In the ever-evolving world of decentralized finance (DeFi), Dolomite has emerged as a game-changer. From its humble beginnings to its current status as a pioneering platform, Adam Knuckey, co-founder of Dolomite, shares the story of its inception, the challenges faced, and the vision for the future.
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Ishan Pandey: Hi Adam, welcome to our series “Behind the Startup.” Please tell us about yourself and the story behind Dolomite?
Adam Knuckey: Hi Ishan, thanks for having me! So the story of Dolomite stretches pretty far back. Personally, I got into crypto originally in 2013 when Bitcoin hit $1,000 for the first time. Someone on a programming forum I was on was working on a crypto project and I helped out with improving their miner. From there I was in and out of the space for a few years, sometimes buying or using Bitcoin. My cofounder Corey got started in 2015, he was building game modding software and was shut down by PayPal so he had to switch to accepting Bitcoin for payment.
My co-founder and I met freshman year of college. Both of us were in the same dorm on the same floor and in the same major, a dual degree in computer science and business. Throughout college we worked together on side projects and competed in hackathons and coding competitions. When the crypto market started heating up in 2017 we dove head first into trading, waking up at all hours of the night to check prices and spending hours reading project whitepapers. Through our trading, we began to get frustrated with the shortcomings of the centralized exchanges that existed at the time. They were fraught with hacks and fraud, and had sub-par user experiences.
It was at that time that we began to dig deeper into a new technology that promised to solve those problems - decentralized exchanges. At the time the only decentralized exchange was EtherDelta, an exchange that listed the least reputable tokens that couldn’t even get listed on the least reputable of centralized exchanges. The UI was basic and clunky and made it easy for users to fat finger trades, selling or buying at wildly unfavorable prices. Despite this, what excited us was what the tech could become.
At the very start of 2018 Corey and I began working on bounties for a new decentralized exchange protocol called Loopring. We built out an Android mobile DEX for them. At the time we were the first building on Loopring and one of the first to build a DEX overall. The CEO of Loopring liked our work enough that he expressed interest in investing in us. So we wrote up a business plan for the DEX - or really, just the exchange - that we always wanted to use, and received an investment in April of 2018.
From there we brought on some developers and built out the initial version of Dolomite. That summer we worked out of a rented house in the Poconos with the whole team. If you’ve seen the movie The Social Network, it was a lot like the house they had in Palo Alto. By 2019 we launched our initial version of Dolomite.
Back then the market was very different. This was before “DeFi” existed as a term, instead loosely called “Open Finance”. The trading volume of all DEXs combined was maybe $10m on a good day. We had to explain to countless people what a DEX actually was, and why someone would want to use it. This was also a time before Uniswap and AMM pools, so we built out Dolomite as an order book exchange, with trades being matched off-chain and settled on-chain. Overall it did decently well, seeing some trade volume from communities that we worked with. We also white labeled our tech to help out other projects.
As time passed and DeFi evolved, it became clear that the space was moving in a different direction than what we had built, towards AMM pools and deep interoperability at the smart contract level. So we spun down our initial version of Dolomite by 2020, and not long after we started building out a new version of Dolomite. This new version would be built for the modern DeFi landscape, using all the experience we had gained in the space, built to push the tech further than what was currently out there. And in October 13th 2022 we launched our new version of Dolomite, built to push the boundaries of what lending protocols are capable of by being able to support many more assets and most importantly many more of the complex assets that have come to define DeFi.
Ishan Pandey: Please tell us a little bit about Dolomite and its core offerings in the decentralized finance (DeFi) space.
Adam Knuckey: Lending protocols in DeFi haven’t changed much in the last couple of years. Most of them support a very similar set of 6-12 basic assets, generally ETH, WBTC (wrapped Bitcoin), stablecoins such as USDC, USDT, and DAI, and a handful of other common assets. The functionality has largely remained the same as well. Add some assets as collateral and you can borrow some other assets up to X% of the value of that collateral, where X is generally around 85%.
