Spool: A Complete Guide

June 29, 2023

In conclusion

Regulatory drama & uncertainty has been plaguing our industry for the past couple of weeks, and the coins have not been liking it. We all might be thinking the same thing. “Take me back to 2021, please”. All you had to do was press the green button on any asset and you could never be wrong. Free money all day, every day.

Aside from all the fun we had clicking buttons all day, it was the first time that DeFi had REALLY been used at a much larger scale. We reached the point where your barber and Uber driver would be making trades on Uniswap.

With this unprecedented level of usage, a lot of cracks started to show on the surface of DeFi, especially on Ethereum. Gas fees were exorbitantly high, transactions took too long to finalize, and in general, the user experience was poor for any average user.

Yield farming on Ethereum was simply too expensive unless your portfolio was over $100k (iykyk 😉). Additionally, trying to constantly rebalance positions was not only prohibitively expensive but also painstakingly slow.

Seeing these glaringly obvious issues, Spool decided to come to market with a portfolio management product.

The basic idea was to have a product where users could front-load all their decisions into Spool’s smart contracts, i.e. the Spool Smart Vaults. These vaults would automatically manage your portfolio in a cost-effective manner. This was V1 of the Spool protocol.

While it worked as intended, there were still many drawbacks identified by the team and users alike.

Issues with V1

For starters, the Spool vaults on V1 only accepted stablecoins. Not having volatile assets leaves out a huge chunk of market participants and proved to be a limitation.

Another issue was the lack of customizability. Their vaults were just that, basic vaults. Permissionless and un upgradeable smart contracts on which users could only deposit and withdraw.

In line with the lack of customizability was the fact that the vaults also supported strategies only with one base asset. Many users often seek multi-asset strategies, but it was something Spool V1 didn’t offer. 

Over and above identifying these issues, the Spool team was also very proactive in talking with users, protocols, and institutions in order to get feedback on their product. After a long time spent on this, they managed to identify a lot of crucial pain points in the market that are yet to be addressed.

Armed with all of this information, Spool marched on to launch V2 of their protocol and let me tell you, it is something to behold.

Introducing Spool V2

Spool V2 is a DeFi toolbox allowing users to create risk-managed, compliant, and automated investment products for DeFi yield. It is a complete rewrite of V1 and was built to be more efficient, faster, and significantly more flexible. It is a product that will not only appease the average DeFi degen but also TradFi institutions who have been hesitant to dip their toes in the DeFi waters.

At the heart of this protocol still remains their smart vaults. These vaults are similar to your traditional DeFi vaults. They are smart contracts that automate investment strategies. Users can define their strategy of choice, and the smart vaults automatically execute the strategy and earn the users’ yield. The key difference with Spool Vaults is their in-built risk model, which gives users additional flexibility in selecting their risk preferences.

While permissionless access for creating & investing in vaults is a good thing, it presents a problem when you’re trying to attract external money. Institutions are large entities that have to follow a set of rules if they want to remain in their position of power. Creating DeFi investment products that anyone has access to presents a compliance violation for them. They won’t risk their entire business just to dip their toes into DeFi.

With this comes Spool V2s first major upgrade. GUARDS.

What are Guards?

Guards are essentially a way by which a creator of a vault can gate access to who invests in that vault. The creation of the vaults will remain permissionless, but the creator of the vault has the choice to decide who can and cannot invest in their vaults.

In general, Guards can be anything that is recorded using a smart contract. Some examples of what Guards can be implemented include:

·         Whitelisting

·         NFT gating

·         Fungible token gating

·         Time locks

·         Wallet age

Whitelisting is something I’m sure most of you are familiar with. You’ve probably spent countless hours in the Discord servers of memecoins and NFT projects trying to get that whitelist so you have early access to buy a specific product. The same applies here.

The creator of a vault can whitelist a set of wallet addresses that are allowed to deposit into or withdraw from the vault. This is handy for institutions that may want to restrict access to a vault only for clients of their business or wallets that have been KYC’d.

NFT gating is another feature that is already popular in crypto. It essentially restricts access to only those who have a specific NFT. This can be applied in different ways too. You can target holders of established NFT projects or you can create your own NFT and only holders of those can have access to the vault.

Fungible token gating is almost identical to NFT gating. The main difference is that rather than having an NFT in the wallet, a prospective user of the vault must have a specific fungible token. However, something unique to this form of gating is that users can also be targeted based on the number of tokens they hold.

If you want to target whales of a certain token, you can implement that. If you want to target the ones who hold fewer tokens, then that is also possible.

Time locks are not a common occurrence in DeFi but are something that can prove to be beneficial. It is essentially the imposition of time restrictions on when a user can withdraw their funds. It helps with creating longer-term strategies and understanding how much capital a specific strategy will have over a given period of time.

In addition, it could potentially create a whole new investment vehicle. If investors in a time-locked vault receive a receipt token, there can be a market created for these receipt tokens as people speculate on the perceived future value of that vault’s strategy.

Lastly, we have wallet age gating, a fairly simple yet important gating process. To prevent your local sybilooor from creating a hundred new wallets in a second and gaming a system, the vaults can be gated based on the age of the wallet.

These are just a few of the potential guards that are in place. As time goes on, they will most certainly add more guards depending on the requirements of the users.

Moving on to Actions

We already showed you how Spool’s V2 smart vaults have significantly higher flexibility. But what else is there to them other than different forms of Gating?

Well, let me introduce you to Actions.

Actions were put in place to create a more adaptable and efficient experience for creators & investors alike.

In short, actions are things that are tied to a user's activity. They primarily apply to deposits and withdrawals and include things like deposit fees or early withdrawal penalties. Let’s quickly dive into a couple of examples of what Actions could look like.

