Introducing Konomi —decentralised money market on Polkadot
Cryptocurrencies have been an interesting “social experiment” since the start of Bitcoin in 2009. For the past 10 years, cryptocurrencies have evolved from digital money to broader blockchain applications and permissionless smart contracts. It is not only a cyberpunk algorithmic product, but an asset class that is gradually accepted by the mainstream financial industry. Among the top crypto assets, Bitcoin has a market cap of over 200 billion USD — which makes the ten-year-old project comparable to Bank of America. However, in terms of comparison to other asset classes, cryptocurrencies are still trivial — the S&P 500 Index itself is worth around 30 trillion USD. Over the years, there have been a lot of attempts to make blockchain technology adopted by the public — applications in decentralized gaming, payment solutions, collectibles and crypto arts have all been growing rapidly. Among those applications, the decentralized finance (DeFi) category is no doubt the game changer. Up to now, the total asset value locked in DeFi protocols has exceeded 6 billion USD — as compared to less than 1 billion at the beginning of 2020. What DeFi has achieved over the past few months have proven to the crypto community that it is the decentralized application that has actual demand by users and has the potential of connecting the crypto world with the broader financial industry. For the first time, crypto assets could also have currency features like earning interest, creating loans and so on.
The key is to create assets in a decentralized and permissionless way
Most of the DeFi protocols and assets are currently issued on Ethereum, making ETH successfully transform from utility token to an asset. Though it sounds unimpressive, it is an important step to become an asset since utility tokens are difficult to accrual value. It is a huge step forward to see blockchain technology being used for issuing assets without a centralized entity and that the value of assets could be recognized by users. It is only when the value of assets are recognized could there be more products built in the ecosystem.
Lending protocols and decentralized exchanges being the first to market
Currently, the protocols that locked the most assets are lending protocols and also liquidity protocols. Maker, Aave and Curve are the three projects that have over 1 billion USD assets locked in the protocol. The reason why these protocols attract the most volume is because it solves the two fundamental problems of crypto assets — time value of money and liquidity. By depositing crypto assets into Aave, users could earn interest that is much higher than fixed deposit in a bank. Also, thanks to automated market making protocols, long tail crypto assets could also gain liquidity and could be easily exchanged. Centralized exchanges have been dominating the liquidity of crypto assets; the way that tokens are selected and traded are all based on the preferences of the exchange operator. Moreover, most of the tokens that are not top market cap projects could not be included by exchanges with good liquidity, causing a negative cycle for users to trade as well. Automated market making protocols such as Uniswap proposed a new way to exchange assets — rather than involving centralized market makers, the protocol itself could generate a price quote automatically based on the constant product of the liquidity pools. Users are rewarded for depositing assets into the liquidity pool as “liquidity providers” (LP) and earn the transaction fees generated for the trading pair. Indeed, everyone could become a market maker. For the crypto asset exchange space, this invention is as significant as the Internet is for information exchange. Before the Internet exists, many niche markets are not explored because the market size is not big enough to cover the cost of operations. However, since the Internet has minimal marginal cost, many business models are made possible on the Internet such as e-commerce. As a consumer, you could probably find rare collectibles on eBay because it is catering to a global audience. It might not make sense for the seller to operate the business in San Francisco only, but it’s a different story if he could sell globally. Similarly, professional market makers are selective in the assets that they support — only when the trading volume hits a certain benchmark does it make sense to deploy the trading algorithm for them. It is a different story if anyone could provide liquidity with the crypto assets that they own.
Another interesting concept introduced by the DeFi protocols is liquidity mining (or yield farming). Since liquidity is provided through depositing assets into the protocols, user rewards are given in the form of platform tokens. For users, it seems like a risk free way of earning platform tokens as compared to buying on the secondary market. Therefore, large amounts of assets are directed to these protocols to earn these platform tokens, further congesting the Ethereum network. Starting with Compound, multiple DeFi protocols have joined the liquidity mining game: Yam, Spaghetti, Grape — developers are running out of foods to name their protocol.
Interesting and smart as the design is, liquidity mining has its problems. To start with, it is not sustainable. It’s like giving out user coupons for promoting a product and cannot be done forever. At the end of the day, users stay with a product because of the added value rather than the promotions. Furthermore, it is not risk free money for users for most of the constant product based AMM protocols.
KONOMI will become the hub for cross-chain financial markets
Most of the DeFi applications right now are on Ethereum; however, it is not the best solution as a base layer protocol by design. As there is more traffic on Ethereum network, the transaction speed and cost are making it harder to scale. Currently, the transaction fee for Uniswap is around 10 USD; in order to participate in the liquidity mining for Curve, the gas fee could easily cost over 200 USD. It is clearly not designed for average users of cryptocurrencies given the high transaction fee. There have been concerns over the years on the performance of Ethereum network and the rapid growth of DeFi applications makes the problem more severe and hard to ignore.
That is why the KONOMI team chose Polkadot to build the liquidity protocol for the future. We believe that going forward, assets will be issued on multiple chains and that cross chain transfer of value should be done in an elegant way (as compared to adding wrappers). KONOMI issued its own blockchain using Parity Substrate and it supportsGrand pa consensus at the base layer. We will first support decentralised money markets and liquidity protocols so that the assets issued on Polkadot could have liquidity across parachains. As the Polkadot mainnet is ready, KONOMI could become the asset issuance and exchange platform for the parachains on Polkadot. Making crypto asset transfers easy, fast and cheap.
Decentralised Money Market
KONOMI will support the assets on Polkadot parachains and provide the financial services layer for the ecosystem. Similar to Ethereum DeFi, lending protocols and exchange protocols will be implemented to create the money market on DOT. Users could use DOT and other assets on parachains as collateral and borrow another asset, like stablecoins. Because of the design of parachain auctions, there is more room for innovation for the money market projects. For example, projects could use their own tokens as a collateral for DOT, and use the DOT to participate in the bidding process. In terms of the collateralization ratio and interest rate, it is up to the design of project and their supporting DOT holders. Compared to the Ethereum ecosystem, this facility could become an alternative venue for investing into Polkadot ecosystem projects with low risk.
Cross-Chain Asset Exchange
Majority of the liquidity protocols only support ERC20 assets. For the other blockchains, they need to create a bridge to Ethereum or create wrapper tokens in order to participate in the liquidity pools. As part of the Polkadot ecosystem, KONOMI will support the assets issued on Polkadot parachains. We believe that the future of decentralized protocols should be connected rather than siloed and Polkadot has the most potential of becoming the ecosystem that supports cross-chain smart contracts.
Konomi issues a platform token, to incentivize users and liquidity providers to participate in the protocol. It resembles the platform token of centralized exchanges and implements the buy-and-burn mechanism as it generates transaction fees. To kick start liquidity, token rewards will be given to participants that contribute trading volume on the platform. KONOMI also serves as the governance token for the ecosystem. In the future, we aim to make KONOMI a truly decentralized organisation in terms of product development, revenue model and token distribution.
In conclusion, KONOMI presents an implementation of a decentralized money market and liquidity pool that support various assets, fast and secure transactions on-chain. Through the design of KONOMI tokens, the protocol demonstrates ability to bootstrap liquidity and to ensure the decentralized governance of the platform.