Dolomite pushes lending protocol tech much further. Rather than a dozen assets, Dolomite is able to support thousands of different assets. Early on in DeFi when more established lending protocols were being built, this wasn’t necessary. It would mean supporting many random low market cap alt coins, something both very risky and not of much interest. But DeFi has matured significantly, and now there are a large number of functional assets, derivatives, and liquidity tokens. Being able to support thousands of assets means Dolomite can list liquidity tokens for a multitude of Uniswap AMM pools, maturing assets with expiration dates, yield-bearing assets and their derivatives, and so many more of the assets that make modern DeFi so exciting.
Additionally, Dolomite can support these assets without hindering their functionality. Even on the few other lending protocols that support more complex assets that offer things like rewards or staking functionality, generally all of that is lost once it’s deposited as collateral. With Dolomite, users can deposit their yield-bearing, reward generating assets and continue to earn all the yield and rewards they generate, even while those assets are being used as collateral. Additionally, in the cases where those assets have actions like staking built into their ecosystem, users can stake right from the Dolomite interface and then still continue to use those assets as collateral, even while earning rewards from staking. Users generally use this functionality to increase the amount of the asset they hold by using borrowed funds to acquire more of the yield-generating asset, increasing their yield. Others use the functionality to hedge price volatility. And still others use it to free up capital while continuing to earn yield and rewards.
This is just the most popular feature of Dolomite currently, but Dolomite has capabilities that stretch beyond just that. Dolomite is not just a lending protocol, but also a DEX that supports margin trading, and will soon offer margin pair trading, in other words the ability to margin trade the ratio between any two assets, rather than just against the value of the US dollar. So for example a margin trade with ETH going long against BTC, where the value of the position rises when ETH gains value in terms of BTC. This pair trading will have as broad of token support as the lending and borrowing aspect of Dolomite. Additionally, Dolomite’s capital efficiency means that users can add liquidity to a Dolomite liquidity pool and simultaneously earn lending interest and fees generated by the AMM pool. Soon that will also include lending interest from lending the LP token itself, and the user will then be able to borrow against the LP token to free up the capital to be used elsewhere while still continuing to earn the interest and fees.
Another unique aspect of Dolomite as a lending protocol is the ability to integrate a DEX aggregator into its lending and borrowing. This will allow users to swap assets while they’re being used as collateral or debt in a borrow position, or borrow an asset, have it swapped to another asset, and have that new asset deposited as collateral, all within the same block so the position is never undercollateralized. This will supercharge the borrowing and lending on Dolomite and offer users capabilities not seen on any other lending protocol.
Ishan Pandey: Can you discuss the importance of user education and user experience in the context of driving adoption and usage of DeFi platforms.
Adam Knuckey: User education and user experience are two things that are absolutely essential to adoption and usage, especially as DeFi continues to mature and increase in complexity.
It feels like the barrier to entry in the space has simultaneously gotten lower and higher. Lower because so many great tools and wallets have been built to make what used to be difficult or opaque instead be easy and transparent, but higher because the space has gotten exponentially more complex as it’s matured.
Wallets exist now that make it clear what transactions are about to do, warn you about fishy sites, give warnings when you might be doing something wrong, have built-in onramps for funds, and seamlessly connect to applications from mobile or desktop.
Applications have been built to track the value of your portfolio across multiple chains and dApps in seconds. But crypto used to be simple. Back in the days of just Bitcoin, adoption was as simple as “here’s your wallet, here’s your address, now I can send you Bitcoin and you can send some to me”. The early days of DeFi were a little more complex, but despite clunkier interfaces the functions were orders of magnitude simpler than they are now. Generally just “this is a DEX, it lets you trade crypto like you would do on a centralized exchange but now you click a button in this Chrome extension to submit the trade”.
Modern DeFi has continued to build upon itself in layer after layer of added complexity. For those of us that have been in the space as these layers have been laid down, the learning process happened steadily and naturally. We learned and discovered as the space as a whole learned and discovered. But someone trying to get into DeFi now may find taking it all in at once quite daunting. Now the space is layer upon layer of LP tokens, complex vesting and staking structures, derivatives, options, perpetuals, reward tokens, replications of advanced traditional financial instruments, and so much more. To take it all in at once can be overwhelming.