This is of course not an exhaustive list, more features will be added in the future and creators can also configure their own customizations if necessary.

A basic example can be a deposit fee. Institutions may want to see an instant and consistent ROI on their investment product and this fee will do exactly that.

Another possibility is an insurance fee. We all know that catastrophic events are never too far away in crypto. You never truly know what’s going to happen. This insurance fee can cover you for such circumstances.

There can also be early withdrawal penalties. Remember the time-lock feature we talked about? Well, if there are people desperate to exit a vault, they can pay this penalty and go ahead with what they please.

However, what I think is the most interesting Action is their Automated Asset Swaps. The creator of the vault can configure it such that the tokens deposited into the vault are automatically swapped to the correct token for the type of strategy the vault is executing. 

In essence, this furthers the flexibility and control that vault creators have over the investment product that they have created.

At the end of the day, however, the name of the game is creating investment products. While the additional control and flexibility are good, what matters most is the strategies implemented in these vaults.

Complex strategies

The main driver of liquidity into the Spool ecosystem is going to be the vault strategies. With V1, there were a lot of limitations in terms of vault strategies. Focus was primarily on stablecoins rather than volatile assets, and multi-asset vault strategies were not possible.

All this changes with V2.

For starters, strategies can now use volatile assets for those chasing higher yield or higher complexity in the composition of the strategy. The benefit that Spool has over other similar yield aggregating products in this scenario is the risk models.

Their risk models ensure that the vaults are well-diversified and minimize risks as much as possible based on the users’ risk preferences.

In combination with this complexity comes additional composability in the form of Vault tokenization. Depositors will be issued an NFT representing their position in the vault.

These deposit tokens could either be used as collateral to borrow against, staked for additional yield, or traded for premiums and discounts. There’s a ton of possibility.

To round up the new strategies available. We need to talk about one of the biggest elephants in the room. Liquid Staking Derivatives (LSDs)

LSDs have taken DeFi by storm after ETH 2.0 went live, with Lido quickly growing to become the #1 protocol by TVL in all of DeFi.

Out of this success, a whole suite of LSDs and LSD-based projects was born. With Spool V2, multiple complex strategies can be made using different LSDs.

The yield generation possibilities with LSDs and LSDfi projects are endless, and Spool V2 simply allows you to automate these complex multi-asset strategies under one roof. 

Simplicity, Flexibility, Compliance, and freedom of choice. This is what Spool V2 is all about. 

They aim to be a DeFi toolbox catered to institutions. They offer a whole lot of flexibility and freedom over vault creation as well as governing who invests in that vault.

They provide a compliant way for large institutions to participate in DeFi, all while automating the execution process with low fees and using their risk models to ensure that damage is limited in the event of a black swan.

While all of this is good, we know what all you degens that made it this far are thinking. Wen token?

Well, there already is one.

SPOOL Token 

The SPOOL token serves two purposes. Accrue value to holders & Governance. 

It has a maximum supply of 210M which is distributed as follows: 

  • 5% - Initial fair launch LBP
  • 8% - For stakeholders (linear vesting over 24 months)
  • 20% - Builders, advisers, and ecosystem (linear vesting over 24 months) 
  • 67% - DAO governed 

This means the DAO has control over where 67% of the supply can be directed, whether that be emissions, liquidity, growth costs, or whatever else the people choose. 

It’s worth noting that 1/3 of this supply has already been burned. Yes, you heard me correctly, One-third. A combination of builders, preDAO members, and the treasury collectively burnt these assets in the broader interest of maintaining decentralization as the project continues to develop.

To be able to vote with your SPOOL, it must be staked for voSPOOL. Holding this voSPOOL then entitles users to governance power. Holders can vote on a variety of pivotal factors such as Spool Improvement Proposals (SIPs), Directing Spool incentive emissions, new strategies, new risk models, as well as treasury management.

voSPOOL is a lot more intricate than simply being a voting token, specifically when it comes to staking. voSPOOL starts accumulating the epoch after the user has staked their SPOOL. It starts out accumulating at 1/156 per SPOOL and maxes out at 1 voSPOOL per SPOOL. The more a user stakes, the faster it accumulates. 

The catch, however, is that once a user unstakes their SPOOL tokens, it resets the voSPOOL balance to 0. The premise is to create a model where long-term voting is prioritized. Institutions and their customers can have long-term input on their products as well as the infrastructure layer itself, creating a more harmonious system. 

The way the treasury gets built is through fees. From all the performance fees collected, 80% is distributed to stakers of SPOOL proportional to their stake, while the remaining 20% is distributed to the treasury which is DAO governed, so indirectly accruing back to the token holders again. 

Spool Team 

Spool has a tight-knit team of 15 people from around the world, all of whom excel in their specific roles. Headed by Luke, who has a wealth of experience in crypto, the team is not only highly efficient in building but very receptive to feedback and quality opinions from the community.

The collective aim has always been to change the game in crypto, and their approach to Spool V2 is a testament to that collective belief.

Concluding thoughts

DeFi as we know it is akin to a long and tangled piece of thread. Intricate and full of connecting knots, yet very difficult to unravel. For those of us who spend all day behind a screen, we have managed to somehow make sense of this entangled web of threads. However, if we want more external money to flow in, this thread needs to be untangled.

Appropriate to its name, Spool simplifies the entire process by being the infrastructure around which the jumbled string of thread can be straightened out.

It provides the perfect toolbox for institutional money to create investment products while being compliant. Products for the DeFi degen already exist, so now it's time we as an industry move on to capture bigger fish and Spool is on the frontlines of this charge to attract the large institutional players.

Keep your eyes peeled and stay vigilant because Spool is here to take DeFi to the next level. 

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