Author: @0x长安 | @RealResearchDAO
The TVL of PancakeSwap accounts for 55% of the total TVL on BNB Chain, which means that there is an unhealthy situation in the BNB Chain ecosystem.
In addition, most of the transactions between stablecoins take place in Pancakeswap on BNB Chain. The high fee expenses indicate an urgent need for a Stableswap that truly belongs to the BNB Chain.
Wombat Exchange is a native multi-chain stablecoin exchange protocol based on Binance Smart Chain (or BNB Chain). The project introduces innovative algorithms to bring a new, efficient and convenient experience to stablecoin exchanges.
It can be simply understood as Curve on the BNB Chain, providing not only stablecoin trading services with lower slippage for the BNB Chain users but much more beyond that. This article will introduce Wombat Exchange in detail and explain why it is called Binance's strategic move.
2.The Necessity of Stableswap
Before understanding Wombat Exchange, let’s first understand why Curve is so important to be called the engine of the market.
The High Demand for Stableswap
In our daily blockchain activities, since the APRs of the LP pools among different DeFi protocols are different, people often exchange between stablecoins. The characteristics of various kinds stablecoins are different as well. For example, USDT has the highest market acceptance and is the most convenient to deposit and withdraw, whereas USDC is more compliant, etc.
However, on Uniswap which focuses on other types of asset transactions, if users need to exchange 100 million worth of assets, the slippage will be relatively high.
Stableswap is the underlying infrastructure of public blockchains
Many DeFi protocols on the public chains rely on Stableswaps to survive. For example, Yearn, Convex, and Abracadabra all rely on Curve.
For example, the auto-compound pools, take Curve and Yearn as an example: Yearn is known as the most profitable protocol in the DeFi industry. Users can stake tokens in Yearn Finance, which will develop and deploy different revenue optimization strategies for it. Yearn’s main revenue source relies on Curve, without which Yearn's various investment strategies would not be possible.
It can be seen from the graph that Yearn's auto-compound pools are all developed around Curve, which is enough to prove its importance in the DeFi ecosystem. As the Curve of BNB Chain, Wombat has the same responsibilities as Curve. As the most important part and the ecological cornerstone of BNB Chain, its appearance will complement the various needs of the BNB Chain users. Below I will introduce the business services of Wombat.
3. Wombat's Business Services
The business services Wombat provides are similar to Curve, which can be divided into 3 categories: stablecoin transactions, stable pegged asset transactions, and non-stable pegged asset transactions. The article will start from these three aspects and tell how Wombat reshapes the BNB Chain ecosystem.
I always hear people say that Binance is the largest stablecoin exchange platform, that it provides deep enough liquidity that people won’t need Wombat Exchange at all. I don’t think this view will stop the births of DEXs.
From an economic point of view, Coinbase has 1,100 employees in 2019, while Uniswap has only 11 employees. Such a small employee count has created such a large and successful product, not to mention that centralized exchanges still need a lot of maintenance and the operating cost is too high.
At present, most of the stablecoin transactions on BNB Chain are carried out on PancakeSwap, whose algorithmic mechanism has led to a relatively high slippage, invisibly increasing the user's loss. Let’s compare the transaction slippage between Wombat Exchange and PancakeSwap in the $USDT-$USDC trading pair of sizes of 10k and 100k: at 10k, the slippage of PancakeSwap takes 10 $USDC, while the slippage on wombat is only 1.6 $USDC. At a size of 100k, PancakeSwap has a slippage of up to 414 $USDC, compared to only 15.7 $USDC on Wombat.
Some people may say that the algorithm of PancakeSwap is different from that of Wombat, which leads to high slippage. Then, let’s compare Wombat Exchange and another Stableswap again, with this time’s Ellipsis Finance (the current most-used Stableswap on BNB Chain). With the size of 10k when trading $USDT, the slippage of Ellipsis is 1.7 $USDC, while trading 100k $USDT, the slippage will be 22536.3 $USDC. It shows that stablecoin trading on BNB Chain is not optimistic. Generally speaking, the audience of stablecoin trading platforms are some high-net-worth users, but the high slippage also makes BNB Chain lose most of its users, making the DeFi space on BNB Chain hard to grow.
If users are not scared off by the troubles, they can also exchange the stablecoins on a CEX, and then withdraw them back to BNB Chain. But here are the two problems:
1. The invention of new products is to improve efficiency. The Stableswaps that exist are to provide stablecoin exchange for users. If the users want to trade in another more troublesome way, isn't it contradictory to the original product design concept?