This is the reason why user education and user experience are so important to adoption. Documentation, guides, and even instructional videos are a must-have for any serious project, written plainly so that even those with no DeFi experience can follow along. Many of the projects being built represent complex financial instruments, and understanding that alone is difficult enough without the added burden of not knowing how to actually perform the actions being described. For the same reason, an intuitive UI/UX is important, especially when peoples’ money is on the line. One single confusing element of the interface may be enough to make a user throw their hands up and give up, or even worse, lose money accidentally.
If these more complex projects being built in DeFi ever want to be able to grow adoption past hardcore DeFi degens, they need to make the interface and instructions as clear as possible so the user can focus on learning about the actual financial activity taking place.
This is something that we try to focus on with Dolomite, although it’s a continuing journey of improvement as we find pain points for users. It should start with a UI that works smoothly on any device and makes each step the user is interested in doing very clear, with clearly displayed titles, descriptions, and buttons. Where UI alone falls short, guides and docs pages should always just be one click away. And as an essential last line of defense, having a team that’s easy to reach on social media to answer questions.
Ishan Pandey: Decentralized exchanges have come a long way since the early days of Ether Delta. In your opinion, what are the key factors that have contributed to the growth and adoption of DEXs?
Adam Knuckey: The growth that has happened since the Ether Delta days was a huge surprise even to us. There was a time in 2018 and 2019 where we were pitching to investors and making predictions like “in just a few years the space as a whole will go from $10m a day in trade volume to $100m!”, and often we felt we were being very overly optimistic. Little did we know that just a couple of years later Uniswap alone would surpass $1b in daily trade volume. Even now I can’t say with certainty what the exact reasons for that growth were, but I would put it down to a few key things.
For one, I think DeFi appealed to the ethos of crypto. Using a centralized exchange to trade a decentralized asset felt so backwards, even dirty. What was the point of these decentralized networks and personal custody through wallets if we’re just going to park the assets on a centralized exchange so they’re available for trading?
For years one of the most common pieces of advice has been “not your keys not your crypto”, so there has always been a push to have users keep their assets in their own wallets. Doing so made the use of centralized exchanges much less appealing, since it required signing up for an account, signing in, depositing to the exchange (often with long confirmation times), worrying about a hack, and then having to withdraw afterwards. A DEX, on the other hand, was only a matter of connecting that wallet to a dApp and submitting a transaction. Afterwards the assets were safe and sound in your wallet. I think that convenience and alignment with the crypto purist in all of us is what led users to become early adopters of DEXs.
As usually follows adoption, developers came in to meet the growing need. Better DEXs and dApps began to be built. More developers wanting to build also led to more development of developer tools, libraries, and resources. Our original 2018 version of Dolomite involved building so much more by hand than one would have to do now thanks to the growth in developer resources. As developers built, users interested in DeFi for the ethos and novelty of it had more they could do, which drew in more people in a virtuous cycle.
The next thing I would credit the growth to is the rise of ERC-20 tokens. In 2017 everyone with a whitepaper and a landing page was making their own chain for their own Bitcoin killer or some industry-specific variation of Bitcoin. But building a network is hard, and requires incentivizing miners and creating a stable and secure network before the new coin can even perform its unique function. And raising money required working with a centralized exchange to host the coin during its sale. With ERC-20 tokens on Ethereum, developers could stand up a project much faster since they were building on the existing and more mature Ethereum network.
This led to many more people creating projects and performing token sales on Ethereum. For many in 2018 and 2019, this was their intro to DeFi. They would hear about an exciting new project, and learn that they need an Ethereum wallet with some ETH in order to purchase the project’s token. So they would stumble their way through setting all of that up for the first time, sometimes even needing to interact with a contract directly to buy into the token sale. But their desire for the next 100x investment led them to persevere.
Which brings me to what I think was the larger driver of adoption in those early days - speculation. I think many people, driven by either the gains they made in 2017 or regret over missing out on 2017, sought their fortune in the next big project. And likewise, many developers wanted to create the next 100x token. So many enterprising developers created well hyped projects and spent a great deal of effort marketing them. The cumulative marketing of all these projects brought a significant number of speculative investors onto Ethereum to participate in token sales, and these projects went to great lengths to make sure that these investors understood how to get started on Ethereum and how to participate in a token sale.
