Fluid: Maximizing capital efficiency in DeFi
Capital efficiency is a key challenge in DeFi. Between lending platforms like Aave and AMM protocols like Uniswap, users often have to choose between lending/borrowing funds or providing liquidity. Fluid, developed by Instadapp, offers a hybrid solution that combines both approaches, allowing for optimized capital utilization. This article explores how Fluid works, compares it to existing solutions, and analyzes the added value of a Portfolio Management System like Nuant in maximizing its potential.
Overview of Fluid protocol and its strategies
Fluid introduces a new approach to capital-efficient lending and market making in DeFi. Built by the Instadapp team, it offers a hybrid solution that merges lending and liquidity provision on DEXs within a single protocol, enabling users to leverage their capital more effectively.
Unlike traditional platforms like Aave or Uniswap, where deposited funds serve either as collateral for lending or liquidity for a DEX, Fluid allows users to do both simultaneously. For example, a user can deposit 10 ETH as collateral, borrow 4,000 USDC and 4,000 USDT against these funds, and use them directly to provide liquidity on Fluid. This enables them to earn trading fees while also gaining access to additional liquidity, optimizing capital utilization.
Beyond this approach, Fluid also allows users to simply deposit USDC, ETH, or other assets to generate passive yield, similar to a lending vault. This option suits users looking for passive income without actively managing their positions.
Additionally, Fluid facilitates looping strategies. A user can borrow funds, redeposit them as collateral, and repeat the process multiple times to maximize exposure and returns while staying within the protocol’s liquidation limits.
Comparison with Aave and Uniswap
The choice between Fluid, Aave, and Uniswap depends on the user’s objectives.
Aave is the best option when a user wants to borrow funds in a simple and secure manner without exposure to impermanent loss risk. For example, if an investor holds ETH but wants to obtain USDC for an investment opportunity, they can deposit their ETH as collateral and borrow USDC on Aave. This allows them to use the borrowed funds while maintaining their exposure to ETH.
On the other hand, Uniswap is ideal for users who want to generate income by providing liquidity and capturing trading fees. However, this exposes liquidity providers to impermanent loss. For example, a user holding ETH and USDC may choose to deposit them in a Uniswap V3 pool to earn a share of the transaction fees, but they will need to monitor the relative price fluctuations of these assets.
Fluid enables users to combine borrowing and liquidity provision in a single action, something that isn't possible when using Aave and Uniswap separately.
With Fluid, this user can deposit their 10 ETH as collateral, borrow USDC-USDT, and immediately inject them into a liquidity pool, optimizing their yield while maintaining exposure to ETH. This allows for dual capital utilization: on one side, ETH is used as collateral to generate a loan, and on the other, the borrowed funds are deployed in an AMM to generate additional returns.
However, this flexibility comes with increased risks:
- Liquidation risk: If ETH’s price drops, the collateral value may no longer be sufficient to cover the loan, leading to liquidation.
- Impermanent loss risk: Providing USDC-USDT in a liquidity pool exposes the user to price variations that can reduce the value of their funds.
- Leverage risk: Borrowing amplifies both gains and losses. If the liquidity pool yield is lower than the borrowing cost, the user may incur net losses.
- Liquidity risk: Withdrawing funds from a pool is not always instant, which can complicate collateral management in times of high volatility.
Fluid maximizes capital efficiency but requires active risk management to avoid liquidation and ensure that returns remain higher than borrowing costs.
The contribution of a PMS like Nuant
Nuant provides an overall view of DeFi positions by centralizing the analysis of exposures by asset, protocol, and blockchain. It offers real-time performance tracking, optimized risk management, and advanced analysis tools such as simulations and backtesting.
An investor using Fluid can leverage Nuant to gain deeper insights and optimize their strategy. Nuant offers real-time alerts and notifications, allowing users to react swiftly to market fluctuations. It also provides PnL computation by asset or sector, giving investors a granular view of their portfolio’s performance. For example, when you will supply ETH and borrow USDC-USDT, Nuant will be able to compute your unrealized PnL based on the market price change. Additionally, Nuant delivers key risk metrics on portfolio exposure, enabling more informed decision-making and proactive risk management.
One of Nuant's major strengths lies in its simulations and backtests. Rather than entering a strategy without visibility, a trader can test different allocations and market scenarios before committing. For example, they could analyze the impact of a 10% market drop on their Fluid positions and adjust their parameters accordingly to limit potential losses.
Conclusion
Fluid represents a significant advancement for those looking to maximize capital efficiency in DeFi by combining lending and market making within the same protocol. However, this flexibility requires more precise management of exposures and risks, making the use of a PMS like Nuant particularly relevant. Nuant provides an overall view of DeFi positions, centralizing the analysis of exposures by asset, protocol, and blockchain, while offering real-time performance tracking, optimized risk management, and advanced analysis tools like simulations and backtesting. For investors wanting to optimize their strategies without multiplying platforms, Fluid, paired with Nuant, offers a promising alternative to existing solutions like Aave and Uniswap, provided they adopt rigorous and dynamic management.
