Pontem x Aries Markets Livestream Recap

Today on our livestream, we have special guest Aries Markets joining us.

Alejo: Welcome Aries Markets! Please introduce yourself and let our community know who you are and what you’re building.

Aries Markets: I’m currently leading Growth and Partnerships at Aries Markets. Aries Markets is a full-suite decentralized exchange, which essentially brings all DeFi products together. This includes lending, borrowing, swapping, and trading. Swapping and trading can be done on margin as well. On top of that, we also provide account management, similar to how you have main accounts and some accounts on centralized exchanges, all in one platform. We have a key focus on security and user experience. You could say that we want to be a one-stop solution for Aptos DeFi on Aries Markets.

Alejo: So as I understand it, you’re building out some of your own protocols and connecting it to other protocols to provide a really good user experience for end users, something that might rival a centralized exchange? Could you talk more about the parts that Aries is building and then the parts that are connecting into other protocols?  

Aries Markets: That’s correct. And the core component of Aries Markets is its lending and borrowing market. Essentially, it leverages the risk engine of the lending and borrowing market and allows users to lend and borrow assets. They can use these assets to swap and trade on the Aries Swap and Aries Trade features. Currently, the Aries Trade feature is not live, given that we are still waiting on full integration with central limit order books like Econia or AUX. The Swap feature, however, is currently live and users can perform swaps on the platform. We also do have a leverage swap, which we can allow users to automatically lend and swap the assets together such that they can achieve leverage exposure to a certain asset. So, the core feature is the lending and borrowing market, and the features which we’ve integrated are the swap feature and the trading feature.            

Alejo: So will people be able to place a limit order? Like at a specific price with the leveraged trading feature?

‍Aries Markets: Yes, that’s right. Any kind of order that you can place on a centralized exchange, you can do that on Aries Markets when we do go live. We want to rival the kind of experience you get on centralized exchanges. We want to support the kind of user experience that we haven’t seen on DeFi yet.

Alejo: So tell us, what are some of the benefits or tradeoffs to a centralized exchange versus something that’s decentralized like this?

Aries Markets: The key difference here in centralized versus decentralized is ownership of assets. The key phrase people usually use is “not your keys, not your money.” In a decentralized environment, you want to be able to control your own keys.I think the key difference you’d probably have trading on a decentralized exchange instead of a centralized is that you're having to make transactions that cost gas, and the Aptos community is currently optimizing for gas usage. And I think we’ll have a better experience once that is live on Aptos. We’ve just seen one of the main centralized exchanges go bust, unfortunately. I think a decentralized option would cause greater opposition in that kind of case.

Alejo: I think we should aim and encourage folks to move towards decentralization. That ethos of owning your own private keys is very important. It’s the sole reason we’re here. It is a little bit ironic that we do trust centralized entities so much. My own opinion is that moving to decentralized entities is good for the ecosystem and it’s better that it happens sooner rather than later.

The people that are here long term get it. The thing that imploded was a centralized exchange, not a decentralized entity. Not to say a decentralized entity couldn’t get that big and implode, that’s obviously still a risk. But it’s completely different to what we saw, which was us trusting a person, but it seems likely they did some malicious activity with customer funds. That’s something that definitely can’t be done with the blockchain because it’s all transparent, it’s all there.

I think people will wake up to the possibilities of this. There has to be some tradeoffs, or maybe costs like gas or speed, but it seems that Aptos is an entirely new paradigm that allows for some of these tradeoffs to be minimized. Could you talk more about how gas and speed works within Aries, and how that compares to a centralized exchange?

Aries Markets: Sure! To expand a little bit more on the topic of tradeoffs between DEXs and CEXs, I think the key part of the tradeoff here probably lies in liquidity as well, given the fact that liquidity is sort of fragmented across different types of values. And since CEXs are the most popular platform that most traders choose, liquidity is definitely better on CEXs. Which is why I think DeFi hasn’t taken over completely yet. As we see DeFi get adopted further and grow, we’ll likely see liquidity transfer into DeFi. The liquidity on decentralized exchanges may not be the best, but we will definitely move in that direction. I think Aptos being a chain that supports these sorts of transactions in terms of finality and cost will be a key value proposition if you were to give up, say, a CNE on blockchain itself.    

‍Alejo: That makes a lot of sense. Liquidity is also a limiting factor and that might be a function of the entities that have liquidity, like market makers that are making markets and arbitraging prices, and using all of these tools on centralized exchanges like credit that they don’t feel comfortable enough using DeFi yet. Maybe the infrastructure isn’t there for third-party custodians to enable the ploying into DeFi. I know that’s definitely a blocker with some third-party custodians. Managing your own keys on Aptos Ledger isn’t live yet, but will be live soon through our wallet. But there are definitely various small points of friction that we need to build out. It’s just a function of how early we still are in building out all this infrastructure. I’m generally optimistic we will see this adoption and liquidity coming over to DeFi, especially with the recent FTX blow-up.