While most of those early projects have died out (as well as many that came into being during the DeFi summer of 2020), those building strong, secure, and useful projects survived and became the foundation of modern DeFi. Additionally, many of those early speculative investors remained in the space, steadily growing their understanding of the technology and what makes for a successful, dependable, and useful DeFi project. Greater understanding opened the door for more complex projects and token mechanics.
And I think that steadily increasing complexity, in no small part due to the “Lego building blocks” composability of the technology, led to exponential growth as DeFi matured. Each new project doesn’t just benefit from the experience of its predecessors, but can actually integrate and build on each other project in the space. It allows for steadily more complex and interesting projects to be built, ones that would have been nearly impossible to build in isolation. This has made DeFi, in my opinion, the most interesting thing going on in crypto. And this has pulled in countless new users and investors.
Ishan Pandey: The introduction of the virtual liquidity model by Dolomite is intriguing. Could you explain how this system works and how it enhances capital efficiency?
Adam Knuckey: Dolomite’s virtual liquidity system plays an important role in offering some of its unique features today and paves the way for an even more unique offering in the future. For starters, Dolomite’s capability to pass along native DeFi features to users like autonomy over external rewards ecosystems and voting rights was made possible by Dolomite’s virtual liquidity layer. As Dolomite’s portfolio management services continue to expand this virtualization layer and its benefits will become more prominent. For instance, users can currently double-dip into multiple sources of yield by supplying liquidity to Dolomite’s native AMM pools and earn swap fees plus lending yield at the same time. The magic behind the virtualization will lead to users being able to recycle liquidity in increasingly more ways and continue to tap into Dolomite’s features while “DeFi’ing” natively with external protocols.
Ishan Pandey: As the DeFi space continues to grow, regulations may become a more significant consideration. How is Dolomite preparing to address potential regulatory challenges in the future?
Adam Knuckey: From the very start back in 2018 we wanted to make sure we were on proper legal footing, and for that reason we have continued to work closely with a skilled law firm that specializes in crypto law. They keep us apprised of all new legislation and potential upcoming regulations that could affect Dolomite, and make sure that we are operating well within the confines of those regulations.
Many projects seem to consider legal work as an afterthought, something they’ll worry about if they become a big hit. But any legitimate project should be considering regulations from the start, and make sure they’re setting up a proper legal framework that puts them in the best position to continue operating for the foreseeable future.
Ishan Pandey: Collaboration and partnerships seem to be essential in the DeFi space. How do you approach building relationships with other projects and protocols?
Adam Knuckey: I would say that building relationships with other projects begins with having a love of and interest in DeFi. Staying up to date with everything that’s going on in the space helps you to spot potential partnerships and collaborations. It also keeps you aware of which projects are less reputable or have had issues in the past. We would love to be able to work with everyone, but we have to balance it with the security and stability of Dolomite.
One of the nice things about DeFi is generally everyone is open to collaborating, especially when it can make both projects stronger. With Dolomite, we are able to help projects grow their reach and ecosystem, as well as provide new functionality to their users. Often, bringing an asset onto Dolomite will lead to more adoption of that asset, both from new and existing users.
Likewise Dolomite benefits by being able to share the tech that makes it all happen with people who may not have heard of Dolomite, and some users may stick around and become regular users of Dolomite. We like to take every collaboration as an opportunity to shine the spotlight on the other project and talk about what we love about their tech and why we wanted to work with them, as well as how their tech meshes well with the unique aspect of Dolomite. Collaborating on Twitter Spaces and threads helps to open a dialogue with each other's communities, and for users it’s a chance to learn about something else cool being built in DeFi.
Ishan Pandey: Scalability has been a challenge for many DeFi platforms. Please explain how platforms can address scalability concerns and ensure smooth user experiences during high-traffic periods?
