This article was first published on XTZ.news. I will be posting my articles there and with a few days delay, I will post here on Publish0x. For all Tezos news you can follow me here, or follow @XTZNews on twitter for more content.
This first introduction on DAO Baker will summarize the DAO Baker ecosystem. DAO Baker is DeFi 2.0, built on Tezos. This article represents part 1 of a 5 part series. Links to other parts of the series will be added to this section when they are published in the very near future. This and future articles in the series contain quotes from Scott Trowbridge (Co-Founder of Blockswap and developers of DAO Baker) that were taken from an interview with XTZNews.
Decentralized Finance (DeFi) represents finance applications like lending protocols, security tokens that provide some sort of percentage in interest, derivatives, decentralized exchanges, etc. all built on a decentralized blockchain. Decentralized means that there is no central entity that controls these applications. It is therefore trustless (no need to trust a third party), and immutable (no one can change the rules of the game). DeFi is most popular for the extra profit you can make through these DeFi applications.
One could argue that PoS in itself already is DeFi. You invest money in the native token of Tezos (XTZ). Then you delegate your XTZ to a Tezos validator (Baker) and earn ~6% in XTZ yearly. Payouts are made every three days and every newly earned XTZ will start earning rewards. So you earn rewards over your newly earned rewards. That’s compound interest on your XTZ. Combine this with the explosive possible growth of a strong and healthy cryptocurrency like Tezos, and you have possibilities that you can’t imagine in PoW cryptocurrencies.
DeFi on Tezos
New DeFi applications are in development on Tezos as we speak. In September last year, the first basis for DeFi applications on Tezos was launched: Dexter, the first decentralized exchange built on Tezos. USDtz, wrapped tzBCT and ETHtz are live, and soon EURtz will be added. Wrapped ERC20 tokens will come soon, on-chain lending-borrowing, NFT market, synthetics exchange and much more is going live in Q1 – Q2.
Great development, but there is room for improvement. In a liquidity pool, you place 50% XTZ and 50% of another asset. So you only earn staking rewards over 50% of the value you hold. What if that could be arranged differently? And if more diverse DeFi applications enter the Tezos ecosystem, what if you wouldn’t need to choose between staking rewards and DeFi gains?
DeFi 2.0: DAO Baker
A company called BlockSwap is working on a DeFi application on Tezos. DAO Baker revolutionizes exactly that part of the game for Tezos. You will be able to delegate your XTZ and earn staking rewards. At the same time, you’ll be able to divert the value of that XTZ towards DeFi applications.
It works as following: DAO Baker tokenizes your XTZ. This means that you receive XTZ-backed tokens called dXTZ. Now you can move this dXTZ into any future DeFi application, while your XTZ remains in your wallet and continues to earn staking rewards. dXTZ tokens are Tezos-based tokens, but any application that works with ERC20 tokens is compatible with dXTZ tokens. (More on the how later.) Important to notice is the fact that dXTZ tokens also give you ownership of the underlying XTZ. This means that dXTZ tokens will always be valued the same as XTZ.
Today we see that another version of wrapped XTZ, wXTZ by Staker DAO, is greatly undervalued on DEXter. This is likely due to the fact that not everyone can redeem the underlying XTZ. DAO Baker has designed this differently through their smartcontracts. More details on how this works, later in the series.
Additionally, DAO Baker will also launch DeFi applications which will make dXTZ usable in DeFi right away. DAO Baker, created by the company Block Swap, will launch the start of an ecosystem. DAO Bakers first dXTZ DeFi application is called “Yield Baker”, and will enable dXTZ token holders to lend their dXTZ and receive interest over that dXTZ. That interest will be paid in dXZT, which can be redeemed for XTZ. (More about that later.)
Tokenization of XTZ Baker bond: derivatives
On top of that, DAO Baker also tokenizes XTZ that is put up as a bond in Tezos’ Proof of Stake system by Bakers. These tokens are called sXZT (as opposed to dXTZ) and its value mirrors the network share of a Tezos block validator and is trackable anytime with on-chain tamper-proof historical data of the baker’s performance. These sXZT tokens can be traded as derivatives. Derivatives are financial products that derive their value from the performance of an underlying entity or asset. Scott Trowbridge, co-founder of Block Swap stated:
“We expect a lot of derivative exchanges will take the lead on listing SLOT. In particular, for Perpetuals, CFD for the Tezos Staking returns of a particular tokenized Validator or for an Index of selected bakers. This is an interesting use-case for crypto native derivatives that have no price feed dependency. Crypto derivatives markets have a daily volume of $20 billion and growing exponentially every day records more than $710 billion in August alone.”
Additionally, Bakers in the DAO Baker ecosystem are expected to provide other fee-based validation services (credit underwriting, non-collateralized loans etc.). Depending on the Baker, being a sXTZ owner may also entitle you a portion of the fees collected for these services.
These two factors indicate that sXTZ tokens could very well exceed the price of the underlying XTZ.
Some of the main Defi protocols and DEXs are showing readiness to list SLOT (sXTZ) tokens. The BlockSwap team is already working with several DEXes to integrate trading possibilities of these tokens, Scott Trowbridge went on to say:
“SLOT (sXTZ) tokens and dXTZ tokens will be on decentralized exchanges, there are already some possible candidates.”
Swap Market, Yield Baker, and DAO Baker refills
Other additional components of the DeFi ecosystem are Swap Market, Yield Baker, and DAO Baker Refills. Swap Market is a purpose-built minimal DEX designed to be the basis for dXTZ and sXTZ trading- and DeFi applications. On Swap Market, any tokenized XTZ liquidity pair can be created. Matt Shams, The CEO and Project Lead at BlockSwap commented:
“A boat-load of Stable coin supply will be there to trade between SLOT tokens and dXTZ use cases.”
Yield baker Is a protocol on Swap Market and provides a pool for a lending platform on Swap Market. People can add dXTZ to the pool, and earn interest by people who borrow dXTZ.
DAO Baker refills is a protocol that enables people to lend dXTZ to put up as bond as PoS validator.
Some extra facts which will later in the series be explored:
DAO Baker does not interfere with the baking process. It runs parallel on Tezos’ LPoS protocol only and registers the data on-chain. DAO Baker is a decentralized smart contract with no admin key. It will be thoroughly audited and before launch, an extensive test net will be run first. The launch is expected to take place in Q1 – Q2 2021. The whitelisting of Bakers that can join the project has already begun.