HashKey Digest

30 June 2021

Benefits of Single Vault Model for DeFi

The single vault model of DeFI has recently been adopted by Balancer, Sushiswap and others, Deribit discusses the features of the single vault model. While Uniswap focuses on getting one part of the DeFi building block right, others like SushiSwap and Balancer are taking a different approach – to optimize the lego baseplate in order to maximize capital efficiency.

Gas efficiency:

SushiSwap’s core frontend developer, Omakase, described BentoBox as: “A layer 1.5 solution, where everything has been put into one token vault.”

Multiple authorisations of tokens can be solved with a single authorisation of the vault. Balancer’s new vault will only count the net number of tokens flowing out of the vault, reducing the amount of on-chain transactions and lowing the gas fee. High-frequency traders are also free from the impact of short-term trading. Arbitrage with no tokens can be performed by trading information between pools.


Secure and flexible underlay:

A single vault allows the decoupling of token management and accounting from the applications built upon it. The application Kashi on the BentoBox vault, for example, allows lending and leveraged trading to be combined into one single transaction. Different teams are involved in the development of  dApps on Balancer. 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. Balancer-Gnosis-Protocol is a collaboration between Balancer and Gnosis that combines Gnosis’ DEX aggregator with a bulk auction to mitigate MEV issue. 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 fund (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.

Disadvantages of the single vault model:

If all assets are put in one place, then the risk of smart contracts is elevated, and higher security will be required for the funds. In fact, dApps and Asset Manager have a high level of authority over the vault assets and therefore arguably represent an additional element of attack.

Vision and the way forward:

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 replication.

Imagine Yearn and SushiSwap built on the same vault, along with Aave and Balancer. These complex protocols would fundamentally be a gateway to participate in the DeFi world, and generate sustainable revenue for users’ assets. It would also raise the barriers 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 Uniswap with the release of Uniwap V3. Both SushiSwap and Balancer are good options for retail liquidity providers who only want to passively manage their liquidity, whereas Uniswap has chosen to cater a more proactive strategy, hoping to attract more established players to the field. If the single vault model achieves its vision and attracts passive liquidity providers, a massive migration of assets is to be expected.

Link to original article: https://insights.deribit.com/market-research/single-vault-model-the-lego-baseplate

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