Adam Knuckey: Frankly, Dolomite would not be able to run on mainnet Ethereum. The fees would be much too high, and the longer block times would hurt the user experience. Personally, we have loved building on Arbitrum, so I guess “Arbitrum” would be my one-word answer to the question.
Layer 2s have made advanced DeFi projects possible. Higher throughput and lower fees allow for complex transactions that would cost a fortune on mainnet Ethereum even at times of low traffic. On Arbitrum even at times of high traffic Dolomite has remained rock steady and usable. I would also say that Arbitrum has been a great community of projects that are eager to collaborate and help each other.
Depending on the project, there can be other considerations. Projects that require price information to operate need strong solutions there as well. We have a longstanding relationship with Chainlink and use Chainlink price oracles on Dolomite to ensure the stability of the protocol even at times of high volatility.
Additionally, as a lending protocol, we have to make sure that Dolomite has proper collateralization ratios such that rapid price movements still allow for liquidations to occur safely so the protocol stays solvent. That is assessed on an asset-by-asset basis, looking at the available liquidity and the market cap of the asset.
Ishan Pandey: The crypto industry has seen its fair share of market volatility. In what ways can DeFi platforms navigate the challenges posed by market fluctuations while providing a stable and reliable platform for users?
Adam Knuckey: Put safety and security first and foremost. The Dolomite smart contracts have been audited multiple times at various points by various reputable firms. Additionally, we make sure that every smart contract is well tested, with 100% line, statement, and branch test coverage. As I mentioned in the last question, we also use Chainlink price oracles to secure the Dolomite Protocol even in times of high volatility, and we make sure we have proper risk parameters in place to make sure the protocol stays solvent. For certain assets, we take additional protective measures.
We’ve built out two safety features - “isolation mode” and “pause sentinel” - which make sure that assets aren’t put into a position where they could incur undue risk. Using Isolation Mode allows Dolomite to dictate which assets can be borrowed against a specific collateral asset, which collateral assets can be used in a position with the Isolation Mode asset, and allow native interactions with the underlying tokens for things like on-chain voting, capturing rewards, or other actions that are specific to the asset. Pause Sentinel is used to reduce contamination risk between assets if there's an issue with a particular listed asset on Dolomite.
If external redemptions are ever made unavailable, are paused, etc. Dolomite can dynamically disable borrowing, disable increasing position size, or more for, but only for the paused asset and its respective positions. This enables Dolomite to isolate technical risk and potential black swans between external integrations to reduce spillover between collateral assets on Dolomite.
In addition to the work we’ve done on the protocol, we also stay up to date on the latest exploits and hacks, ensuring that Dolomite isn’t at risk. And just to account for the worst case scenario, we’ve signed up with Chainalysis Crypto Incident Response to monitor for exploits and act quickly to recover funds. Chainalysis is the leader in their field, and has helped recover over $11b in crypto lost to hacks.
Ishan Pandey: Lastly, looking to the future, what are your long-term goals and visions for Dolomite, and how do you plan to achieve them in an ever-evolving crypto landscape?
Adam Knuckey: We still have so many awesome features in the pipeline that we can’t wait to build and release! Overall our philosophical goal is to remove dead-ends from DeFi, unlocking dormant capital so it can be used instead of just parked somewhere. This is what we’ve done by enabling more complex yield-bearing assets to be used as collateral, but we aim to expand that to anything from LP tokens, to staked assets, and beyond. We would love to integrate as much as possible into the Dolomite ecosystem.
Our biggest goal with Dolomite would be to establish it as a foundational element of the DeFi ecosystem on the scale of Uniswap or Aave, becoming the standard lending protocol for layer 2 networks, as well as a widely used trading venue for margin trading, pair trading, and perhaps even options. In order for this to be a reality, developers need to be able to build on top of Dolomite. With that in mind, we built our base protocol to be immutable so that developers can have the sort of guarantees that they have with protocols like Uniswap. Additionally, we will likely expand to other chains as opportunities arise so we can broaden Dolomite’s user base and list of supported assets. Ideally one day we will offer cross-chain support, letting users seamlessly use Dolomite from anywhere in DeFi, for any asset of interest, for all their lending, borrowing, and trading needs.
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