dex – CoinGraph IQ

One of the main problems in DeFi (Decentralized Finance) is the seamless swapping of tokens. If a user wants to exchange one token for another, they can only do so if the wallet or exchange supports it with a token pairing. The issue here is that not all tokens are swappable with each other. You will need to find a token pair first, to make an intermediate exchange before you can swap for the token you need.

This is because there are many types of blockchains used by tokens and they are not all compatible with each other. The most liquid tokens are the easiest to pair because they have the most liquidity. When you want to swap from a lesser known token for another token, if it does not have a supported pair to swap, you will need to swap it first with a more liquid token.

Swapping tokens can be frustrating with so many processes involved
(Photo Credit:Andrea Piacquadio)

For example, let’s say you have a token called X and you want to swap it for Z. You realize that you cannot swap them directly with each other. Token Z does not have a pairing with X, so you will have to swap it with another token first. You then decide to swap with token Y, which is paired with both X and Z. You will need to exchange X for Y, and then you can swap Y for Z. That is the best way to convert tokens, but it can also be more time consuming and cost more in terms of transaction fees.

It would be so much easier if things can take place on the backend. If a user can just send their order to swap X for Z, without having to perform any other intermediate step, it would save time and money. It would also be more convenient when it comes to user experience.

Symbiosis provides a solution to swapping tokens across different blockchains. It is a liquidity protocol that integrates the features of a multi-chain AMM (Automated Market Maker) and DEX (Decentralized Exchange). It is like a decentralized version of a digital exchange (e.g. Binance, Coinbase) that functions as an AMM (e.g. Uniswap).

With Symbiosis, users can swap any token across different blockchains with no additional software required. This provides interoperability between token swaps. As an AMM, it automates the order book system for unlimited token pairs with the best exchange rates offered. As a DEX, swapping of tokens is direct without requiring a trusted third-party like a payment processor or intermediary.

**Swapping allows the exchange of one token for another.**

The process of swapping tokens from Symbiosis is called a cross-chain swap. This allows tokens to be traded across dissimilar blockchains without requiring the authorization from another exchange to process the transaction. Think of it as an open system that facilitates the flow of transactions. The tokens can also be on blockchains that are either EVM (Ethereum Virtual Machine) or non-EVM compatible. In order to get the best prices for swaps, Symbiosis routes transactions to other AMM DEXes like Uniswap or PancakeSwap. This allows for better price discovery by exploring the best options. Users also don’t have to pay different gas fees across blockchains since the protocol abstracts it into a single transaction fee.

An important benefit of Symbiosis is that it also addresses some issues that can occur during swaps. These are slippage and impermanent loss. A slippage occurs when there is a divergence in the price of the token from the time it was ordered and the fulfillment of an order. This can lead to what is called an impermanent loss. If the price recovers, then the loss is only temporary. However, if the price of a token does not recover right away and it is used for another transaction the loss becomes permanent. To address this, Symbiosis uses liquidity pools that includes stablecoins to offset market volatility with little to no slippage.

Swaps are just one of the many features of Symbiosis, which users will find very useful. It provides a much simpler solution for moving liquidity across multiple chains without experiencing fragmentation due to the many interfaces and processes involved. Current systems make swapping more difficult to the average user. What Symbiosis offers is a one-stop-shop solution for swapping different types of cryptocurrencies with less difficulty.

Disclosure: This article was written for #SymbiosisDeFined. This is not in any way financial advice, but for educational purposes only. DYOR always to verify the information.

First Published At Publish0x (3/23/22)

You can take two good things and combine them together to get the best of both. In LA’s streets you can get what some would consider one of the city’s iconic sandwiches. It is the hotdog wrapped in bacon. It brings you the meaty flavor of a hotdog with the greasy goodness of bacon. Now think about the top digital asset Bitcoin (BTC). What would you wrap it with if you were to compare it to a hotdog wrapped in bacon? How about Ether (ETH), the Ethereum blockchain’s token. BTC is your hotdog, while ETH is your bacon. It actually exists and it is called Wrapped Bitcoin (WBTC).

Wrapping one cryptocurrency with another uses the hotdog wrapped in bacon example as a simpler way to illustrate an analogy. Wrapping in this sense means to create a protocol to represent one cryptocurrency on another cryptocurrency’s blockchain. BTC can be represented on the Ethereum blockchain by issuing an ERC-20 token called WBTC. This allows BTC integration with smart contracts that can be traded on the Ethereum network using the ERC-20 standard.

