating DynaSet Futures that can be used by optimizers to hedge against the risks of devaluating assets. This is especially useful in scenarios where tokens are loaned for a longer time-period.
• The generation of tokens that give users the right to participate in governance of the system; the SingDAO token. The holders of these tokens will be rewarded by SingYield tokens, meaning that this is paid from the collective rewards of the liquidity pool. (My assumption is that the underlying bundle will be a MetaSet that corresponds evenly to all underlying DynaSets). Part of these SingDAO tokens can also be traded, but restrictions are in place to safeguard that the governance of the platform is managed by long-term holders.

To summarize: Users of SingularityDAO can:
- Take a position in a bundle of tokens; a DynaSet
- Take a position in a collection of multiple or all (weighted) DynaSets; a MetaSet
- Earn rewards by locking up their DynaSet or MetaSet participation
- Earn SingDAO tokens and governance power by long term participation in the platform

So now that you have a rough idea (I hope) of what AutoNIO and SingularityDAO are all about, let’s get back to the opening question in part 1: How are they related to each other and how will they benefit SNET?
Note that this is not all written down specifically, so these are mostly my own assumptions and expectations.

How SingularityDAO will benefit from AutoNIO
AutoNIO has been developing their AI trading platform since 2017. ON the short term, SingularityDAO can benefit from this by leveraging the algorithms for Automated Market Making, to ensure liquidity in the altcoins market.

How SingularityNET will profit from AutoNIO:

First of all, SingularityNET will profit from AutoNIO because in the backend the AI services that power the AutoNIO trading platform are hosted on SNET. These services are also owned by AutoNIO, but using them will require AGI, thus creating demand for the AGI token. I expect that when more services are created or a single service will be used for more portfolios, that this will require NIOX to hold more AGI in reserve.

How SingularityNET will Profit from SingularityDAO

There are many actions in SingularityDAO that will rely (partly) on AI: The management of the DynaSet and MetaSets, Market Making operations and Yield optimization. All these AI services will be made available through the SingularityNET platform and require AGI to perform. This will lead to greater demand of AGI.
On top of that AGI will be one of the (many) utility coins that will benefit of the liquidity and market making processes. Here, AGI might have a small advantage over other coins in terms of representation in many DynaSets.
Finally, the exposure of SingularityDAO (if successful) will certainly also put SNET and AGI in the spotlights, leading to more demand.

How the greater Crypto market will benefit from SIngularityDAO:

• Make low cap coins attractive for large investors
  For holders with big bags (whales) investing in low liquidity altcoins is impractical. Investing any substantial amount will immediately blow up the exchange rate. However, if a hundred small caps are bundled in a single DynaSet, this will allow these investors to onboard more easily and, more importantly, to liquidate their assets quickly again if they need to.
• Yield farming with low cap altcoins
  Ability to participate in Yield Farming while holding on to your small cap crypto tokens. I can imagine a DynaSet containing only AGI, or perhaps 80% AGI, 10% ADA and 10% Ocean. I can hold these assets and at the same time earn some interest on the Yield Farming layer.
  In comparison with UniSwap: Here I can also choose to add liquidity to the AGI-ETH pair, but I would need both AGI and ETH and their relative ratio will change over time.
• A virtuous circle for successful tokens.
  Tokens that are most often traded will likely get a higher demand and therefore will return more rewards. The effect could be that because of their popularity more of these tokens are being locked in the liquidity pool, changing the balance of demand and supply. This will then generate more interest, leading even more tokens to be locked up in an ongoing virtuous circle.
• More independence from Centralized Exchanges.
  The hope is that by making investments in altcoins easier/less risky for big investors (because of smart bundling of multiple tokens), more money will flow into these markets. Part of this liquidity will in turn be made available for the Dexs. This will solve, or at least help the DEXs with their biggest issue: the problem of market making due to lack of liquidity.

Final thoughts
In part 1 I wrote that the DeFi world is getting more complex and may just lead to different winners and victims than today. Depending on the route this tech will take, this could interfere with the promise of a more egalitarian, democratic financial society. So the question remains, what will the impact be of AI on this DeFi environment?

I would argue that it is the same as in the ‘regular world’ of Big Tech, commerce and social media: If these AI tools are exclusively available to the large institutions, they will widen the gap, making some institutions even more powerful, most likely to the expense of the regular citizen. However, suppose that the algorithms offered on AutoNIO/NIOX and on SingularityDAO get sufficient traction. These platforms are created to offer democratic access to everyone. Sure, there will be some that are more adept to the tools and they will be able to make a handsome income of it. But likely these people will be the quants, machine learning researchers and data analysts that are working for the big institutions today, not the institutions themselves.

More interestingly, the algorithms will improve as they are being used, experimented with, tested and adapted. With a large enough pool of users these algorithms will eventually get the upper hand over the big institutions, because they will be able to improve at a faster rate, driven by a larger and more diversified pool of creators and users.

There are 2 big uncertainties with this picture.

One: as always with these kinds of platforms: Adoption. Will AutoNIO and SingularityNET be able to reach the tipping point of sufficient active users? I have no doubt that the tech will be sound and the DeFi movement is still going strong, despite the accidents mentioned in part one. Still, there may be other contenders, new regulations, unforeseen exploits, or the minds may just not be ready for this new paradigm. Time will tell.

Two: What about the winners in this new race? The DeFi world is probably already dominated by big whale-size players. If they are the ones that learn the quickest how to harness the power of these new AI platforms this could make them even more powerful. They can keep the best performing algorithms for themselves or use them to further increase their wealth. Will they be able to withstand the wisdom of the crowd for a longer period? Or will new whales rise, until there are so many that they are no longer a threat of forming a new financial oligopoly? Also this is hard to tell.

In any case these new decentralized platforms will make high tech, cutting edge tooling available for everyone. I like the idea of a more diversified and level playing field where Big tech, Big finance, governments, whales AND the crowd of retail investors will define the landscape together. Because I believe that any ecosystem will be increasingly ‘antifragile’ when it diversifies.
(With thanks to Nassim Taleb for his great book “Antifragile”)

Of course, these are all just scenarios. The real world is often more unpredictable. Things are moving slow most of the time until they are not. Changes are experienced differently when you’re in the middle of them. Often it is only when looking back that we are impressed by the speed of new developments. I wonder how we will look back to this moment in time when we have enough distance for perspective. Did we see the changes coming? Were we able to benefit from them? Or did we even have a small part in moving them into the right direction?

I know that the people behind SingularityNET, such as its founder Dr. Ben Goertzel are working very consciously and deliberately on moving the developments of AI in a democratic, beneficial direction. And by writing this article I hope I will have attributed just a tiny little bit to their monumental endeavors. You can support these initiatives as well. Don’t take my word for it but research SingularityNET and their ecosystem for yourself and help spreading the word!

if you missed part one of this article, you can find it here.

For more insights in SingularityNET and its ecosystem, read my other artcles: https://janhorlings.medium.com/