Jack Lu, 23, was impressed with the idea for his new DeFi platform Bounce while working on his thesis on game theory and cryptocurrency at Reed College in California.
“It took me a long time to think about it,” says Lu of his game theory-influenced auction platform. “Everyone was talking about loans and credits, uniswap and the provision of liquidity. When I look at this financial channel I think there’s one thing missing, namely auctions. “
Lu – who counts Andre Cronje from Yearn.Finance, Kain Warwick from Synthetix and Calvin Liu from Compound as peers – describes Bounce as a decentralized version of eBay, Sotheby’s or Christies. Users can set up pools to auction tokens and play around with parameters like the number to be exchanged, the time limit, and different ways of accepting bids.
He co-founded Ankr’s CEO Chandler Song and the bare black and white platform went live on August 4th. “I teamed up with some friends and we did it,” says Lu. “The platform has been in operation for two months and is ninth at the ETH gas station.”
To date, more than 2,700 pools have been created and more than 500,000 ethers ($ 179 million) have changed hands on the Ethereum version of the platform. Bounce was also one of the first five projects announced for the interoperable Binance Smart Chain – essentially an Ethereum clone with lower gas fees and avoidance of congestion – and as of early September, 700,000 BNB ($ 18.5 million) have also been countered this version exchanged.
The website started with two types of auctions. Fixed swap where everyone has the same price (like a 2017 ICO) and sealed bid auctions.
“You can put in a reserve price and a timer, and anyone can come and bid above the reserve price. And when the pool is closed, the smart contract fills the orders from the highest price to the lowest price. So people get different prices. “
Lu recently added some variations of Dutch-style auctions that assume a high price and gradually sell the tokens as the price goes down, as well as English auctions that assume a reserve price and go up.
World tour off San Francisco
Originally from Guangdong Province, China, Lu attended high school in the UK, where he took introductory economics courses that enabled him to complete his studies on Reed College early. “That’s where Steve Jobs went,” says Lu. There he discovered crypto in 2016.
“Quite a few teenagers were into crypto at the time, and my college roommate taught me about Ethereum, and then I started reading medium articles and Reddit,” he says. Lu began joining crypto groups and befriended NEO founder Hongfei Da, which resulted in a six-month internship at NGC Ventures in Shanghai in 2018.
After graduating in 2019, it became a full-time gig. Today he is the US investment manager for the San Francisco-based fund.
“I help our portfolio projects design their tokenomics,” he says. “During my due diligence on many projects, I have a broader view of what is going on in the crypto market and what advances are being made in tokenomics in the crypto world.”
Learn to play games
He may be the youngest employee in the company, but he’s also the only one to have written his thesis on blockchain and game theory – one of only a handful on the subject in the world at the time.
Game theory is a branch of mathematics that studies the strategies used in competitive situations where the results for the players are critically dependent on the actions of the other players. It has been applied to everything from war to economics to biology, but explored Lu’s thesis as to why it is perfect for cryptocurrencies. The “players” in the decentralized world of blockchain, from miners to traders to hackers, are independent and make decisions after evaluating the benefits and costs associated with their movements.
Unlike in the real world (like the New Yorker points out) game theory actually works better when applied to blockchain and smart contracts because the rules are set, the blockchain is transparent and the information can be made available to all players. Research has shown that the more informed party in a business typically gains up to 18% more economic benefits than the less informed party. Lu explains:
I always say it’s a successful experiment in game theory as we use smart contracts to avoid a lot of human elements for a game and we can see how pool creators and participants act.
His dissertation examined concepts like that Nash equilibriumThis is used to analyze the outcome of games where there is strategic interaction between multiple decision-makers and where the outcome for each depends on the decisions others make as well as their own.
Snitches get four years
The famous example of the Prisoner’s Dilemma helps to illustrate the concept:
Two suspects are being interrogated separately for a crime. If both confess, they will be sentenced to four years in prison. If this is not the case, each person is sentenced to two years in prison. If only one confesses, he will be released and the other sentenced to six years.
The best result is that none of them confess. However, the model predicts that both of them will confess since they have no information about what the other prisoner is doing and thus hedge their bets and both converge on the mean outcome.
Game theory gets fantastically complicated very quickly with games within games, and various amounts of knowledge and information about what other players are up to are expressed in algebraic formulas.
Lu enjoys watching the auctions on Bounce to see how things play out in the context of game theory. “I think all kinds of auctions are game theory events,” he says, pointing out that a sealed bid auction is a reminder of the Prisoner’s Dilemma.
“If you raise (the price) everyone has to pay more than the sealed bidder’s reserve price. But if everyone bids near the reserve price, everyone would be better off. I think this kind of behavior in the chain is very interesting to see . “
According to Lu, auctions provide a better way of finding prices for initial DEX offers than exchanges or automated market makers like Uniswap. where the mechanics of competition encourage many quick and reactive price promotions.
“When you run an auction for Bounce, people have time to think. And the projects also have time to think about and analyze people’s demand for each pool,” he says. “There is only one floor price or one price cap so everything else is based solely on market demand. ”
“Some projects run consecutive sealed bid auctions and the final price for each round is different. As in the first round, the final executed price is high and in the second round the price is lower, and in the third round the price increases again. I think that’s very interesting for analyzing players. “
He compares it to a guessing game in which the players in the second round assume that they can participate at a lower price because they have more offers after the first round. In the third round, however, they assume that everyone else will bid lower again en masse They bid higher to make sure they get tokens. As he puts it:
If you think that way, others will think that way too, so this is the pattern of successive play in game theory.