Aries Markets: I think it’s the hefty cost that crypto has to pay. It’s very unfortunate. A lot of my friends live in Asia, a lot in Singapore and Taiwan, and most users there rely on centralized exchanges like FTX to store their coins. I think this is going to be a huge blow to the trust that most crypto users have, which would ideally promote DeFi, but it will take time to bring back that kind of interest and adoption after such a huge blow.

Alejo: What is some of the sentiment that you’re hearing in Asia? Was there a lot of exposure to FTX?    

Aries Markets: So within Asia, I think FTX and Binance are the top two CEXs. There are specific CEXs for different target regions like Korea. For communities within the Singapore region, Binance is not certified or legal, so most Singaporeans use FTX. As for Taiwan, not to comment too much in detail, but I know that some of their users are paired against Chinese exchanges so they prefer FTX as well. At least that’s what I’ve been reading and hearing. So most users there probably rely on FTX and were affected by the debacle. It’s a huge blow, I must say, across the entire space.

Alejo: It’s relatively surprising that a relatively Western exchange gained so much traction and adoption in Asia. I guess in the West, we have more regulated exchanges like Coinbase. That might also be a gap, the fact that there is some lack of regulation, at least globally, that is coherent and led to this type of blow up.

What I was thinking too was potentially one of the trade offs is access to all these different assets in one place. There’s inherent risk too when you use bridges to bring over Solana, bitcoin, Ethereum, etc. to Aptos. Obviously there’s a different type of risk when you do it on a centralized exchange. I don’t know why, but it feels less risky that you’re trading bitcoin against whatever. Whereas on a decentralized exchange, if you’re trading wrapped bitcoin, you know it’s not really bitcoin in the back of your mind. But similarly on an exchange it’s not really your bitcoin either. Maybe that mind shift will come eventually where people will feel more comfortable with bridges. You know what’s super interesting? Billions of dollars are stolen in DeFi. There’s been like $300-$400 million hacks, but it didn’t seem to have such a huge effect like this. Hopefully this is just somewhat of a bump. Maybe people now will feel more comfortable trusting a bridge, like a Layer Zero or Wormhole.

Aries Markets: The level in terms of penetration has changed. That speaks for the level of exposure and trust globally that FTX has garnered and the amount of trust that has been broken. I think most crypto users treat exchanges like a safe haven, and it’s probably where they store the bulk of their assets as well, because when you can’t store securities, you rely on centralized entities to do that and you put your trust in them managing those funds correctly. Unfortunately in this case, it was misplaced. It’s definitely going to be a much bigger blow than a DeFi hack where your funds were not secured because you take ownership of it in that sense. When it comes to losing your funds, when another entity you trusted your funds with loses them, it’s a heavier blow.  

Alejo: I wonder if this will lead to everything being decentralized. I’ve talked to a lot of people who have been affected, but none of them has just rage quit crypto. They’re more annoyed and pissed off at what’s going on with all the centralized entities. It’s nuanced. Everybody that is affected, if they truly understand it, they get it. I don’t know if you’ve met anybody who rage quit.

Aries Markets: If anything, it’s actually a proposition for DeFi. But it’s still a huge blow. With this kind of contagion, it’s really hard for people to trust DeFi and also crypto entirely. It’s going to be quite a difficult path to navigate across. We’ll probably need something more regulatory on crypto as a whole before adoption comes back again, unfortunately.

Alejo: Hopefully, those regulatory bodies focus on the real issues, which are centralized entities. I think this was a big criticism of SBF from the entire crypto community, as he was trying to regulate DeFi in a way that was favorable to him and unfavorable to entrepreneurs and developers who are just building protocols independently. Hopefully, regulators are nuanced enough to see the difference and that they should be regulating these centralized entities that take control of people’s keys, custody their assets, and move them around balance sheets they shouldn’t be moving them around in. Hopefully, they take a nuanced and thoughtful approach to DeFi.

This is a very powerful tool that enables anybody in the world with Internet access to money that has US grade trust and stability. The fact that you can access the US dollar without jumping through hoops is super powerful for 80-90% of the world. Access to money is now being democratized with crypto. All you need is a wallet. There are obviously barriers to entry like figuring out how to custody those keys. When the Internet first came out, people were skeptical. It does take a large cultural shift and we will get there over time. In my opinion, what happened to FTX is not too dissimilar from what happened to all the banks in 2008. Nobody really knew how much risk there really was and there was too much leverage in the system. Once there was a liquidity crisis, it started to implode.

There’s a solution to this now. Money doesn’t have to be opaque and abstract. It can be on-chain and fully transparent. The spreadsheets will always add up. I think it’s up to us to make these products more accessible, and I think you’re making great progress here with your product to make these accessible and make them look more like traditional finance. People shouldn’t feel like they’re using something entirely foreign. It’s just a small shift in how you manage your funds. I’m fairly certain we’ll get there within 5-10 years, we just have to put our heads down and continue building.                