2. It will cause an outflow of funds. There is no guarantee that users will still be willing to withdraw all funds back to BNB Chain after they deposit funds into a CEX. Every time a user deposits funds, it indicates the outflow of existing funds from the BNB Chain. Just like a small country, BNB Chain should have complete ecological facilities to retain users' funds on the chain as much as possible.
Stable pegged asset transactions (Side Pools)
In our blockchain activities, most of the stablecoins used by people are assets pegged from the real world. These stablecoins are endorsed by a large institution, and the institution uses its own credit to guarantee customers that 1 share of their stablecoins can be exchanged for $1 US dollars. This requires the institutional assets to be transparent. Otherwise, if too many stablecoins that are pegged cannot be redeemed with real-life assets, it will lead to a serious financial crisis.
Later, people began to explore decentralized stablecoins, such as algorithmic stablecoins. People wanted to use the mechanism of additional issuance or burning to allow people to stabilize the price at $1 through the mechanism of arbitrage, and the purpose of all stablecoins is to keep the price constant at $1. Similar to the current stablecoins, it also requires a party to ensure that one algorithmic stablecoin can be converted into $1 USD. At this time, a deep liquidity pool is required to remain the stablecoins on peg.
Side Pool is an independent pool on Wombat, which will list some stablecoin assets that have not been verified over time and have different risk factors. These algorithmic stablecoins will be anchored with $BUSD, which is tied to U.S. debt. Yes, customers can trust that 1$BUSD=1$USD, so using $BUSD to bind the algorithmic stablecoin is to give the algorithmic stablecoin value.
This is why I think Wombat is a new strategic move of Binance, which has a plan to increase the market share by $BUSD. Since all of these algorithmic stablecoins need a pool to ensure their value, the algorithmic stablecoin projects will need to purchase $BUSD to collateralize their own stablecoins. In this case, Binance is giving $BUSD more use value, so as to hope that users will hold more $BUSD.
Tokens like algorithmic stablecoins may be depegged. In order to ensure the safety of users' funds, Wombat has created a Side Pool. If a stablecoin depegs, Wombat will pause the related transactions and deposits, while only withdrawals are allowed to protect other pools from being depleted. For example, in the BUSD-UST trading pair, when UST is depegged, users are only allowed to exchange their UST into BUSD, but not into other stablecoins, such as USDC, to avoid UST’s depegging affecting the users in other pools.
Non-stable pegged asset transactions (Liquid Staking)
The most popular event recently is the ETH Merge in which the network will transition from PoW to PoS. On August 25, Coinbase announced that Coinbase Wrapped Staked ETH (cbETH) will be listed on the Ethereum network.
Liquid staking was once a sexy story. First, let me explain what liquid staking is:
Liquid Staking refers to the process by which users obtain liquidity through their staked assets.
Why liquid staking?
Due to the PoS mechanism, tokens will be saved in custodian wallets for a long time, which will lead to insufficient tokens circulating in the market, leading to a deflationary pressure that will hinder users' activities on-chain. Moreover, if the staked assets are insufficient, the Ethereum network will also face security risks such as a small number of nodes and insufficient decentralization. And in the process of staking, users can not only enjoy the rewards but also can transfer the LP tokens to other platforms to unlock more liquidity, which greatly improves the efficiency of capital utilization.
On August 30, CZ also retweeted an article about Liquid Staking. BNB Chain has introduced liquid staking through three Web3 protocols, namely Ankr, Stader, and pStake. Users can stake the $BNB they hold on these three platforms. The currently obtained staked certificates BNBx, stkBNB, aBNBc can be traded with other tokens on ApeSwap, Beef finance, Ellipsis finance, Alpaca finance, and other platforms to release more liquidity.
Now that Wombat is online and has also introduced the liquid staking mechanism to provide liquidity for staked certificates to release the liquidity of $BNB. Gwendolyn Regina, the Investment Director of BNB Chain, said: "Only 24% of the total market value of the staking platform is locked in staked assets." There is still a lot of room for growth in this field, and the launch of Wombat is expected to drive the growth of the entire BNB Chain.
For such platforms, the most important thing is the depth of staked assets. A deep depth means low slippage, and low slippage means it will be favored by more users. Therefore, the demand for Stableswap is higher, attracting high networth users, retail investors, and institutional investors. High networth users need to use Stableswap for large transactions of stablecoins. The big players, do not seek high returns, but only for sustainability and safety.
Institutional investors, such as the auto-compound pools, etc., need a safe, stable, sustainable platform, since they are mining, claiming, and selling their rewards every day. Most platforms simply cannot afford the selling pressure. In order to obtain higher returns, they will also choose to lock their tokens as veTokens to boost the yield of their pools.
