ICON's growing DeFi ecosystem
|RHIZOME WIRE||Mar 12|
At the beginning of this week, the ICON community learned of another DeFi project being built on ICON: the Equality Exchange (of which I am an early contributor).
Here’s a section from the initial announcement:
We are proud to announce Equality, a decentralized, non-custodial, peer-to-contract exchange protocol designed to trade assets that, assuming honest and secure conditions, should trade at approximately the same value.
Our goal is to create an exchange that will allow users to trade similarly-priced assets — such as stablecoins — with low fees and slippage. Meanwhile, we will garner adequate liquidity by incentivizing liquidity providers (LPs) with a share of transaction fees. Additionally, our liquidity pools will be integrated with other ICON DeFi products such as OMM to provide additional yield for LPs.
Furthermore, LPs will also receive Equality tokens (EQU), which provide governance rights over the Equality platform. There is no ICO and no pre-mine of EQU tokens.
For those who have been involved in the DeFi space for some time, this type of protocol likely sounds a bit familiar. And that’s because it is. Equality is designed around the same elements that are built into the design of Curve.Fi, which is currently the 5th ranked DeFi protocol currently operating, based on the amount of crypto locked up in USD terms (just under $4 billion as of this writing).
For those not familiar with Curve, here’s a bit how it works, from the latest addition to my Guide to DeFi on ICON series:
Curve is an automated market maker that was built to solve this problem.
It does this in two ways. First, Curve charges very low transaction fees — only 0.04% (more than 10x lower than our example above).
It also employs an algorithm — called the StableSwap invariant —along with a number of incentives to attract significant liquidity, in order to significantly reduce price slippage.
It does this through something called a “rebalancing fee,” which is used to keep the correct balance in the pool.
Let’s pretend we have a pool of blnUSD and USDb, and it’s set at a ratio of 50/50 of each.
Someone decides they want to trade some of their blnUSD for USDb.
As a result, there is now more blnUSD in the pool than USDb, meaning the pool is out of balance.
As a result, a rebalancing fee is now applied to those who want to swap their tokens. Accordingly, if the pool is out of balance (with more blnUSD than USDb), trading blnUSD for USDb will now be slightly more expensive. Inversely, if you wanted to exchange your USDb for blnUSD (thus restoring balance to the pool), you’d be getting a slightly cheaper price.
As a result of this dance, the pool fairly quickly arrives back at it’s 50/50 balance.
Equality will work essentially in the same way.
Now, this isn’t the only benefit to ICONists of this platform (the benefits to liquidity providers are significant as well, as you’ll see if you read the entire chapter on Equality), but it is an important one.
First, it gives proactive traders and opportunity to earn relatively low-risk profits on arbitrage trading.
By monitoring the balance of the pool and detecting when the rebalancing fee is significant, an ICONist could exchange $1 of one stablecoin for more than $1 of another stablecoin, locking in an instant profit. Now, in most cases, this amount will be fairly low. But with enough volume and frequency of trades, this can earn a decent return — while you also work to ensure the protocol works as designed by keeping the price as close to $1 as possible.
As you can imagine, this could also lead to a significant number of transactions on the ICON network as traders look to scalp profits. Thanks to the minimal transaction fees that Equality will charge (and ICON’s minimal network fees), the window of profit for an arbitrage trade will be fairly large. This is a nice advantage of Equality over Curve — thanks to high Ethereum gas fees, the amount of spread that has to emerge above $1 has to be significant enough to ensure there is still a profit after you account for the fees. That shouldn’t be an issue on ICON.
I went into a bit of an explanation in the final chapter of the ICON DeFi Guide (the chapter analyzing the various benefits to the ICON protocol that these platforms would bring) about the emerging arbitrage activities the various platforms bring:
As I referenced in the prior chapter, there will always be small price discrepancies between the two AMMs on ICON — uTrade and ICONPOOL — as well as the decentralized exchange operating on Balanced.
These discrepancies basically offer an opportunity for free profit for those who are vigilant and fast-acting enough.
Any time a trade is made of any significant size on any of these platforms (a transaction on the ICON network itself), there will be a price difference relative to the other two markets. This should trigger two more transactions — buying on one market and selling on another — in order to capture profit and equalize the price.
Theoretically, this means that anytime a trade is made on one market, it will generate two additional trades in order to bring the price back to stasis. Of course, the initial transaction would have to be large enough to move the price sufficiently, but it won’t take much to create a big enough window for a profit opportunity.
With yet another avenue available for arbitrage trading beyond those listed above, the number of opportunities (for both profits and transactions) grows even more with the addition of Equality.
I also spent time looking at the other activities that would generate transactions on ICON:
Based just on the tools within this guide, any of the following actions will generate a transaction:
Any trade made on an AMM or DEX
Liquidity added or removed from an AMM
Minting of an LP token on an AMM
Depositing or removing collateral into Balanced
Minting BALN tokens for Balance users
Depositing or removing collateral into Omm
Minting of OMM tokens for Omm users
Depositing or withdrawing ICX in Optimus
Minting finICX and FIN tokens on Optimus
Of course, this is just a small helping of activities that doesn’t even go into governance activities or other behavior that would generate transactions. But you can start to use your imagination in the number of ways DeFi could generate more activity, especially as people explore unique yield farming strategies and more platforms become available.
You can now add the various transactions that Curve will bring to this list.
As you can see by now, not only are there clear benefits to the actual DeFi users on ICON, but to all ICONists as well, as the amount of network activity generated by all these protocols certainly won’t be insignificant.
As Ricky Dodds stated during the recent AMA, "I think the next 3-6 months will be the most transformative months of the project to date." When looking at the coming DeFi wave, it’s hard to disagree with that.
PS: To learn even more about the Equality Exchange, be sure to listen to the episode of Eye on ICON that covers that topic!