In Wrapped Bitcoin, BTC is locked into a smart contract and issued as WBTC. This allows BTC holders to access DeFi systems on the Ethereum blockchain. It is as good in value as BTC which is verified by a Proof-of-Reserve system. This ensures a 1:1 peg between the issued or minted WBTC tokens and BTC. The actual BTC is still on the Bitcoin blockchain since you cannot store it on the Ethereum blockchain. The BTC is taken under the custody of the WBTC token issuer, so it is not directly with the WBTC token holder. It is maintained by a group called the WBTC DAO, who are the custodians of the BTC. The group’s members include blockchain-based organizations like BitGo, Ren and Kyber.

What is the purpose of WBTC?

As mentioned earlier, it is primarily for giving BTC holders a way to gain access to the DeFi markets. A large portion of the DeFi space uses the Ethereum blockchain and BTC is not directly compatible with it. It is a bridge that allows BTC holders to use DeFi protocols to provide liquidity or participate in other services that yield returns. WBTC is a way to bring the value from BTC into the DeFi space without having to convert BTC to ETH. BTC (as of 2020) has the largest cryptocurrency market cap and this is crucial in helping bring liquidity to the DeFi space as well as expanding on the collateral types available.

This is a great way for BTC holders to take part in the DeFi markets. Many BTC holders have plenty of value stored, but are not able to use it if they are HODLing. DeFi provides ways for cryptocurrency to earn even while HODLing, using decentralized protocols like Uniswap, Curve and Yearn. Most DeFi protocols will only support ERC-20 or ETH since they execute from smart contracts on the Ethereum blockchain. WBTC is a protocol that allows BTC to be wrapped in an Ethereum ERC-20 token. Holders would not need to convert their BTC to ETH during this process.

Minting WBTC

To enter the DeFi space, Bitcoin holders would have to deposit their BTC into a smart contract of a WBTC issuer (e.g. BitGo, Coinsquare, etc.). This can be a digital exchange or DEX (Decentralized Exchange) that accepts BTC. Once the BTC has been deposited, WBTC tokens are minted that have a 1:1 value to the BTC that was deposited. Once the holder receives their WBTC, they can now use it for loan collateral, providing liquidity and swapping for other tokens. Digital exchanges will most likely require a KYC (Know Your Customer) in compliance with the law before the WBTC can be issued. On a DEX or over-the-counter it is not required (check with the exchange requirements always). The WBTC can be cashed out to either BTC or ETH.

Another way to get WBTC is through a DEX like Uniswap. Instead of depositing BTC into a smart contract, anyone who holds ETH can purchase WBTC. It requires connecting a digital wallet like Metamask to perform the transaction with ETH. The WBTC is already available in the market and it does not require BTC for purchase in this case. Since WBTC is an ERC-20 token, it can be purchased with ETH very easily.

Other Uses For WBTC

WBTC can be put to use in DeFi yield farming protocols. This allows WBTC holders to put their digital asset for lending and trading purposes. In return, the WBTC holders earn yields as a their return on investment. These yields are fees collected from the transactions. Rewards can be issued in the form of governance tokens, which allow the holders to participate in digital governance through voting. This provides holders a way of participating in decisions that govern these protocols.

Yield farming requires the holders to deposit their WBTC. In return, they are issued another token. Examples of these tokens include SNX (Synthetix token), REN (Ren Project token) and BAL (Balancer token). The tokens are specific to which protocol is used by the yield provider. To learn more about yield farming, there is an article on Coindesk that explains it a little bit further. (Link here)

The Best Of Both

Wrapped Bitcoin brings the best of two blockchains. It is a way to interoperate between two digital assets at the protocol layer. The value of Bitcoin and the decentralized applications on Ethereum. BTC is the digital asset while ETH is the protocol that utilizes it for liquidity, trades and financing. The Ethereum blockchain is serving as a transaction layer that can bring more capital into diverse markets. Bitcoin can provide the capital, as institutional investment grows in the digital asset. WBTC provides a way for investors to bring capital for yielding returns using the Ethereum blockchain.

Disclaimer: This is not financial advice, just reference. Do your own research always to verify information.