Unifi Protocol: A Bridge Between ICON and the DeFi Economy
In October 2020, the blockchain project Sesameseed announced they would be putting forth a grant proposal to integrate ICON into their Unifi Protocol. Fortunately, this grant was approved, and this integration is scheduled to launch by the end of this year.
But what, exactly, is the Unifi Protocol, and why is it good for ICON?
Let’s find out!
First, let’s get a bit of background on the developers of Unifi Protocol, Sesameseed. Here’s a description of just what Sesameseed is:
SEED is a multi-chain rewards tokens that can be earned by staking with Sesameseed on any one of a number of different blockchains. Each SEED is backed by the node reward tokens earned by Sesameseed on those different blockchains. The SEED rewards economy is designed to be the easiest way to earn the best staking rewards over time.
SEED can be redeemed at any time for these multi-chain rewards in Sesameseed’s staking wallet, Sprout. Every day more node rewards are used to increase the total redeem value. SEED can also be purchased or sold on an exchange, historically at a price well above the redeem value.
Holding SEED is desirable since it:
- automatically stakes on all its blockchains to earn more SEED
- passively compounds staking rewards every day (“set it and forget it”)
- continuously increases in redeem value over time as it is held.
These features make SEED the easiest way to maximize staking rewards from multiple blockchains at once.
I wrote about Sesameseed back when they announced their desire to join the ICON ecosystem, and summarized the project as such:
The best way to think of this is that Sesameseed is a smart-contract whose job it is to earn staking rewards with as many chains as possible (as of now, the first three major chains they operate nodes on and earn rewards with are TRON, Harmony, and Ontology). All those rewards from those projects are dumped into a giant basket of sorts; meanwhile holders of SEED could claim their share of those rewards (based on the number of SEED tokens they own) by trading in their SEED.
This might be a bit to digest. If so, I’d strong recommend watching the following video, which does a great job describing the project.
So how does this relate to the Unifi Protocol? Well, let’s take this brief description of Sesameseed found in the Unifi Protocol Whitepaper, which I think does an excellent job of summarizing Sesameseed:
[a] multi-chain staking community committed to bringing their innovative technology solutions to all their represented blockchains.
The way I see it, Sesameseed has set out to create a more holistic approach to blockchain technology, hoping to knock down the various walls that surround each individual project — whether those walls are a result of the technology or the community — and replace them with bridges, ensuring greater fluidity between cryptocurrency tokens, technology, and communities.
In other words, those who hold tokens and projects that have been integrated into Sesameseed (as ICX soon will be) will start to see other tokens integrated into Sesameseed not as “other” or “competing” projects, but rather an extension of their own community. And that’s an important step for the long-term success of blockchain.
And that’s where Unifi Protocol comes in.
Let’s start by breaking down the description of Unifi Protocol, as laid out in the whitepaper:
The UniFi protocol is a group of non-custodial, interoperable, decentralized, and multi-chain smart contracts protocols providing building blocks for DeFi development.
- “Non-custodial” — The protocol never holds your tokens.
- “Interoperable” — Able to communicate/interact with other blockchains/networks.
- “Decentralized” — Unifi has no centralized operator or point-of-failure, and has governance mechanisms built into it
- “Multi-chain” — Can be accessed and utilized from multiple blockchains/networks
The best way to think of the Unifi Protocol is that it is a collection of smart contracts that serve as a platform for various DeFi projects to be built upon. Just like ICON is a network that allows DApps to operate on top of the underlying blockchain, Unifi can be viewed in a similar manner, although built with various reward and incentive mechanisms that are geared toward DeFi tools and products. The added bonus is that it not only allows these DeFi tools to be built, but it allows them to interoperate among numerous other chains that have been integrated into the Unifi Protocol.
The project that some may think is the most comparable to Unifi is Uniswap. But Unifi does not see itself as anything close to a Uniswap clone:
Many DeFi platforms style themselves as a “Uniswap clone,” or use a food-themed title to showcase their similarity to other projects. This lack of creativity in the market has been a point of contention amongst critics of these fly-by-night operations.
This is one area where the Unifi Protocol stands out from among the rest. The Protocol consists of completely custom contracts that will be launched on multiple blockchains, starting with TRON, Ontology, Harmony, and Ethereum. Unifi is decidedly not a clone of Uniswap or any other decentralized automated market maker exchange. It features custom built smart contracts that solve many of the limitations of Uniswap clones. Unifi’s unique token economy captures real value with every transaction made on the protocol, completely verifiable on chain.
So what exactly does this mean from a practical sense? This excerpt from the whitepaper does a good job of laying it out:
UniFi provides a bridge to connect the economy of Ethereum-based DeFi products to the growing DeFi markets on other blockchains. UniFi allows cross-chain swap functionality by utilizing the time tested SEED Bridge to swap tokens from one blockchain to another, opening up the world of multi-chain Defi products. On a trade platform, this would allow trading between any token on any connected chain (like Ethereum) and any coin or token on any other UniFi supported blockchain. For a lending platform, this could mean collateralizing a loan with ETH (or any token), while allowing the user to withdraw the loaned funds in a token on another chain. UniFi could provide virtual machine governed trading, collateralized margin trading, futures, options, mutual funds, and most anything else found in a traditional fiat-based exchange house. (emphasis mine)
You’re probably wondering: if Unifi is it’s own protocol, does it have a native token (like ICON does with ICX)? The answer is: yes.
