Stablecoins are amongst the most popular sectors within crypto. They make up 14.2% of the total crypto market cap which is no small feat given how vast the crypto landscape has become over the last few years. The sector is populated with a plethora of stablecoins with every project trying to capture a piece of the pie.
As a result, there arose a demand for a new type of platform, a platform that simplified the process of swapping between stablecoins. A stableswap platform. Stableswaps are essentially decentralised exchanges (DEXs) using their own version of an automated market maker (AMM) algorithm that’s specifically optimised for swapping between pegged assets.
Current Stablecoin Landscape
Presently, Curve Finance is the king of the stableswaps. Boasting a cumulative trading volume of $217B since launch, and earning a total of $87M in fees which have mostly been paid back to token holders, Curve Finance has not only pioneered but led this space for 2 years now.
However, with so many new L1 ecosystems spawning up since 2021, new teams had the chance to fill the stableswap demand gap on the alt L1 ecosystems. While many new stableswap platforms emerged, the most successful one was Platypus Finance on Avalanche. The main differentiator was the Asset Liability Management function which allowed it to become the second most prominent stableswap platform out there.
While both Curve and Platypus are dominant in their field, it doesn’t mean that the solutions they came up with are optimal.
There are 4 key areas where current market leaders are still lacking:
- Maximizing capital utilization
- Minimizing slippage
- Reducing their barriers to scalability
- Improving User-friendliness
Seeing the existing gap in the market, the team at Wombat Exchange decided to seize the opportunity and build a stableswap that solves these problems making it potentially superior to existing market leaders.
What is Wombat Exchange and the WOM Token?
https://www.youtube.com/watch?v=OOrgqgnx0Tk
Wombat is a stableswap platform that launched on the Binance Smart Chain (BSC) and is optimized to be very slippage efficient, scalable and easy to use. Their talented engineers have made improvements upon the invariant function formulas that have been used by Curve and Platypus to create one of the most advanced stableswap platforms out there.
Seeing that their primary goal has been to optimise capital utilisation, slippage, scalability, and user-friendliness, let's go over how each one of these aims is achieved before jumping into the technical specifications.
Traditional DEXs have siloed liquidity pools. If the DEX has a USDT/DAI pair and a USDT/USDC pair, then the USDT in the USDT/DAI pair is separate from the USDT in the USDT/USDC pair. If you want to provide liquidity in both pools then you have to provide USDT separately to each individual pool. This segregation reduces the overall potential capital utilization. If you look at how banks operate to switch between currencies, they do not have separate reserves for each currency trading pair, they simply keep reserves of all currencies and freely exchange between them.
Similarly, Wombat has designed an open liquidity pool where users can provide single-sided liquidity into one general pool and earn higher rewards, while traders can swap between any stablecoin without the need to interact with multiple different pools. You can think of it as one large multi-asset liquidity pool. A knock-on benefit of this is that since all the liquidity will be concentrated in one pool it reduces the price impact of large trades and also reduces slippage.
However, tackling slippage is not as easy as simply increasing liquidity in the pool, it is the product of a well-designed invariant function. An invariant function is essentially the ability of a value to remain constant after it has been put through a function. Different DEXs use different invariants but Curve Finance made the stableswap invariant which is specifically catered to trading pegged assets. However, in order to make their invariant more slippage efficient, Wombat included something called a coverage ratio which essentially makes it such that equilibrium is reached much faster and is maintained for much longer than other stableswaps, thus making it more slippage efficient.
When it comes to scalability, the open liquidity pool design comes back into the picture. The main reason it is more scalable is that it removes the complexities of interacting with traditional liquidity pools. Previous pools require equal amounts of liquidity to be held for both/all the coins in the trading pair. This becomes very difficult, especially for newer stablecoins. Solutions such as pairing newer stablecoins to LP tokens have emerged but those are also just another added layer of complexity for the end user. Being able to provide single-sided liquidity in an open liquidity pool prevents newer stablecoins from being an anchor against scalability.
Now imagine all the improvements mentioned above and combine that with a smooth and intuitive UI. That is what Wombat offers, putting it well on track to be the most user-friendly stableswap protocol in the market.
After reading this you may have some concerns regarding security. Having liquidity concentrated in one pool proves to be risky given how frequently smart contracts get exploited. Unfortunately, the risk of smart contract exploitation will always be there but Wombat has teamed up with some of the best auditors to ensure that this risk remains as low as possible.
Their contracts are audited by Hacken, Peckshield, and Zokyo. Their bug bounty hunter is Immunefi.
Under The Hood
Now that you have a brief overview of Wombat, let's get into the nitty-gritty of how everything works under the hood.
