Decentralized Exchange (DEX) Single Vault Model – The Backbone of Building Blocks

In recent months, innovations in the automated market maker (AMM) space have fueled the growth of decentralized exchanges (DEX).

Decentralized Exchange (DEX) Single Vault Model - The Backbone of Building Blocks

In recent months, innovations in the automated market maker (AMM) space have fueled the growth of decentralized exchanges (DEX).

Uniswap has released its V3 product, introducing the concept of “centralized liquidity” with up to 4,000 times higher capital utilization compared to its V2 product, while Bancor V2.1 also incorporates an interesting token economics model to address impermanent losses, allowing users to can inject unilateral liquidity.

Other DEXs have been exploring different directions, and one component that is gaining adoption is the “single vault model”.

SushiSwap’s BentoBox and Balancer V2

In March 2021, SushiSwap launched its single vault “BentoBox”, positioned as a decentralized “App Store (App Store)” where all users can put any assets into this box, which can be connected to many different applications. As an example, the funds in BentoBox can be used to both supply lightning loans and participate in liquidity mining on Onsen at the same time, and – in the future – can even provide liquidity for SushiSwap’s AMM to provide liquidity.

Similarly, Balancer has taken advantage of the launch of its V2 product to enable a single vault model, where Balacer’s protocol vault aggregates all tokens from all Balancer pools and manages them centrally. The logic of automated market makers is separated from token management and bookkeeping. Token management and bookkeeping are done by the vault, while the logic of AMM is independent for each pool.

Building Blocks Baseboard

A single vault can be thought of as a base board for blocks on which other blocks (different DeFi applications) can be placed. While protocols like Uniswap work to get a building block right, other protocols like SushiSwap and Balancer take a different approach – to synthesize these building blocks.

The backplane securely stores tokens and automatically generates a yield for them as a way to reduce opportunity costs. Developers can develop directly on the backplane, and their dApps can leverage the underlying assets while attracting more users to the protocol as a whole.

The holy grail of DEX is to maximize the efficiency of capital utilization and bring the highest yield to liquidity providers. In this article, we try to explain why a single vault model can serve this goal.

Benefits of the Single Vault Model

Gas Efficiency
Omakase, the core front-end developer of SushiSwap, calls BentoBox “a layer 1.5 solution where everything can be put into a single token vault”. A single vault brings a more Gas-efficient infrastructure by reducing unnecessary token transfers, as users can hold the balance of tokens directly in the vault.

Today, many Gas fees are wasted on multiple licenses for the same token. With a single vault, this doesn’t happen anymore. By authorizing the vault once, you can give funds access to all the protocols built on this vault.

Previously, because of the complexity of Balancer’s “smart order routing algorithm,” it often didn’t generate enough of a rise in Gas fees to even out the gains users would get from lower price slippage. A single vault solves this problem entirely so that the market can emerge with better prices.

With Balancer’s new vault, it is possible to execute transactions on multiple pools at the same time, with only the final net number of tokens being transferred out of/into the vault. This will reduce the number of transactions that need to be chained, saving users a lot of Gas.

High frequency traders can also avoid sending ERC20 trades for short term positions. This is especially useful for DEX aggregators.

Further, with Lightning Lending, arbitrageurs can arbitrage without capital, simply by moving information between pools, ultimately making the entire process more efficient and less capital-intensive.

Decentralized Exchange (DEX) Single Vault Model - The Backbone of Building Blocks
  • Source: Blancer Blog –

In general, developers can now develop dApps without worrying about the burden of Gas optimization. At the same time, traders can trade on these platforms with confidence, because Gas fees are lower and profits are more secure.

Secure and flexible underlay
The single vault model provides developers with a solid foundation by decoupling the pool’s AMM logic and token management. The details of the underlying layer can be entrusted to the vault, relieving developers of some of the technical burden. Such a modular architecture allows for a more focused and efficient development team.

SushiSwap

The first application built on top of the BentoBox vault is Kashi, which can use the funds within BentoBox to engage in lending and one-click leveraged trading. Because all the funds are in a centralized vault, it can use internal token transfers to reduce the number of transactions on the chain and the overall Gas fee. As an example, with BentoBox and Kashi, more than double the leverage can be done with just one on-chain transaction.

MISO will also be developed based on BentoBox. This is a launcher for project founders to start new projects on SushiSwap. MISO has created a suite of smart contracts so that founders without a technical background can issue new tokens and migrate to SushSwap via the launcher. The smart contract suite includes the following features: new token innovation for projects, treasury functionality to lock tokens for a certain period of time, initial token issuance and crowdfunding, and liquidity mining for new coins.

Balancer

Balancer’s token vault is now a testing ground for different teams to invent AMM strategies and dApps. Their team has officially announced two partners.

Element Finance, a fixed-rate protocol, will develop a custom trading curve on Balancer V2 to avoid the hassle of building your own AMM from scratch and copying others’ AMMs.

