DeFi Deep Dive #3: KeeperDAO
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While many people in DeFi are busy playing tic-tac-toe, the team at KeeperDAO are clearly playing chess — as evidenced by their $ROOK token, overall chessboard theme, and protocol designed around game theory.
KeeperDAO describes itself as both a “proxy volatility fund, providing backstop liquidity for on-chain lending and synthetic asset protocols” and a “virtual mempool enabling DeFi users and keepers to coordinate, capture, and distribute profit.”
Sounds complicated, but it’s easiest to imagine it as profit sharing for arbitrageurs. Arbitrage opportunities often exist, but are difficult for a single user to exploit efficiently. KeeperDAO incentivizes the individual user (aka a “Keeper”) to capture this profit opportunity on-chain, take incentive, and distribute the remaining value to the community.
The team has set up a variety of mechanisms to promote this behavior. At a simple level, for example, a Keeper can request a flashloan from the KeeperDAO Liquidity Pool to attack the arbitrage opportunity. The mechanisms for how this works are a work in progress, with its evolution is guided towards incentivizing collaboration and returning value back to the DAO.
KeeperDAO is releasing three “games” to exemplify their model. The first, launched in February, is the “Hiding Game.”
In describing the Hiding Game, KeeperDAO diagnoses current attempts at capturing arbitrage as lose-lose opportunities. Slippage and gas wars can often times erase the value of any potential arbitrage. The Hiding Game aims to turn this into a win-win by submitting the trade to KeeperDAO, which analyzes the transaction to see if there is a profit opportunity by frontrunning or tailgating the transaction and avoid expensive gas fights.
The money on the table is mostly extracted by miners. The Hiding Game aims to rebalance these profits to all participants, essentially “hiding” this sum from miners
The Hiding Game is already up and running, with the game proving popular enough that much of the KeeperDAO resources are going to integrating new paths and strategies. The team is also planning to release a Coordination Game and an Incentive Game in the future, all of which should theoretically increase the value of their $ROOK token, currently trading near $400.
Crowdsourcing intelligent trading strategies seems to have worked at least to some degree. The KeeperDAO has already run over $5B in flashloan volume since their launch in November 2020
We see KeeperDAO as something like a weaponized think tank. Instead of pumping out policy papers like a classic think tank, the big brains are pitted against each other in a friendly competition. The biggest brain wins the most, but everybody involved takes money home.
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