Synthetix founder Kain Warwick says bounce offers some fascinating possibilities.
“Pricing mechanisms in the chain are still quite rudimentary for early-stage projects with low liquidity,” he says. “Bounce aims to develop several new token distribution mechanisms that will greatly improve pricing and reduce volatility. Synthetix is exploring the use of this mechanism as part of ours [stablecoin] Stabilization efforts for sUSD pens. “
Synthetix is expected to make an appropriate announcement soon.
Another use case for bounce is decentralized over-the-counter trading (OTC). Users with large stacks of tokens can set up a pool privately or publicly to arrange an OTC deal and avoid the price collapse that would occur with a centralized exchange.
Around 50 IDOs and OTC trades have already used the platform. Bounce hit a milestone when Lu added support for non-fungible tokens. NFTs are unique tokens that first appeared in the form of CryptoKitties but now represent ownership of digital art, fashion, unique in-game items such as F1 cars in racing games, and collectibles for sporting memorabilia.
“I think an English auction is a perfect solution for NFTs that are art or tools in a game. However, there are more features like using NFTs as collateral or NFTs as loans. Therefore, Dutch and sealed bid auctions have some special use cases. “
Competition for auctions
Bounce isn’t the only token auction platform and has competition in the form of Mesa, which is currently in beta, and Coin List. But Lu argues that bounce is more decentralized than either.
“The difference is in the philosophy, I want everything to be in the chain, I don’t want any calculation (out of the chain), which means that the smart contract can do everything,” he says. “The smart contracts have to be lightweight and your data type has to be very efficient as you can only do a limited amount of calculations on the chain.”
Game theory was also influential when Lu designed the tokenomics for the project. While studying many complicated token systems in the course of his job, he decided to start small.
“It is impossible to create a perfect game at the beginning because you cannot immediately reach equilibrium every single game,” he explains – which in this case means an optimal result. “A lot of projects believe they can, which is why they’re building a very, very complex token economy.” He explains that:
For game theory, you gradually move into your equilibrium and that’s how I designed the bounce tokenomics
Lu started with daily rewards based on number transactions, then added stake and uniswap liquidity pool rewards and more.
“For me the philosophy that we’re going to be building more symbolic economic pieces along the road is not right at the beginning because even if you’re building a very complex system, if no people are participating and you don’t see what people want, it’s you are far from balance. “
Attack by the scammers
Lu was philosophically oriented towards maximum decentralization and faced a difficult situation when fraud surfaced on the platform. This is an issue plaguing DeFi logs with a wide variety of scam tokens listed on Uniswap every week.
“People say, ‘Oh, you should ban scammers,’ but I was like, ‘Oh, that’s a dilemma because if I ban the scammers, it means this platform is no longer decentralized,” he says.
“How can you define if it’s real or fake?” he says. “So the only way is to build a system of social trust.”
By doing system just releasedUsers use BOT tokens and can then propose a project to the Social Trust Board. The staker community votes which tokens are legitimate and which are not. So far, around ten proposals have been put to the vote.
“The applicant (of a pool) will use his token to ensure that he has a financial interest in it. And they can interpret all the information of the project and all bounce holders can go to this social trust board and open any suggestions. If you like it, you can upvote, if you don’t like it, you can downvote. “
Interestingly, it’s not based on the similar sound Kleros curated the token registration for Uniswap, which uses a game theory concept called Schelling Point to reward jurors with tokens for voting for the verdict they believe most other jurors are likely to give and punish them for voting otherwise.
“There is no mechanism at the moment, but there will be penalties later,” Lu says of the social trust system. “If you propose a pool, you put tokens in an insurance fund and the mechanism penalizes malicious behavior. If everything is clear, you get the insurance back, otherwise you compensate people through the insurance fund.”
“I think this will be a very nice experiment. When talking about DeFi governance, they all just focus on parameters like changing the transaction fee from that percentage to that percentage and adding a new pair. But that’s not all governance is about, there should be a big, big social element and people should be able to use tokens to do some interesting things. When social trust is built on Bounce, I hope other people can try to use it too. “
Attack of the clones
The other big problem DeFi projects face is that once a successful log is created, someone else clones it and gives their users greater incentives to jump ship. Lu says he’s just happy when “more people start thinking about different types of auctions and see that this is also a DeFi piece people can work on,” and doesn’t worry about clones.
“As the creator of this idea, I know exactly what I’m doing,” he says. “You may be able to copy the auction types I have created, but I have a roadmap in mind that I need to follow so that we can gradually compete.
“You can copy part of the framework, but if the framework has a solid foundation and a community to support it, I don’t think copycat will work.”
Governance for Bounce will be taken over by an all-star cast that includes Liu (Compound), Warwick (Syntherix), Stani Kulechov (Aave), George Lambeth (balancer), Nikita Ovchinnik (1 inch) and Michael Gu (box mining) . Lu hopes to do more with these projects and believes that interoperability and collaboration are key to DeFi’s future.
“The next step will be to find a collaboration with other DeFi projects, as I firmly believe that we only need one financial channel and that everyone has to cooperate with one another – in order not to have the ambition to fork other people”, he says.
If you look at the financial structures in history, everything worked out because of the collaboration.