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The advantages, difficulties and innovations of the single treasury model

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Whether the single treasury model will become the future development trend of DeFi, this article will discuss it in detail.

Original title: " The Single Vault Model - The Base of DeFi Lego "

Original Source: Deribit Insight

Original Author: Jacob Goh

Original Compilation: The Way of DeFi

In recent months, innovations in the field of automated market makers (AMMs) have boosted 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 a An interesting token economic model to solve the pain point of impermanent loss and realize the provision of unilateral liquidity.

Other DEXs have been innovating in different directions, among which the Single Vault Model (Single Vault Model ) is increasingly adopted.

SushiSwap’s BentoBox and Balancer V2

In March 2021, SushiSwap released its A single vault, BentoBox, where all users can deposit their tokens into the Box - a decentralized "app store" that can be accessed by many different applications. For example, the funds in BentoBox can provide flash loans while performing income farming in Onsen, and even provide liquidity on SushiSwap’s AMM in the future.

Similarly, Balancer launched its single vault in their V2 announcement. Balancer's protocol treasury aggregates and manages tokens added to each Balancer pool. Automated market maker (AMM) logic is separate from token management and accounting. Token management and accounting counting are done by the treasury, while AMM logic is done by each pool individually.

Lego Base

A single vault can be seen as a Lego base, allowing other Lego Components (different DeFi applications) can be built on top of it. Protocols like Uniswap, whose approach is to focus on building a good Lego block, and protocols like SushiSwap and Balancer take a different approach - synthesizing these Lego blocks.

The base securely stores tokens and automatically yields underutilized assets to reduce opportunity cost. Developers can develop directly on top of the base, and the DApps they develop can leverage the underlying assets, as well as attract more users to increase the overall adoption of the protocol.

The Holy Grail of DEXs is to provide LPs with maximum capital efficiency and yield. In this post, we will try to explain how the single vault pattern optimizes this goal.

Advantages of a single treasury model

gas efficiency

Omakase, a core front-end developer at SushiSwap, describes BentoBox as. "A layer 1.5 solution with everything in one tokenbase". A single vault allows internal token balances to be maintained within the vault, which ensures gas efficiency by reducing unnecessary token transfers.

Today, gas fees are wasted on multiple approvals for the same token. This situation does not occur in a single vault. Once a token is approved for use in a vault, it can be used in all protocols built on top of the vault.

Previously, the increased gas costs due to the complexity of Balancer's smart order routing algorithm had outweighed the potential savings from the lower price impact. The new model completely solves this problem and optimizes the price.

With Balancer's new vaults, transactions can be executed against multiple pools and only the final net token amount is transferred back and forth between the vaults. This will reduce the number of transactions under the hood, saving users a lot of gas.

High-frequency traders can also avoid posting ERC20 transactions for any short-term positions, which is especially useful for DEX aggregators.

In addition, through the use of flash loans, arbitrageurs can conduct information transactions between fund pools to achieve arbitrage even without holding tokens, thereby increasing Process efficiency, reducing capital-intensive operations.

Source:Balancer Medium

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

Through the AMM logic of the fund pool Separated from token management and accounting, a single treasury model provides a strong foundation for developers to work on. Low-level minutiae can be delegated to the vault, removing any technical overhead for the developer. This modular architecture allows teams to become more focused and efficient.

SushiSwap

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The first dApp built on BentoBox is Kashi, which utilizes assets on BentoBox for lending and one-click leveraged trading. Since all tokens are stored in a central vault, the number of transactions and overall gas fees for internal token transfers can be reduced. For example, through BentoBox and Kashi, short selling with more than 1 times leverage can be completed in one transaction.

MISO will also be built on BentoBox. It is a launch platform for project founders to launch new projects on SushiSwap. MISO has created a set of smart contracts so that non-technical founders can initiate liquidity through MISO and migrate to SushiSwap to easily launch their new tokens. Smart contracts contain these functions: creation of new tokens for the project, a vault option to lock tokens over time, initial coin offerings and crowdsales, and a mining farm for new tokens.

Balancer

Balancer's token library can now be used as the team's AMM innovation strategy and DApps launch platform, and has 2 official partners:

Element Finance, A fixed-rate interest protocol that will build custom transaction curves on Balancer V2 to avoid the hassle of forking or building an AMM from scratch.

