What is Entangle Protocol and the ENTANGLE Token?
Liquidity is the single most important aspect of this whole thing we are trying to build. The future of France will not be achieved if the current issues around liquidity provision remain the same. Naturally, as with all emerging technologies, problems are just unrealised opportunities.
As we scramble to see decentralised exchanges, money markets and other DeFi protocols revamp their current structures to make liquidity more efficient, other protocols are seeking to make the act of providing liquidity more streamlined.
I see the developments in the automated market maker (AMM) space begin to really ramp up, Uniswap v3, albeit a better product than v2, still has its issues with regards to complexity. We saw a full micro-niche of projects spin up to try to make liquidity provisions on Uni v3 a hell of a lot easier. It is fair to say that these didn’t necessarily take off.
I don’t think this was a failed effort, maybe it was just too much of a dynamic landscape with lots of confusing moving parts. Retail was not interested and already established market makers had the infrastructure to properly take advantage of concentrated liquidity and Uni v3.
There will be a full makeover of AMMs coming this year. Trader Joe is teasing an all-new AMM which we will be covering here plus, the Uni v3 license agreement that is used as a time delay against would-be vampire attacks… no names mentioned 🍣 … would be ineffective as of around Q2 – 2023. So, naturally, we will begin to see a load of concentrated liquidity protocols spin up then.
The flip side of that is that protocols need more liquidity. Making it more complicated, not to mention the added dynamic of the multi-chain world… the barrier to entry becomes too high for the average investors and prospective liquidity providers.
Dare I mention the added scepticism and vulnerabilities of cross-chain bridges to allow the seamless flow of capital from one ecosystem to the next? It is almost a weekly occurrence and doesn’t seem to show any signs of slowing down which again, is an issue for liquidity and capital velocity (naturally).
So… if none of that made any sense and you are here to read about Entangle Protocol and when you can ape into it, let’s get to it.
The rest of the article will detail how Entangle Protocol aims to capitalise on an inefficient liquidity problem, remove the need for bridges, and enable seamless liquidity provisions plus a load of other cool shit that I will get into.
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What is the Entangle Protocol?
“Entangle is the first Cross-Chain Protocol utilising Synthetic Derivatives to synergise liquidity and liquify value across universal Layer 1 & Layer 2 ecosystems. Entangle features several innovations not seen before in DeFi, including non-custodial Synthetic-LP Vaults, an internal network of cross-chain DEXes with rebalancing logic, and a cross-chain over-collateralised stablecoin (EnUSD) & single sided asset staking bonds.”
So, what does that mean in ape-speak?
The protocol is going to allow users to seamlessly deposit stablecoins on one chain and then gain exposure to LP positions and consequently the yield that they generate.
Remember Celcius where they were offering you 8% on stables and then taking your funds on-chain and also giving them to 3AC? Well, you don’t need those guys anymore, gladly…
You could effectively take USDC on Avalanche and gain exposure to an LP position that is on Arbitrum, without taking time out of your day to bridge funds, buy the desired tokens and deposit the LP position.
Why would I want to do that?
In short: Cheaper, faster, better.
More detail: Well, yield is the obvious one. Stablecoin yield, pool2 emissions and other Ponzinomics have been completely obliterated. The real yield is coming from trading fees and people are beginning to realise that. So, what better way to be exposed to actual yield than facilitating those trades by becoming a liquidity provider…
Yes, I know, I hear you through the screen… WhAt AbOuT ImPeRManenT LosS?!
I’ll get into this below.
So that is the idea but how does it work in principle?
It all boils down to synthetic LPs. Don’t get scared this is quite simple to explain. You deposit your single asset on Entangle protocol into the vault of your choosing. Again, it doesn’t matter what chain you are on or what chain/vault you want to provide liquidity for, you deposit and away you go.
From there the protocol will add liquidity for you to the destination liquidity pool.