Aries Markets: For sure. I also think the user experience part, in terms of bringing the next wave of adoption to users, is where our focus is as well.

To share more about Aries Markets, in terms of user experience, it’s why we’re bringing all of the DeFi products into Aries Markets. Currently we’re trying to figure out the soft issue of the front end user experience. On other chains, if you want to do a swap you have to go to one place. If you want to do lending/borrowing, you have to go to another. Essentially, we want to be a one-stop solution that all users on Aptos DeFi can just navigate to and conduct all their DeFi activities on one platform. That is the first inning into optimizing the user experience.

Beyond that is to figure out how to bridge or create wallets. The key issue is that most users are not able to secure their private keys in an efficient way. So we’re building up products to do that, primarily starting with our mobile application where you have a mobile wallet that helps prevent phishing attempts through malicious links. These are the first steps and the direction that we’ll be going in to bring this to the next wave of users.

Alejo: And aggregating everything in one place is a huge step in making it more accessible. Another one that I’m thinking about is private key management. I don’t think exchanges like Coinbase or Binance are definitely bad. They still have a place in the ecosystem. It’s definitely still important to do KYC/AML to make sure folks are not money laundering and such. And I do think that those on and off ramps are a key role for exchanges.

However, actually giving them the private keys is pretty dangerous. They should have relatively good infrastructure for managing private keys. What about something like a semi-custodial solution where you, a trusted third-party you can leave your keys with, plus an exchange all manage a multi-sig for your assets and easily allow you to interact with DeFi through that? That way if you lose your device or keys, you can still access it through the third-party plus the exchange. Honestly, the exchanges do build really good interfaces, similar to how you’re building on Aries. And they already have millions of users, so potentially that could be a way that we work together with these exchanges. I think there’s still a role for CeFi and a way for us all to work together in a way that keeps everyone accountable.    

We do have a lot of questions here from the community, so let’s go through some of them.

1. How do you examine the reliability of the platforms that you work with?

Aries Markets: First, having conversations with the protocols and teams. We definitely look at the team’s background. It’s a plus if they have investors backing them, which we test through a third-party. We hope to see audits, preferably from auditors we’ve worked with before such as Ottersec. And if the code is open source, we screen it as well. This is sort of the process we go through before we even integrate with these protocols.

2. What’s the main difference between Aries and other DEXs?

‍Aries Markets: I think it’s very common that most users think that Aries Markets only supports swapping or trading like typical DEXs. But like I said, Aries Markets is a full-suite decentralized exchange. We try to provide all the key DeFi products which includes lending, borrowing, swapping on margin, trading on margin, and account management. So the key difference is that we have all of these products, not just swapping and trading.  

3. What are some other use cases? Could I do margin liquid staking?

‍Aries Markets: That’s actually one of the new strategies we’re working on with another protocol. We’re also working with some platforms to automate this as well. These are some of the lower-hanging strategies you can do. Beyond that, it’s more complex in terms of how you have to do a long-short position. I’ll leave our users to their imaginations when it comes down to these kinds of strategies.

4. How does the feature of dynamic interest rate and liquidations benefit the user?

Aries Markets: Dynamic interest rates help to guide the cost of borrowing and lending to a level that maximizes capital efficiency. You can think of it like basically your interest rates will be undefined, at least the rate of change of interest rate will be undefined when utilization is above a target level of utilization. So this way, interest rates can adapt to the utilization rates for an underlying asset. It will allow users to lend and borrow at optimal interest rates. It essentially lowers the risk and reward for users when it comes to lending and borrowing.  

For dynamic liquidations, they are designed to make liquidators compete for the profit they make during these liquidations, and it also minimizes the loss taken. Instead of the fixed profit that liquidators usually earn from a typical liquidation, dynamic liquidation introduces a variable discount which liquidators need to compete for. What this achieves is liquidators who will not be competing in terms of speed, which may require them to jam many transactions onto the blockchain, but rather compete in other terms of the access of profitability. Liquidations happen not at a fixed discount, but dynamically based on the health ratio of the account.  

5. Do you have something similar to Maker, where there’s an emergency stop in times of extreme volatility?

Aries Markets: That will be dependent on the price oracle, and we do have something in place for these kinds of events and that will be dependent on the liquidity of the pool. Say we’re listing a new asset, the liquidity of that asset in the market will definitely be a key factor in determining the LTV of the asset.

6. There was a recent hack on Mango Markets that seems to have been a possible hack or price manipulation.  How does your platform manage this sort of risk?

Aries Markets: I think there was a price manipulation. Basically, one of the oracles that they were dependent on were manipulated, therefore overstating the counter collateral that they had on the platform. In terms of preventing these kinds of issues happening to Aries Markets, it starts with the price oracles that we rely on. Since we rely on more than one, all the information received is redundant, which delivers the best liquidity or average price. We will try to reflect the most accurate price for every asset on Aries Markets and prevent any overstating of the value of collateral.