"Element Finance needs to implement custom constants or transaction curves, but does not want to have the technical overhead of forking or build our own AMM with custom logic. For To avoid these problems, we chose to build on Balancer V2." - Element Finance, April 2021

Balancer-Gnosis-Protocol, a partnership between Balancer and Gnosis, Gnosis’ DEX aggregator and batch auctions will be brought to market, designed to ease miners’ extractable value.

Both BentoBox and Balancer's Vault will allow dApps integrated in the Vault to connect to each other, thereby providing synergy between these dApps and leveraging the value of network effects. At the same time, dApps bring new users to the vault, allowing TVL and protocol growth.

Capital Efficiency

Pools have full control over the underlying tokens they add to their vaults. This opens up a wide design space for capital efficiency, asset managers and dApps can be built on top of the treasury. Once nominated by the pool, external smart contracts that have full control over the pool's tokens can function by using the underlying tokens for other purposes, such as voting, yield farming, and lending.

SushiSwap

Assets on BentoBox can be used to provide flash loans even though the same tokens are being mined in Onsen. Even if assets are not lent out, users can still use their tokens to earn yield or LP fees. This enables the user to get the maximum benefit at any point in time.

Kashi's target utilization is between 70-80%. This utilization rate refers to the percentage of the total supply of an asset that is currently on loan. It will attempt to achieve this with a flexible rate that fluctuates based on changes in utilization.

Source: SushiSwap,BoringCrypto's Blog

Balancer

Balancer is similar to BentoBox, the assets in the Balancer vault can also be used for flash loans. In addition, Balancer cooperated with Aave to build the first Balancer V2 asset manager, allowing idle assets in the V2 pool to earn income on Aave.

The following GIF depicts such a situation: only a small portion of assets in the liquidity pool are traded, and most assets remain idle in the liquidity pool. Through the asset manager, these assets can be programmatically deposited into the Aave pool 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 manager will automatically replenish the pool with DAI and send more WETH to Aave to maximize yield.

Currently, only a fraction of the TVL in AMMs is generating revenue. We can expect the liquidity utilization metric (the percentage of yield-generating assets) to improve dramatically with the implementation of asset managers in a single vault.

Source: Balancer Dashboard

Disadvantages of the single vault model

When all assets are in one vault, the risk of smart contracts increases due to complexity. While both the Balancer and SushiSwap teams have put enormous effort into ensuring the safety of funds, this innovation also represents a degree of risk.

In particular, dApps and asset managers are highly privileged on Vault assets and may represent other attack vectors, the complex logic involved should be carefully reviewed .

Vision and the way ahead

"The innovation of BentoBox lies in its effortless Scalable design. Its scalar design allows BentoBox to serve as the infrastructure for future DeFi protocols on Sushi. Unlike other protocols, it creates a primary source of liquidity that any user can exchange with minimal approval and minimal Gain liquidity with gas usage and maximum capital efficiency." - SushiSwap, May 2021

In addition to various tangible benefits from the vault, An important factor to consider is that it brings a huge competitive advantage to the integrated protocol. Such an advantage is hard to come by in DeFi, and it will make the complexity of the protocol almost impossible to fork and replicate.

Imagine that Yearn is in the same vault as SushiSwap, and Aave is also united with Balancer. These protocol complexes will effectively become the entry point to participate in DeFi and generate sustainable income for users' assets. This will also raise the barriers to entry, preventing other upcoming DEXs from eroding the market share of SushiSwap and Balancer.

In this transition, it can be seen that SushiSwap and Balancer are targeting passive liquidity providers, because after Uniswap's V3 upgrade, more active Liquidity providers flock to Uniswap. SushiSwap and Balancer are good options for retail liquidity providers looking to manage their liquidity passively, while Uniswap will offer a more active strategy to attract more established players into the space. If the single-vault model achieves its goal of being the go-to for passive liquidity providers, a mass migration of assets would not be surprising.

DeFi castles will be made of Money Legos. Source: TwistedSifter

Going back to the Lego analogy, SushiSwap and Balancer see AMM as a Lego building block on their ecosystem. Copy homework from Polygon's gameplay - actively encourage mature DeFi protocols such as Aave and Curve to deploy on their L2 platform, the next step will be to encourage more Lego bricks to be built on the Lego base, and fill Lego with countless Lego bricks bottom plate.

Over time, this structure can become more complex with the integration of the protocol, building an insurmountable moat for Sushiswap and Balancer. The Lego base will be a solid foundation for building a huge DeFi castle.