Starting with the open liquidity pool design. It has already been established that this design makes it easier to interact with a stableswap, increases overall liquidity, and is also more beneficial for newer stablecoins. But how this is achieved is a result of two factors. Dividing the protocol into two separate open liquidity pools, the main pool & the side pool, and also, the implementation of a coverage ratio.
The main pool consists of only 4 stablecoins, USDC, USDT, BUSD, and DAI, while the side pool allows for any other stablecoin to be a part of it. The reason for this separation is that the stablecoin space is still fairly experimental especially when it comes to decentralised stablecoins. As a result, depegs and blow-ups are a fairly common occurrence. The majority of the faith of market participants seems to be in centralised stablecoins and DAI. DAI has survived many stress tests and has proved its worthiness to be included in the main pool.
Users can swap between the side pool and the main pool but the main pool will only have these 4 stablecoins for the foreseeable future. For a newer stablecoin to graduate from the side pool to the main pool they have to pass a rigorous analysis by the team. The purpose of this segregation is so that in the event of a stablecoin depeg, the main pool, which has the majority of liquidity, doesn’t get affected. In order to protect the side pool, the protocol will freeze that coin immediately. So when the risk of a depeg is detected, the coin will be frozen and only withdrawals will be allowed so users can exit and the rest of the pool doesn’t get affected in any major way.
However, protection against depeg risks is just one aspect of it, general management of liquidity pools is also very important, especially for the open liquidity pool design.
This is where the coverage ratio comes in. Traditionally, a coverage ratio signifies the ability of a company to cover its liabilities with its asset. In Wombat’s case, each stablecoin is looked at as its own company which means each stablecoin is assigned its own coverage ratio. A higher coverage ratio means that there are more assets than liabilities indicating a lower risk of default. The opposite is true for a lower coverage ratio.
When a deposit is made the assets and liabilities go up by the same amount. However, when a swap from one stablecoin to another is made, the coverage ratio changes.
For example, if a trader swaps 100 BUSD for USDT. The assets for USDT increase by 100 and assets for BUSD decrease by 100 while liabilities remain the same. This means the BUSD coverage ratio decreases while the USDT coverage ratio increases. Hence, the name of the game is to maintain equilibrium. To achieve this with the coverage ratio, there are deposit gains (i.e. rewards for deposits) and withdrawal fees in place to act as incentives for traders to maintain equilibrium.
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While the mechanisms to maintain and manage the pools are good, the mechanisms to attract liquidity need to be just as good. For wombat, they have divided the rewards for being a liquidity provider (LP) into 2 pools. A Base pool & a Boosting pool.
The base pool is where you get your rewards for providing single-sided liquidity to the pool. LP’s receive rewards in the native token WOM and the amount received per month is determined by the amount deposited relative to the size of the pool. To earn additional rewards, users can approach the boosting pool. This is where users lock up their WOM tokens for veWOM (similar to CRV and veCRV). The longer the tokens are locked, the more veWOM they get and more veVOM entitles the user to higher rewards.
Out of the total supply allocated to liquidity mining, 30% will go to base pool rewards and 70% will go to boosting pool rewards.
Invariant function
The invariant function was designed to fulfil three of the most important properties of any AMM. Path independence, liquidity insensitivity, and no arbitrage.
To begin with, the invariant formula is fairly similar to Curve Finance’s, however, some tweaks in the formula made it such that the Wombat invariant is a little simpler and easier to solve than the Curve invariant. Reaching equilibrium happens much faster and staying at equilibrium lasts for much longer when compared to the predecessors. This is all to say that the simpler function allows the general design of the stableswap to be path-independent and liquidity insensitive. However, it does not solve for arbitrage.
To solve for arbitrage they introduce the concept of asset liability management (ALM) which was pioneered by the team at Platypus finance. Basically, the implementation of a coverage ratio means that there are more opportunities for arbitrage which can at times be malicious. So to get around this the team developed a withdrawal fee to prevent withdrawal arbitrage and incentivize users to deposit and keep the system at an equilibrium state. This is a cool way that Wombat mitigates arbitrage attacks.
This is the overly simplified interpretation of how the invariant curve works. If you would like a highly technical explanation, then please check out the whitepaper (Link: Wombat_Whitepaper_Public.pdf)
Tokenomics of WOM.
Other than being utilised for liquidity incentives, the WOM token acts as a governance token where users can vote on different proposals within the protocol.
Total Supply: 1,000,000,000
Distribution:
- Private Sale – 7.5% (75,000,000)
- Strategic sale – 3.5% (35,000,000)
- Public sale – 3.3% (33,000,000)
- Binance seed – 5% (50,000,000)
- Binance Partnership – 15% (150,000,000)
- Team – 20% (200,000,000)
- Liquidity incentives – 20% (200,000,000)
- Treasury – 25.7% (257,000,000)
On the surface, it may seem like a lot of supply to come onto the market at once. And that would be correct. But, if we take a look at the vesting schedule it begins to make a lot more sense...
