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FeeFi operating principles

Hello, this is Team Protocon.

Following the last <Introducing: Fee Model, Fee Financing(FeeFi)> and <DeFi and FeeFi>, we’re going to talk about how FeeFi works similar to the DEX service today.

Have you ever heard of Mt. Gox hacking case?

Established in 2007, Japan’s cryptocurrency exchange, Mt. Gox has grown into the world’s largest cryptocurrency exchange by 2014. However, the first cryptocurrency hacking incident in which the private key of the exchange was stolen caused about 47 billion yen worth of damage, forcing bankruptcy and rehabilitation of Mt. Gox. In addition, trust in centralized cryptocurrency exchanges has declined due to a number of hacking problems, including the NEM (New Economy Movement) leak hacking of Japanese cryptocurrency exchange CoinCheck and Korea’s Bithumb hacking cases, and decentralized exchanges that do not rely on third parties have begun to stand out.

Cryptocurrency exchange

According to Hashnet, Decentralized Exchange (DEX) or Decentralized Exchange is defined as a decentralized cryptocurrency exchange operated on a P2P basis, unlike server-client centralized exchanges. Unlike the centralized exchanges that control transactions between individuals, DEX works by automated protocols that allow different coins to be exchanged between individuals called Atomic Swap. Uniswap is a protocol designed to facilitate automatic exchange transactions between ETH and ERC-20-based tokens. The Uni Swap mentioned in the previous episode is a type of Atomic Swap.

The main advantage of decentralized exchanges is

- You don’t have to leave the money on the exchange, so you can prevent the risk of leaking money due to hacking.

- You don’t need to worry about the hassle of identification and personal information leakage because you don’t need to authenticate yourself when using the centralized exchange.

- If supply and demand exist, unlisted tokens can also be traded freely.

On the other hand, the downside of the decentralized exchange is,

- You have to manage your wallet’s secret key to run the funds, but if you lose it, you can hardly recover it.

- If the volume of transactions is small, there is a liquidity problem that makes it difficult to complete the transaction.

- Fees are incurred because transactions are recorded in the blockchain and have a complex fee structure.

Source: Binance Academy

Other projects are proposing various methodologies to compensate for the shortcomings. Although it will take a lot of time for DEX to become widespread, it is expected to become an innovative system because it is rapidly emerging as a way to deal with security issues, which is the biggest drawback of the centralized exchange.

FeeFi (Fee Financing)

ProtoconNet also provides FeeFi, which works as a decentralized exchange mechanism. FeeFi is a new methodology to solve the problems surrounding fees by using DeFi financing techniques proposed by Protocon.

If you look at the features of FeeFi,

1. When using dApp services, it is not necessary to pay mainnet tokens as a remittance and transaction fees.

2. We pay dApp tokens and PEN tokens as rewards in return for liquidity supply to PEN liquidity pools generation.

3. The commission price incurred when creating a block can be maintained consistently.

These features have the advantage of providing convenient UX for users while improving one of the disadvantages of DEX, the complex fee structure.

FeeFi works by multiple stakeholders as follows:

▶︎ Title

PEN Token: ProtoconNet’s key currency and mainnet token

AT Token: Token of dApp service

P z: USD price of fee

P pen: USD price of 1 PEN

P at: USD price of 1 AT

Fee at = P z/P at (AT): AT fee equal to the base price P z

Fee pen = P z/P pen (PEN): PEN fee equal to the base price P z

K: Value adjusted so that the fee exchange value between AT and PEN is the same

▶︎ Stakeholders

User A (dApp service user): When using dApp service, remittance and transaction fees must be paid with mainnet tokens, but in ProtoconNet, there is no need to separately obtain PEN, the mainnet token.

User B (dApp service provider): User receives a dApp service fee that includes FeeFi fee, and since the fee is kept constant in ProtoconNet, stable service can be provided. In addition, liquidity providers who receive dApp tokens as rewards to their PEN deposits can naturally flow into dApp services, thereby reducing marketing costs.

Liquidity Provider (PEN token holder): Creates a liquidity supply pool by depositing PEN on FeeFi. Each time a new block is created and dApp token is discounted, a portion of the PEN token is paid as a reward.

▶︎ How it works

1. Liquidity Provider deposits N PEN in FeeFi.

2–1. The Price Information Provider fetches external market prices through an External Oracle Service.

2–2. The Price Information Provider provides the acquired data to FeeFi with a more sophisticated K value through the internal oracle production system.

2–3. FeeFi transmits fee information P z/P at based on USD price to User A.

3–1. User A requests to transmit N AT to ProtoconNet.

3–2. User A pays P z/P at amount of AT tokens to FeeFi as a fee regardless of the size of the transaction.

4. Fee at paid by FeeFi is exchanged for 0.5*Fee pen (PEN). By trading for 50% of the value, Liquidity Provider offers 0.5*Fee pen (PEN) and receives twice the value of Fee at, which means that AT can be purchased at a 50% discount.

5–2. FeeFi pays 0.4*Fee pen (PEN) to ProtoconNet node operators.

5–3. FeeFi saves 0.1*Fee pen (PEN) into public funds.

6. ProtoconNet confirms the transmission of N AT through transaction generation and block generation.

7. A certain portion of public funds is provided to Price Information Providers as participation rewards.

8. The tokens additionally issued at the time of block creation are equally distributed among node operators, liquidity providers, and public funds.

ProtoconNet defines this operation process and its consequences as ‘Fee Farming’ or FeeFi(Fee Financing). Fee financing provides liquidity providers, dApp service users and dApp providers, market price information providers, and all stakeholders with reasonable rewards and convenient transactions under constant fee prices. It is possible to build an ecosystem structure that can benefit all by sharing the added value created by operating the network.

Today we briefly looked at how FeeFi works. You can check the details in Protocon White Paper 1.0, and it will be continuously updated, so please look forward to it.

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