You will receive a synthetic LP token i.e. synth-AVAX-USDC LP. this is basically an IOU of your USDC deposit and will be gaining yield each time the AVAX-USDC pool is used by traders.
The synth-LP isn’t just a pretty face though, it is actually quite smart and useful. Whilst deposited your yield generated will be auto-compounded back into the LP position generating your compounded gains for the entirety of your stay in the vault.
To figure out the colossal benefit of compound interest you can use our friend The Calculator Guy’s APR to APY calculator below:
Spoiler alert APR is for boomers. APY is where it is at, and that’s what Entangle will give you.
Additionally, if that wasn’t enough, you can take your synth-LP position and use it as collateral to mint enUSD.
Anyone who is familiar with Abracadabra and MIM will know the power that this type of borrowing can give a user.
This is quite smart because this solves the issues that the DEX and LPs face when it comes to liquidity.
Why? The reason is Patient Capital – i.e. users with a long-term view on providing liquidity.
Providing liquidity is a waiting game and is better suited to non-paper-handed individuals. This really amplifies when you add auto-compounding into the mix. The further out from the day of deposit the gains begin to really add up. Compounding is more powerful the more you do it, so naturally becoming a liquidity provider for a week isn’t going to reap the benefits.
That being said, tying up assets in an LP can leave you in a sticky situation concerning opportunity cost… LP positions for the most part are illiquid, so when nice shiny projects come on to the market and you are tied up in an LP, then those opportunities pass you by.
Now, you are getting it.
Borrowing against an auto-compounding, yield-generating LP position on any chain will now be possible with Entangle. So, yeah you can go explore the markets for new opportunities with your enUSD all the while collecting interest from your LP positions.
The exchanges benefit from this whole situation too as capital is less likely to leave their exchanges to go in search of the next 1000x shitcoin. Traders get a better experience from the deeper liquidity and the flywheel continues.
Disclaimer: Don’t be an idiot… LP positions can be volatile and have an intrinsic value. So, don’t go maxing out your loan-to-value and minting as much enUSD as possible and then crying about it when you get liquidated. Understand the risks before you go level up.
Internal Dex Rebalancing – IDEX.
This is key to understanding. The team refers to overflows and underflows in their docs which is effectively how they maintain a balance between USDC and the synth-LPs.
In the event of underflow or overflow of USDC v SynthLPs sold on each shared USDC pool, an IDEX rebalancing is triggered as follows:
In the event of an overflow, USDC is utilised to obtain more LPs to mint additional Synth-LPs. In the event of underflow of USDC, Synth-LPs are burned, LPs liquidated & USDC positioned back to the IDEX.
Impermanent Loss –
See I told you I would get to it…
As I mentioned, if you deposit USDC into an LP vault you are gaining exposure to the underlying LP position. This has its own intrinsic value i.e. if AVAX is $20 and you want to add to the AVAX-USDC LP vault then 1 AVAX-USDC LP token at a 50:50 ratio for example would equal the dollar value of $40 (1 AVAX at $20 and $20USDC at $1).
So if you were to add $40 of USDC exposure to that vault and the value of AVAX were to drop to $10 then the underlying LP position you are exposed to would now weigh more heavily in AVAX than USDC, which will affect the overall price of the LP position.
What I’m getting at is you can still face price depreciation and appreciation. Just because you deposited x amount of USDC doesn’t mean you don’t take any risk of the underlying LP value moving. Entangle makes the whole process a lot cheaper, faster and easier with the added benefits of auto-compounding and borrowing potential.
There are additional features such as Single Sided Asset Staking but these are not due out until Q1 2023 so I will cover them in more detail closer to the time. For now, you can read about them in the project docs if you feel like it.
enUSD – The Stablecoin of Entangle Protocol.
You can go read my recent post about Stablecoins, DeFi and Regulation where I state that despite the recent shitshow with UST, actual stablecoins are the biggest opportunity in crypto.