From the whitepaper:
UP Token (Unlimited Potential Token) — This token is the core of UniFi’s DeFi system. UP is minted and distributed in direct proportion to the fees and other revenue generated by the entire UniFi protocol. This includes designated fees or revenue from all UniFi-developed platforms, as well as from any projects developed by others which utilize the UniFi protocol.
To better understand this, let’s use ICX as an analogy. Let’s pretend that with every transaction fee that occurred on the ICON network, instead of that ICX fee getting burned, it was instead redistributed back to token holders. That’s similar to how UP works:
The unique fee and revenue sharing model of UniFi creates a strong incentive to earn and hold UP. UP earns a continuing share of fees and other revenues generated by UniFi as long as it is held.
Here’s where things get a bit interesting. Technically speaking, there isn’t just “one” UP token. Instead, an UP token will live on each blockchain that has integrated UniFi:
Each blockchain where the UniFi protocol operates will have a designated base token. The fees for trading will be collected in that base token. For example, ONG on Ontology, TRX on TRON, and ONE on Harmony.
(And of course, soon ICX on ICON)
Why is it built this way? Well, first, it’s consistent with the design of the protocol itself, which allows for interopability between blockchains — it’s almost at technical requirement that UP has multiple versions living on various blockchains.
But, beyond that, is the tokenomics of UP:
UP tokens are backed by the pooled value of trading fees and other revenue generated by the UniFi protocol. This pool is governed by the smart contract, trustless, and provable on-chain. This is a great improvement over other fee sharing tokens which have no transparency and no pooled fees to cover the redemption value of their token.
Again, let’s use ICX as an example. When ICX is integrated into Unifi, ICX will be used in order to interact with the protocol — either to make a trade, receive a loan, or conduct other DeFi activities. Those ICX fees will go into a giant pool of ICX, maintained by the Unifi smart contract.
Accordingly, those who hold UP on the ICON network can redeem their UP for a slice of that pool of ICX. But you may not want to be in a rush to redeem those rewards — that’s because the redemption value of UP only increases over time:
During the minting process, some base tokens (normally a percentage) are dedicated to raising the redemption value of all previously minted UP tokens. This amount of base tokens is known as the Power UP Rate (PUR). The PUR may differ on different blockchains and may be changed, but can never be set to zero.
All new UP tokens minted must have a redemption value at least equal to the redemption value of existing UP tokens. The base tokens in the PUR are applied before a new UP is minted. This means the redemption value of all UP must go UP every time a UP token is minted.
The best way to translate this is that, over time, the minting of UP will decrease for each blockchain, regardless of the fees collected into the ICX pool. So as the size of the pool gradually increases, the amount of UP available to cash in on those rewards will decrease. Accordingly, each UP token in circulation is entitled to a larger share of the pool.
For more on the nuances of the UP tokenomics, of which there are many, I encourage you to read through the whitepaper.
I’ve been mentioning fees paid into the protocol. But what exactly is collecting those fees?
uTrade is the trading platform built upon the Unifi Protocol smart contracts:
uTrade operates as a decentrailized unlimited liquidity market maker where one token is exchanged for another, utilizing liquidity provided by incentivized liquidity providers.
What does this mean for practical purposes? As an example, let’s take TAP, an IRC-2 token built on the ICON blockchain.
Without Unifi, it’s difficult to exchange TAP for any token that hasn’t been built on the ICON network. But what if I wanted to trade TAP for TRON’s token, TRX? Well, since TRON operates within the Unifi Protocol, this would be possible (assuming adequate liquidity for the trading pair), utilizing the uTrade platform built on Unifi. As of today, you would need to trade via the SEED pair for each token, but it’s likely that in the future uTrade will do this behind the scenes, creating a simple TAP/TRX (or any other pair) trading process.
For comparison purposes, Uniswap (despite it’s many differences) is the best analogy for uTrade. But, once again, uTrade isn’t simply a copycat; it offers much more to its users. Specifically, here are the limitaitons of Uniswap as explained in the Unifi whitepaper:
- With a Bancor or Uniswap style system, swapping is limited to within a single blockchain’s economy. This greatly restricts trade pairings and necessitates the use of a third party custodial exchange to bridge the gap between blockchains and their respective DeFi economies.
- Limited liquidity provider fee sharing is available. They only earn a share of the fees for the one pairing the liquidity provider funded.
- Traders get no rewards token or loyalty incentive.
I’ve already touched upon the benefits of the first point. The second point is also important.
With Uniswap and other similar protocols, those who provide liquidity into the protocol are rewarded via fees from that pool. However, when it comes to uTrade “Liquidity Providers share in the fees generated by the entire UniFi protocol, not just by the one uPair where they provided liquidity.” In this case, they receive UP.