Info - https://medium.com/wombat-exchange/wom-tokenomics-and-distribution-83f8e0a030ea
The vesting is much shorter for the public than it is for the team or partners etc. If you take a look at the calibre of partners and investors on the cap table it becomes even more telling...
Binance, Jump, Workhole, and GSR to name a few that initially jump out are the whos-who of DeFi venture funding.
Roadmap -
There are some clear catalysts in the roadmap for Wombat... A few points that jump out immediately to me are veVOM Gauge Voting and the launch of Wombat Incubation Labs... If we take a look at what occurred with Curve and Platypus, it wouldn't be too crazy to suggest that protocols will build on top of Wombat.
Curve got Convex and then a full ecosystem build around extracting the most optimal yields from the Curve protocol. All of this increased the demand for CRV and generated a flywheel effect that benefitted the protocol and its holders.
Platypus got Vector Finance who effectively absorbed as much PTP from the market as physically possible to boost yields for stablecoin depositors on their additional layer. The protocol effectively locked up PTP off of the market forever, this allowed them to boost yields for their users without the need for the need to stake their PTP. This also allows them to have the majority vote over future Platypus Gauge Weights...
I don't think it would be insane to suggest a similar type of ecosystem will develop around Wombat and generate the WOM flywheel.
Team
The team is made up of some of the brightest and most charismatic people in this space.
Starting off with the founder, Alex Lee AKA Wommander in Chief. Previously he was a quant trader and blockchain engineer. He has previously worked on multiple other crypto projects and is also very well-versed in portfolio management. He has now decided to use his expertise to work on building a next-gen stableswap platform.
You can listen to our Twitter Spaces with Alex below:
https://twitter.com/blocmatesdotcom/status/1564221175688900608?s=20&t=sEhaoA_GJ7nwzBA_hw0_kg
The next in line is the chief technology officer, Daniel Chan. Daniel is an OG in the crypto space where he’s spent most of his time working as a blockchain engineer. Apart from this, he has a diverse background in fields ranging from banking to social services. He is now bringing his diverse set of expertise to DeFi by helping build Wombat Exchange.
Moving on to the Chief Marketing Officer, Ray Wong. Ray was previously an entrepreneur and is experienced in scaling different projects through every stage of their lifecycle. After that, he turned to marketing within the crypto industry where he quickly mastered his craft to be amongst the best in the space. His expertise will prove to be very valuable at Wombat.
Lastly, The advisor. Their primary advisor is Mr.Duckbill. He’s not only an OG in the crypto space but is also the founder of Platypus Finance, the leading stableswap on Avalanche. His advice will be nothing but beneficial for the Wombat. An added bonus is that he is also an expert at tokenomics design. You can read the difference between Platypus and Wombat HERE.
While there are other members on the team, information about them is unclear at the moment. But the leading figures of the team should give you a good enough idea about the calibre of the project.
Community
In its short life span, Wombat has managed to build a sizeable community. Telegram and Discord both boast an impressive 10k members with an active and vibrant community. The community has a good mix of experienced participants and newcomers with everyone being welcoming and willing to help. The team members are fairly active and respond to community questions as frequently as possible.
An added bonus is that the mood is often light-hearted with memes frequently circling around. All in all, it’s a good community to be a part of.
Conclusion
To summarize, this is a very impressive project. They have done really well from both the technical side and the marketing side.
The main issues I have with it are the security concerns of having the majority of the liquidity concentrated in 2 pools. In the event of an exploit, it is possible that the protocol loses almost all its TVL. Given Platypus's past track record and the security audits, this should be sufficient. Other than this, they are currently only live on the Binance Smart Chain. They do have plans to eventually go multichain but given how big of an improvement Wombat is over other Stableswaps, I believe they would have faired well on Ethereum, Avalanche, or any other L1 ecosystem.
However, the rationale behind choosing BSC over the others makes a lot of sense. BSC currently doesn’t have a well-functioning stableswap which is why capturing market share and becoming strong on BSC first will give the project enough runway to then gradually launch on other chains and capture market share in other ecosystems.
If you take the success of Curve within DeFi as a cursor for how important stableswaps are, then one can only imagine how well a more enhanced and optimised stableswap platform will fair.
Final Notes from Grant (blocmates) -
WOM will be listing live on Pancake Swap on 30th August 2022, through an Initial Farm Offering (IFO). Details of which can be found below:
https://twitter.com/WombatExchange/status/1563196494232322049
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