MonoX: Another DeFi 2.0, a New Paradigm of Capital Efficiency

Source: Deep Tide TechFlow

Peeling back the recent hot keywords in the Crypto world, we find that the market has been dominated by three major buzzwords: Gamefi, WEB3.0, MEME.

As a result, the once "savior" DeFi has become OLD MONEY, yet this is a field that primary and secondary investors cannot avoid.

Whether it's GameFi or WEB3.0, the underlying foundation is the liquidity built by DeFi. However, the current issue is that after AMM, we haven't seen any eye-catching DeFi innovations for a long time.

What does DeFi 2.0 look like in your mind?

I originally thought it would be optimizing AMM to improve capital efficiency; creating convenient entry points to attract outside capital or uncollateralized lending and other credit expansions… What ultimately presents itself to us is the OlympusDAO "protocol-controlled liquidity," directing funds to the protocol, which uses the funds from these early supporters to provide liquidity, or adding a bit of Ponzi model, but we also look forward to new forms of DeFi 2.0.

Today, I would like to introduce a DeFi protocol that embodies another form of DeFi 2.0, MonoX.Finance.

The first time I heard about MonoX was because it was selected for the CoinList Spring 2021 Seed Program. When I tried to define what MonoX is, I was somewhat at a loss because it is not a single product; it should be understood as a brand new DeFi ecosystem.

The core of its mechanism lies in the protocol design that constructs a new AMM architecture, which can automatically pair a single token deposited by users with its stablecoin vCash to create LP, thus greatly releasing over-collateralized funds and improving capital efficiency.

On this basis, it can become the infrastructure for various new DeFi products and services in the future, such as lending, NFTs, IDOs, contracts, options, and other derivative trading products.

This is a new paradigm, a new DeFi ecosystem.

vCASH

The first step to understanding MonoX should be to try to understand vCash, which is a new type of stablecoin developed by MonoX. vCash, or Virtual Cash, has its dollar stablecoin as vUSD. Unlike USDT, which is mapped to real dollars, it is a virtual counterparty of the liquidity pool, which can be understood as an asset mapping in the liquidity pool, releasing the liquidity of the collateralized assets.

When users first deposit liquidity to create a new pool, they can set an initial price for the asset. Each asset in the MonoX pool expresses its value in vCASH, starting with a balance of 0. When asset A is purchased, the vCASH balance increases; when asset A is sold, the vCASH balance decreases.

When users sell tokens, vCash is created, thus theoretically maintaining an infinitely expandable supply of vCash in pricing calculations, while users can use vCash to exchange for any asset in the liquidity pool.

Single Token Liquidity

If vCash is the cornerstone of the MonoX ecosystem, then single token liquidity is the soul of MonoX.

Currently, almost all DEX protocols on the market typically require users to add two or more tokens to the liquidity pool to provide liquidity, which is quite frustrating.

For liquidity providers, they have to pair their assets with mainstream assets like USDT or ETH in proportion, leading to repeated capital occupation and low capital utilization efficiency.

For traders, transactions often consist of multiple conversions between different pools, facing slippage losses and high GAS fees with each trade, increasing transaction costs.

Single token liquidity pools will help solve these problems.

When providing liquidity, users only need to add a single token to the liquidity pool, and MonoX will automatically combine the deposited asset with the vCash stablecoin to create an LP pair and provide corresponding LP tokens.

This should be the outcome that project teams most want to see: zero capital startup token liquidity pools, allowing more funds to be used for development.

Additionally, in the MonoX ecosystem, the vCASH stablecoin acts as a connector for all assets, eliminating the need to swap between multiple pools during transactions. All transactions follow the same trading path: A -> vCASH -> B, reducing slippage losses and saving transaction fees.

Based on this mechanism, MonoX has launched a new DEX called Monoswap, to meet the needs of project teams issuing assets and investors trading assets.

Compared to traditional DEXs, Monoswap has a stronger financial value capture capability.

In addition to earning income through trading fees (0.3%), Monoswap can also earn income through vCash in three main ways:

1) Automatically rebalancing the liquidity pool. For officially established liquidity pools, when the vCASH balance in the pool is negative, it automatically sells the pool's debt to reset the balance to 0.

2) When users directly purchase vCASH from the market.

3) When users sell vCASH back to the protocol.

Monoswap combines the characteristics of an exchange and a market maker, achieving a higher level of profitability with the same trading volume and TVL compared to traditional DEXs.

Dual Pool Design

From order books to dual-token AMM, and then to single-token liquidity, each innovation represents an improvement in capital efficiency, a leap for DeFi. However, there are shadows on the other side of the coin: malicious actors can more easily exploit loopholes and use permissionless token listings for scams, and in a single-token liquidity environment, they can issue their assets at almost zero cost…

To address this, MonoX has implemented a dual pool design.

The MonoX protocol has two types of liquidity pools: "Trustless Pool" and "Official Pool."

The trustless pool, as the name suggests, allows anyone to write smart contracts to create liquidity pools and add liquidity. To prevent malicious scams, the vCASH balance in the trustless pool cannot be less than 0. When the balance is 0, tokens in that pool can only be bought, not sold.

The official pool carries a certain degree of "trust endorsement." Mono holders can vote in the community DAO, and after voting, it can become an official pool. Initially, the official team will also collaborate with multiple quality projects to help them launch official pools.

To avoid the situation of "a proliferation of low-quality tokens," MonoX has added certain constraints to LPs to protect traders and LPs.

The largest LP holder in unofficial mining pools cannot remove their LP within 3 months of the pool's creation.

Within 3 months, the largest LP holder cannot send LP tokens to other users.

If a user has just added liquidity, they cannot immediately remove it.

(1) For the Trustless Pool, it requires 24 hours before removal.

(2) For the Official Pool, it is 4 hours.

This design retains the characteristics of decentralization, still allows permissionless token listings, maximizes capital efficiency in single-token liquidity, and utilizes community DAO management to minimize the proliferation of scam projects, making it easier for truly focused developers and projects to gain recognition.

According to official information, there are currently 6 official liquidity pools: ETH, WETH, WBTC, USDT, USDC, and MONO, which are now in a blind mining phase with an APY of 50-200%. The more liquidity provided, the more airdrops received.

Regarding the future outlook for MonoX, there are mainly two points:

First, the existence of single-token liquidity pools makes liquidity provision a fixed income mechanism, which can attract a large amount of low-risk capital.

Large funds participating in liquidity mining often use derivatives to hedge against impermanent loss and other risks, or they may refrain from participating due to concerns about market volatility. The existence of single-token pools has a natural appeal for this type of capital, even attracting funds from outside OLD MONEY.

Second, the imaginative space for Value-Backed Tokens (VBTs).

vCash is a specific case within VBTs, which can be understood as releasing liquidity for those already collateralized tokens (because they already have value backing). Following this model, it can open up space in more areas, such as:

1) Synthetic assets (already have asset support for minting)

2) Fragmented NFTs (already have support from the NFTs themselves)

3) Game tokens (already supported by in-game assets)

4) Insurance tokens (already have assets as collateral support)

A reasonable aspiration is that in the future, MonoX is likely to become a hub for VBT asset trading, a new DeFi 2.0.

Conflict of interest: The author holds a small position in Mono, and the content of this article does not constitute investment advice.