Similarly, the third point is also an important distinction. As mentioned, most other protocols do not offer an incentive to traders. That’s not the case with uTrade: “Traders earn SEED as a loyalty reward which continues to earn rewards the longer it is held.” While traders to still pay a fee (which is used to reward liquidity providers), they do receive a portion of that fee back in the form of SEED.
Accordingly, users on both ends — traders and liquidity providers — both earn rewards. That’s a great incentive to draw activity into the protocol.
And to better understand the value of providing liquidity, be sure to read this article.
Beyond the trading platform that exists in uTrade, UniFi will also be launching lending program called uLend:
uLend is a UniFi protocol-based lending platform. Traditional lenders such as banks make use of a credit score supplied by a third party credit agency to determine creditworthiness. The UniFi protocol allows uLend to create loans which require no trust and are governed by smart contracts. No credit rating required, no permission for the borrower to access their own funds is needed. The borrower can anonymously create a loan and payment record, on-chain, which could be used as a form of credit rating. This could unlock opportunities for lenders to offer higher risk lower collateral loans, and open the world of person to person lending.
While there’s no official launch date yet, uLend will just add another powerful DeFi tool to Unifi (and to ICON!).
The integration of Unifi Protocol comes at a serendipitous time for ICONists, as Unifi recently unveiled their governance model:
UNFI will be the first sustainable DeFi token to incorporate Proof of Stake elements into its powerful DAO representative governance model. Under the UNFI PoS ecosystem, candidates for the Unifi Council of Representatives will campaign for election as a Community Council Representative (CR). CRs will serve on the Unifi Council of Representatives and have the ability to propose or vote on changes to the Unifi DAO. Consensus will be achieved by majority approval from the CRs.
A lot of this will sound familiar to ICONists. The governance model is designed around community representatives (like P-Reps), who are elected by the community and make governance decisions.
While a great deal of this governance model has been laid out, other details are still being worked out and there is still no official launch date. However, much like ICON prior to its decentralization, a great deal of the Unifi community’s attention and excitement is focused on the buildup and launch of the governance system.
If you’d like a deeper dive on the governance details, be sure to check out the governance whitepaper.
Benefits for ICONists
By now, you may be wondering what’s in it for ICX holders. Why should you be excited about UniFi’s integration?
First, there’s the fairly obvious ability to have access to trading pairs between not only IRC-2 tokens, but also between IRC-2 tokens, and tokens running on different blockchains. While this may not be an immediate need for ICONists, it will be tremendously advantageous in the future to have liquidity for the various IRC-2 tokens that will be incorporated onto the ICON protocol. Keep in mind, when trading on uTrade, you’ll earn a portion of your trading fees back in the form of SEED tokens.
As an extension of this, I believe it’s also possible that DApps running on ICON may be able to incorporate the SEED Bridge — the same bridge that allows uTrade to function — as a way of accepting tokens beyond ICX. For instance, ICONbet, the casino DApp built on ICON, currently accepts only ICX. With an implementation of UniFi, it may be possible for ICONbet to accept a wide array of non-IRC-2 tokens.
Furthermore, based on the UP token reward structure, ICONists also have an opportunity to put their ICX to work by serving as liquidity providers on uTrade, earning UP tokens which only appreciate in value over time.
How exactly would this work?
Well, let’s say you own both ICX and SEED, which you can earn as a rebate for trading fees on uTrade, can be earned by delegating your ICX to Sesameseed, or can be bought on the open market.
Let’s pretend you have $100 worth of ICX and $100 worth of SEED. You can deposit both into uTrade’s liquidity pool for the ICX/SEED pair. As long as your funds remain in the pool, you’ll earn UP tokens. And, of course, you can withdraw your liquidity at any point in time and keep all the UP tokens you’ve earned up to that point.
As a result of doing this, you now hold ICX, SEED, and UP tokens. And remember, the redemption (and market) value of both SEED and UP are effectively guaranteed to increase over time. That’s not a bad deal. (Of course, as with any DeFi project, there are some risks involved, so be sure to DYOR before serving as a liquidity provider!)
It’s obvious that Unifi will add a lot of utility to the ICON network, as well as additional ways for ICX holders to make additional passive income.
What I believe is so exciting about both Unifi Protocol and Sesameseed is that, although they may seem like projects that have been around a long time, we’re still in relatively early days, in my opinion.
Although Sesameseed first launched in 2018, it only has three chains currently integrated. ICX will be the fourth. SEED hopes to integrate at least 40 chains. If you’ve read about the tokenomics of SEED, you understand why being early is better.
And the same goes for UP and uTrade. Here’s a quote from a Telegram AMA conducted by Sesameseed explaining why:
The way UP is designed, it is always a great time to earn some UP. However it was always better to have earned some up already. As the redemption value goes up constantly the amount of up earned in number of tokens declines. This means those who have UP currently have earned larger amounts of tokens then will be easy to do at a later time.
Over time, as the 40 chains get gradually added to Sesameseed and uTrade, more and more people will try to obtain UP while the UP distribution continues to decrease. Again, being able to participate early with ICX gives ICONists a great advantage over those who may not discover UP until later on.