“Element Finance needed to implement a custom invariant or trading curve, but did not want to incur the technical overhead of replicating or building their own AMM from scratch. Therefore, we chose to develop on Balancer V2.” — Element Finance, April 2021

Balancer-Gnosis-Protocol is a collaboration between Balancer and Gnosis that combines Gnosis’ DEX aggregator with a bulk auction to mitigate the MEV problem.

Both BentoBox and Balancer vaults support the interlinking of dApps with integrated vaults – thus providing dApp synergies and network effects. At the same time, the new users brought by the dApps lead to an increase in TVL (total locked-in value).

Funds utilization
The pool of funds (the logic) has full control over the assets it deposits in the vault. This opens up the design space to improve the utilization of funds. After being designated by the pool, an external smart contract can take full control of the assets that the pool can control and use those funds for other purposes, such as voting, mining and lending.

SushiSwap

Assets in BentoBox can be used to provide lightning loans, even if those funds are also mined on Onsen. Even if these funds are not lent out, the user can get a yield (or a return on the liquidity provider’s fees) with this. This maximizes the user’s return at any given moment.

Kashi has a target utilization rate of between 70% and 80%. The utilization rate is the ratio of funds currently lent to the total funds available, and Kashi uses a rate that varies flexibly with the utilization rate to reach the target.

Decentralized Exchange (DEX) Single Vault Model - The Backbone of Building Blocks
  • Source: SushiSwap, BoringCrypto Blog –

Balancer

Similar to BentoBox, Balancer vault assets can be used for lightning loans. In addition, Balancer has worked with Aave to develop the first Balancer V2 Asset Manager, which allows idle assets from the V2 pool to be placed in Aave for income.

  • Source: Blancer Blog –

The idea of this motion picture is that only a small portion of the assets in the liquidity pool will be used for exchange, while most of the assets are idle. With the “Asset Manager” feature, these assets are at the mercy of the program and are deposited into the Aave protocol at a specific threshold.

Decentralized Exchange (DEX) Single Vault Model - The Backbone of Building Blocks
  • Source: Blancer Blog –

As the pool becomes more unbalanced over time, large volume swaps can fail. At this point, Asset Manager automatically fills the pool with DAI and sends WETH to Aave to maximize the user’s return on funds.

Currently, only a small portion of AMM’s TVL is made up of productivity. We expect liquidity utilization (the percentage of assets in the pool that are generating income) to increase significantly with the implementation of a single vault and Asset Manager.

Decentralized Exchange (DEX) Single Vault Model - The Backbone of Building Blocks
  • Source: Blancer Dashboard –

Disadvantages of the single vault model

If all assets are put in one place, then the risk of smart contracts is elevated by their complexity. While there is no doubt that both the Balancer and SushiSwap teams have gone to great lengths to secure their funds, such an innovation still implies a certain amount of risk.

In fact, the dApp and Asset Manager have a high level of authority over the vault assets and therefore arguably represent an additional element of attack. The associated complex logic should be evaluated in detail.

Vision and the way forward

“The creativity of BentoBox lies in its light and elegant scalable design. This scalable design allows BentoBox to serve as the infrastructure for future DeFi protocols coming to Sushi. Unlike other protocols, it creates a unified source of mobility where any user can be reached with the fewest number of authorizations, the least amount of Gas usage, and with the highest capital efficiency.” — SushiSwap, May 2021

In addition to the various visible benefits from the vault, an important factor to consider is the sustainable competitive moat it provides for an integrated protocol. Such an advantage is hard to come by in the DeFi world, even as it can make the eventual protocol that grows into it complex beyond reproduction.

Imagine Yearn and SushiSwap built on the same vault, along with Aave and Balancer. these complex protocols would fundamentally be a gateway to participation in the DeFi world, and generate sustainable revenue for users’ assets. It would also raise the barrier to entry and prevent future DEXs from cannibalizing SushiSwap and Balancer.

In this shift, it can be seen that both SushiSwap and Balancer are targeting passive liquidity providers as more active LPs will flock to Uniwap with the release of Uniwap V3. Both SushiSwap and Balancer are good options for retail liquidity providers who only want to passively Uniswap has chosen to cater to a more proactive strategy, hoping to attract more established players to the space. If the single vault model achieves its vision and attracts passive liquidity providers, a massive migration of assets is to be expected.

Decentralized Exchange (DEX) Single Vault Model - The Backbone of Building Blocks
  • The DeFi castle made of currency blocks. Source: TwistedSifte –

Going back to the building blocks metaphor, both SushiSwap and Balancer see AMM as a building block in their ecosystem. Taking a cue from Polygon (which actively incentivizes existing DeFi protocols like Aave and Curve to be deployed on their L2 platform), their next step is to incentivize more monetary blocks to be built on a single vault – filling the floor with a multitude of blocks.

In time, these blocks will become more and more complex, creating an impenetrable moat for SushiSwap and Balancer. And this block base will become the solid foundation of the mighty DeFi castle.

(End)

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/decentralized-exchange-dex-single-vault-model-the-backbone-of-building-blocks/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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