Anyway, before people begin to get worried about a decentralised stablecoin like enUSD, there is an important distinction to be made. UST was an under-collateralised algorithmic stablecoin dependent on arbitrage to maintain the peg. It had no backstop apart from Do Kwon’s ego and thus, ended the way it did.
enUSD will be a CDP-stablecoin much like DAI and MIM which have stood their ground against the market downturns in quite a commendable fashion. Minting enUSD will require over-collateralisation such that a synth-LP position worth $1000 will only be able to mint a fraction of the $ value in enUSD (probably around 70-85%).
If the value of the synth-LP drops below the value of the minted enUSD then the position can be liquidated to protect the protocol from bad debt. The user will keep their enUSD and the protocol will liquidate the user’s assets i.e. burn the synth-LP, remove the liquidity and obtain the USDC.
From the get-go, enUSD will only be minted from stablecoin synth-LP positions which I think is a good idea. The team have also built a custom liquidation engine which they have extensively back-tested on past market data for optimising against black swan events. I suppose the recent data collected from the market will have been useful…
Entangle Architecture –
Entangle Protocol is its own blockchain. Yup, to be able to connect to the top-performing DEX’s across EVM and non-EVM compatible chains the infrastructure needed to do so has to be bespoke.
The protocol utilises the Tendermint Core at the consensus layer with a network of Entangle nodes. At the application layer, we have the Cosmos SDK allowing smart contract functionality between different chains and applications.
What is the ENTANGLE Token?
The bit you have all been waiting for, I know this audience well enough…
The Entangle & EnUSD tokens serve multiple purposes including:
- Validating and Securing Transactions (DPoS)
- Bootstrapping the Ecosystem
- Treasury Management
- Receiving Economic Incentives
- Adjusting Protocol Parameters
Naturally, with its own blockchain, the ENTANGLE token will be required for staking and delegation to secure the network. Additionally, governance voting will be applied to both ENTANGLE and enUSD, although the weight and capping of enUSD votes lean towards ENTANGLE holders having a larger say in proposals.
What about value accrual?
Well, the team has thought about that too. Given the vast amount of features this protocol has, multiple revenue streams will benefit token holders.
So, as you can see from the image there are four immediate ways that the protocol generates revenue and value. The team have opted to go with a buy-back and burn model which all you degens seem to love. I was not immediately a fan of buy-back and burn but then when I stopped being lazy and looked at the fact that this will account for 56% of the revenue generated then I stopped being a little bitch.
On that point, if protocols solely use buyback and burn in their early stages it doesn’t really bode well for longevity. Where are the incentives for the treasury, where is the budget for marketing and where are the funds for development? Luckily, the team has accounted for all that in their revenue model so all is good!
Abracadabra, Maker print money from their CDP models alone and they don’t necessarily have other revenue streams (on-chain). There is a reason why AAVE and Curve are developing their own CDPs to… make of that what you will, not financial advice, I am literally an idiot.
Final Thoughts –
In short, I think this is cool. I have mentioned this publicly many times but I think projects finding new and innovative ways to utilise liquidity will do extremely well. The current system is screwed and stale.
I wrote this before I found Entangle…
So, yeah, I am optimistic about this one. I’ll get the team on a podcast or spaces or something in the coming week and I’ll be looking to scoop some. Please don’t take any of this as investment advice, they are just my thoughts about a cool new protocol I found.
I think their biggest hurdles will probably be the understanding of synth-LPs but I think I’ll probably cover this in another article in more of a tutorial format too and hopefully, people can use that as a reference. I’ll leave some links below if you want to check the project out a little more:
Website – https://entangle.fi/
Discord – https://discord.com/invite/UmVyt64ASJ
Twitter – https://twitter.com/Entanglefi
Telegram – https://twitter.com/Entanglefi
blocmates Links –
YouTube – www.youtube.com/blocmates
Telegram – @blocmates
Discord – blocmates#0001
Discord Community –
Twitter – @blocmatesdotcom
Email – [email protected]