In recent months, innovations in the field of automated market makers (AMM) have promoted the growth of decentralized exchanges (DEXs).
Uniswap released its V3 version, which introduced centralized liquidity, which increased the capital efficiency by 4000 times compared to its V2 design, while Bancor V2.1 introduced an interesting token economic model to solve the pain points of impermanent loss and achieve unilateral flow. Sexual provision.
Other DEXs have been innovating in different directions, and one of them is increasingly adopting the Single Vault Model (Single Vault Model).
BentoBox and Balancer V2 by SushiSwap
In March 2021, SushiSwap released its single vault BentoBox. All users can deposit their tokens in this box-a decentralized “app store” that can be used by many different applications Program access. For example, the funds in BentoBox can provide lightning loans, while income farming in Onsen, and even provide liquidity on SushiSwap’s AMM in the future.
Similarly, Balancer also launched its single vault in their V2 announcement. Balancer’s protocol vault aggregates and manages the tokens added to each Balancer pool. Automatic market maker (AMM) logic is separate from token management and accounting. Token management and accounting are done by the vault, while the AMM logic is done by each pool separately.
A single vault can be regarded as a Lego base, allowing other Lego components (different DeFi applications) to be built on it. For protocols like Uniswap, his approach is to focus on building a good Lego brick, while protocols like SushiSwap and Balancer take a different approach-synthesize these Lego bricks.
The base securely stores tokens and automatically generates revenue from underutilized assets to reduce opportunity costs. Developers can develop directly on the base, and the DApps they develop can use the underlying assets and attract more users to increase the overall adoption of the protocol.
The holy grail of DEXs is to provide LPs with the greatest capital efficiency and return. In this article, we will try to explain how the single vault model optimizes this goal.
Advantages of the single treasury model
SushiSwap’s core front-end developer Omakase described BentoBox as. “A 1.5-layer solution, everything is placed in a token library”. A single vault allows the balance of internal tokens to be maintained in the vault, thereby reducing unnecessary token transfers, thereby ensuring gas efficiency.
Today, gas fees are wasted on multiple approvals for the same token. This situation will not happen in a single vault. Once a token is approved for use in the vault, it can be used for all agreements established on the vault.
In the past, the increased gas cost due to the complexity of the Balancer intelligent order routing algorithm has overwhelmed the potential savings brought about by the lower price impact. The new model completely solves this problem and optimizes the price.
Using Balancer’s new vault, transactions can be executed against multiple fund pools, and only the final net token amount will be transferred back and forth between the vaults. This will reduce the number of transactions under the hood and save users a lot of gas.
High-frequency traders can also avoid posting any short-term ERC20 trades, which is particularly useful for DEX aggregators.
In addition, through the use of flash loans, arbitrageurs can exchange information between capital pools to achieve arbitrage even without holding tokens, thereby improving process efficiency and reducing capital-intensive operations.
In general, developers can build dApps without worrying about gas overhead. At the same time, traders will also choose to trade on these platforms, because gas fees have less impact on their profits.
Provide a safe and flexible foundation for the establishment of applications
By separating the AMM logic of the fund pool from token management and accounting, a single treasury model provides a strong foundation for the work of developers. Low-level details can be entrusted to the vault, thereby eliminating any technical overhead for developers. This modular architecture allows the team to become more focused and efficient.
The first dApp built on BentoBox is Kashi, which uses assets on BentoBox for lending and one-click leveraged transactions. Since all tokens are stored in the central vault, the number of transactions for internal token transfers and the overall gas fee can be reduced. For example, through BentoBox and Kashi, shorts with more than 1x leverage can be completed in one transaction.
MISO will also be built on BentoBox. It is the launch platform for project founders to launch new projects on SushiSwap. MISO has created a set of smart contracts so that founders with non-technical backgrounds can initiate liquidity through MISO and migrate to SushiSwap to easily launch their new tokens. Smart contracts include these functions: creating new tokens for the project, lock-in vault options for tokens over time, initial token issuance and crowdfunding, and a mining farm for new tokens.
Balancer’s token library can now be used as the team’s AMM innovation strategy and DApps startup platform. There are already 2 official partners:
Element Finance, a fixed-rate interest agreement, will establish a customized trading curve on Balancer V2 to avoid the trouble of forking or establishing AMM from scratch.
“Element Finance needs to implement custom constants or transaction curves, but does not want to have the technical overhead of forks or build our own AMM with custom logic. In order to avoid these problems, we choose to build on Balancer V2.”-Element Finance , April 2021
Balancer-Gnosis-Protocol, a partnership between Balancer and Gnosis, will bring Gnosis’s DEX aggregator and batch auction to the market, aiming to reduce the value that miners can extract.