For institutional investors, in order to list stablecoins, they need to build their own pool, creating a demand to lock the platform's token, so as to increase APR to attract users to deposit stablecoins into their pool.
4. The characteristics of Wombat
Wombat is different from other Stableswaps in two aspects: asset-liability management and coverage ratio. Wombat draws on the algorithm mechanism of Platypus Finance and further innovates it.
The original acceptance model focused on an asset share, in which the liquidity pool often involves a variety of volatile assets. Once the market price fluctuates, because of impermanent losses, liquidity providers often cannot get back their own share of assets. Here is an example:
Use X * Y=K equation to calculate (the product of the number of assets is constant)
Before: ETH/USDT=1000; After: ETH/USDT=1100,
LP provide 10 ETH and 10000 USDT
(1) (10-dx) * (10000+dy)=10 * 10000
Note: The user buys ETH with USDT in the pool, so the amount of USDT increases and the amount of ETH decreases
That is to say: 0.465 ETH is reduced in the pool and 488.5 USDT is added
At this time, the value in the pool is: 9.5353 ETH ($ETH=$1100USD) 10488.5 USDT ($USDT=1$USD)
9.535*1100+10488.5*1=20977, and the original capital should be: 1100*10+10000=21000
So, you originally provided 10 $ETH and 10,000 $USDT, but when the price increases by 10%, when you want to withdraw your funds, you can only withdraw: 9.5353 $ETH and 10488.5 $USDT
Wombat believes that investors should not bear such impermanent losses, so the mechanism adopted by Wombat is also different from the model that focuses on asset share. The asset-liability management model adopted by Wombat is like lending. Investors lend assets to the fund pool, and they can get back the original share of assets + transaction fee dividends as much as they lend out.
And because of the similar lending mechanism, liquidity providers can provide liquidity unilaterally, instead of equal proportions like Curve.
In the $BUSD-$DAI-$USDT-$USDC pool, as a liquidity provider, you can hold only 40k $USDT. If you provide liquidity on Curve, you will first need to convert 40,000 $USDT into the pool in equal proportions of 4 different stablecoins. Whereas in Wombat, you can deposit all your $USDT directly.
When the liquidity provider injects 10 $ETH and 10,000 $USDT into the pool, the smart contract will record that you have as much debt as 10 $ETH and 10,000 $USDT. Because everyone's debt is constant, users can trade with minimal slippage. Therefore, compared with previous models, Wombat's mechanism will also be favored by more retail investors.
In theory, as long as there is sufficient liquidity in the pool, you can redeem your corresponding tokens at any time.
The coverage ratio represents the coverage ratio of the asset in the liquidity pool, which can be simply understood as the share of the pool. When the coverage rate is high, the solvency of the pool is high. When the coverage rate is low, it means that the solvency of the pool is poor. And the coverage ratio is an important factor affecting transaction slippage. When the coverage ratio of the pool is low, the transaction slippage increases.
Under this mechanism, arbitrageurs can equalize the coverage ratio to 100% to be profitable. As long as the arbitrageurs are profitable, the coverage rate can be stabilized at 100%, so that the stablecoins in the pool will not be unilaterally exhausted. The proportion will not completely dump the other side.
How is this achieved? When the coverage ratio deviates too much, because of the high slippage, unless there are special circumstances, the user's willingness to exchange will decrease, and stablecoins will be left in the pool.
According to Platypus’s Yellow Paper, when the coverage ratio is between 0.4 and 1, the slippage is significantly lower. But once it exceeds this range, it can be seen that the transaction slippage will reach a terrible position.
Wombat has optimized this mechanism, setting a withdrawal fee to prevent whales from withdrawing from arbitrage and taking away the funds from the pool. Usually, the withdrawal fee will not have a great impact on the liquidity provider. Only when the pool is seriously offset will a large amount of withdrawal fee be incurred.
The amount of the withdrawal fee depends on the amount of withdrawal. For example, when the coverage ratio reaches 0.8, if the user withdraws 50% of the liquidity, the withdrawal fee will be about 0.03%, and the withdrawal of 1% of the liquidity will be charged about 0.01% withdrawal fee.
The launch of Wombat Exchange will help BNB Chain to reshape its ecosystem and provide favorable assistance for the construction of more DeFi protocols. Its existence means that Binance is willing to spend more effort on constructing BNB Chain, implying that the underlying liquidity of the BNB Chain will be greatly increased. The summer of BNB Chain is arriving soon.
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