Both the BentoBox and Balancer vaults will allow dApps integrated in the vault to be connected to each other, thereby providing synergy between these dApps and leveraging the value of network effects. At the same time, dApps brought new users to the vault, enabling TVL and agreements to grow.
The pool has complete control over the base tokens they add to the vault. This opens up a broad design space for improving capital efficiency, and asset managers and dApps can be built on the vault. After being nominated by the fund pool, an external smart contract that has full control over the tokens in the fund pool can function by using the underlying tokens for other purposes, such as voting, income farming, and lending.
The assets on BentoBox can be used to provide flash loans, even if the same tokens are being used for mining in Onsen. Even if the asset is not lent, users can still use their tokens to earn revenue or LP fees. This allows users to get the maximum benefit at any point in time.
Kashi’s target utilization rate is between 70-80%. This utilization rate refers to the percentage of assets currently lent to the total supply. It will attempt to achieve this goal through flexible interest rates, which fluctuate in response to changes in utilization.
Balancer is similar to BentoBox, and the assets in the Balancer vault can also be used for lightning loans. In addition, Balancer cooperated with Aave to establish the first Balancer V2 asset manager, allowing idle assets in the V2 pool to gain income on Aave.
Only a small part of the assets in the liquidity pool are traded, and most of the assets have been idle in the liquidity pool. Through the asset manager, these assets can be deposited into the Aave pool programmatically based on certain thresholds.
Over time, the proportion of assets in the asset pool becomes more unbalanced, and large transactions may fail. When this happens, the asset management company will automatically replenish the fund pool with DAI and send more WETH to Aave to maximize revenue.
Currently, only a small portion of TVL in AMM generates revenue. We can expect that with the implementation of asset managers in a single vault, the liquidity utilization index (the percentage of assets that can generate income) can be greatly improved.
Disadvantages of the single vault model
When all assets are in a vault, the risk of smart contracts will increase due to complexity. Although the Balancer and SushiSwap teams have made great efforts to ensure the safety of funds, this innovation also represents a certain degree of risk.
In particular, dApps and asset managers have high authority on Vault assets and may represent other attack vectors. The complex logic involved should be carefully reviewed.
Vision and the road to the future
“The innovation of BentoBox lies in its effortlessly scalable design. Its scalar design allows BentoBox to be used as the infrastructure for the future DeFi protocol on Sushi. Unlike other protocols, it creates a major source of liquidity. Any user can obtain liquidity with the least approval, the least gas usage, and the greatest capital efficiency.”-SushiSwap, May 2021
In addition to obtaining various tangible benefits from the vault, an important factor that needs to be considered is that it brings huge competition to the integration protocol. Such an advantage is difficult to obtain in DeFi, and it will make the complexity of the protocol almost impossible to fork and replicate.
Imagine that Yearn and SushiSwap are in the same vault, and Aave and Balancer are also combined. These protocol complexes will effectively become the entry point for participating in DeFi and create sustainable income for users’ assets. This will also increase barriers to entry and prevent other upcoming DEXs from eroding the market share of SushiSwap and Balancer.
In this transition, it can be seen that the target of SushiSwap and Balancer is passive liquidity providers, because after Uniswap’s V3 upgrade, more active liquidity providers flock to Uniswap. For retail liquidity providers who want to passively manage their liquidity, SushiSwap and Balancer are good choices, and Uniswap will provide more active strategies to attract more mature participants into the field. If the single treasury model achieves the goal of a passive liquidity provider’s go-to, then the large-scale migration of assets will not be surprising.
Going back to the Lego metaphor, SushiSwap and Balancer see AMM as a Lego building block in their ecosystem. Copy homework from Polygon’s gameplay-actively incentivize mature DeFi protocols such as Aave and Curve to be deployed on their L2 platform. The next step will be to incentivize more Lego bricks to be built on Lego bases and fill Lego with countless Lego bricks Bottom plate.
Over time, this structure can become more complex with the integration of the agreement, building an insurmountable moat for Sushiswap and Balancer. The Lego base will become a solid foundation for building a huge DeFi castle.
Author/ Translator: Jamie Kim
Bio: Jamie Kim is a technology journalist. Raised in Hong Kong and always vocal at heart. She aims to share her expertise with the readers at blockreview.net. Kim is a Bitcoin maximalist who believes with unwavering conviction that Bitcoin is the only cryptocurrency – in fact, currency – worth caring about.