[Serenity Premium] Wombex Finance [Initial Review Apr 2023]

Wombex Finance is a DeFi protocol built natively on the Binance Smart Chain (BNB) that boosts yield for liquidity providers and concentrates governance power across the Wombat Exchange. Wombat Exchange is a DEX protocol designed for low-slippage, scalability, and single-sided staking V2 stableswap operations. Wombex and Wombat Exchange have been deployed on the Arbitrum chain, with current TVLs of $34.15 million and $47.17 million, respectively. Wombat Exchange provides users with efficient exchange rates and minimal slippage when swapping stablecoins, and single-staking pools offer sustainable yields. Wombex aims to make yield generation efficient by combining the power of liquidity providers and WOM token holders, accumulating veWOM and aggregating LP deposits to supercharge each other, and accelerate long-term Wombat growth.

The Strategy in this Article

This strategy is depositing FRAX into FRAX-MAI-USD+ Pool on Wombex Finance of Arbitrum chain

Current yield: 28.2% (April 21, 2023)

Our risk assessment: Medium

Our yield projection based on this week's Benchmark Yield: 16.0%

The Concept and How the Protocol Works

Before diving into Wombex Finance, it's important to understand the key features of Wombat Exchange. Wombat Exchange is an automated market maker (AMM) protocol that features a low-slippage and hyper-efficient stableswap mechanism similar to Curve Finance and Platypus Finance. The platform utilizes veTokenomics, which is inspired by Solidity. We have previously covered Velodrome in an article for further information. Wombat Exchange is also the primary and leading stableswap protocol on the Binance Smart Chain (BNB) and has recently launched on the Arbitrum chain.

Wombat Exchange's Core Concepts

1. Single-sided LP and Coverage Ratio

Wombat Exchange employs a unique single-sided liquidity pool design, unlike conventional DEXes that use liquidity pairs. This enables users to earn yield on a single token deposit, which is also ideal for lending protocols and other derivative tokens. Many previous attempts at implementing single-sided LPs were unsuccessful, but Wombat Exchange overcame this by introducing an asset-liability management model to price assets, measured by the coverage ratio. The coverage ratio measures the pool's ability to cover its debt payment, with each stablecoin in a pool having its own ratio. Each stablecoin in the pool is treated as a separate business unit, with its own assets and liabilities. When a user deposits tokens, both assets and liabilities increase. Swaps conducted on the platform cause the assets of two liquidity pools to increase or decrease depending on the direction of the swap. Wombat Exchange's coverage ratio is 100% when assets in the pool and liabilities are the same. If there are fewer assets in the pool than deposited, the coverage ratio goes below 100%. To prevent withdrawal arbitrage, Wombat Exchange has a protection mechanism that levies a withdrawal fee or provides deposit gain if the coverage ratio for a specific asset in the pool is below or above 100%.

2. Unlimited Scalability

Wombat Exchange's asset-liability management design leads to scalability. In contrast to Curve, which requires LP tokens to maintain a 50/50 balance or risk applying different trading prices for assets within the pool, Wombat prioritizes each token's coverage ratio over the ratio between assets in the pool. This means that the pricing of both tokens will not be affected, even if 99% of the deposited funds in one pool are in token A and only 1% in token B. As a result, Wombat can scale infinitely, unlike any other automated market maker. This liquidity structure also enables new stablecoins to join the pool without being constrained by their lower liquidity levels, while liquidity for major stablecoins like $USDC and $USDT can scale endlessly and support larger transactions.

3. Guages

Wombat Exchange's single-sided LP design has a unique feature that sets it apart from Curve Finance. In Wombat, each asset in the pool has its own gauge, and the APR for each asset varies based on trading fees, incentives, and bribes. This design allows for protocols to incentivize only one side of the LP and seed the other side for free with their own tokens. Bribes are natively supported by the protocol, providing an additional way to incentivize LP providers. This feature enables protocols to promote their token without needing to hold the underlying asset, making it easier for smaller protocols to participate in the liquidity provision process.

WOM Wars

Wombat Exchange has a concept called '$WOM Wars,' similar to Curve's war on its token $CRV. Yield aggregators built on top of Wombat are in a race to obtain the maximum amount of veWOM. There are three primary motivations for yield aggregating protocols to participate in this race:

(1) To offer the best yields on Wombat LPs

(2) To have a significant influence on Wombat governance

(3) To provide juicy yields on bribes.

At present, only three yield aggregating protocols, including Wombex Finance, Magpie, and Quoll Finance, are participating in the WOM Wars on the BSC. However, in this article, we will just focus on Wombex Finance on Arbitrum chain.

Wombex Finance

Wombex Finance is a yield-aggregating DeFi protocol that enhances the yield of the Wombat exchange by combining the power of liquidity providers (LPs) and $WOM token holders. This is accomplished through the use of the veToken model, which boosts the LPs for $WOM holders. A crucial aspect of the veToken model is its efficient tool for governance coordination, which facilitates protocol expansion and assists LPs in allocating capital.

Liquidity Providers

Wombex Finance leverages accumulated veWOM, which is owned by the protocol, to enhance yield for all funds supplied to the protocol and distribute WOM rewards among all LPs. Liquidity providers who deposit liquidity via Wombex receive higher yields than those who directly provide liquidity to Wombat. The additional yield is generated by boosting WOM rewards through the use of Wombex's veWOM holdings and the WMX issued pro-rata for every WOM mined by Wombex LPs. Liquidity providers receive WOM rewards (minus protocol fees) and WMX issued pro-rata for each mined WOM. These combined rewards offer a significantly higher yield than what LPs can currently earn on Wombat. As a result, Wombex supercharges yield for Wombat LPs. Liquidity providers can provide liquidity through Wombat by staking Wombat LP tokens into Wombex.

WOM Holders

WOM holders can deposit their WOM into wmxWOM and receive a liquid staking derivative called wmxWOM. By doing so, they earn a portion of future mined WOM, additional WMX rewards, and all the rewards and yield offered to veWOM holders on Wombex. As a result, WOM holders who own WOM through the Wombex contract receive a higher APY on top of their holdings than typical veWOM holders.

WMX Holders

WMX token holders play a role in governance aggregation across Wombat by voting using the protocol-owned veWOM. Token holders vote on proposals related to Wombat and Wombex and are rewarded with a share of WOM mined by Wombex LPs. The lock-up period for WMX is 16 weeks and cannot be altered. By being vote-locked, WMX enables its holder to fully participate in Wombex and benefit from the following utility provided by the protocol:

• Receiving a share of protocol fees (charged in mined WOM) for staking WMX in vote-lock

• Participating in Wombat governance through the use of veWOM protocol holdings (meta-governance) and having an influence on the direction of rewards emission

• Governing the Wombex protocol, including treasury, emission schedule, and other parameters, by vote-locking WMX (vlWMX)

Bribe Market

Wombex Finance has created a bribe market as a vital feature for the Wombat ecosystem and a significant aspect of the Wombex Finance protocol. Through this feature, users on Wombex can add bribes for all Wombat pools, vote, and track statistics for the current bribing round. When WMX is vote-locked, it becomes vlWMX, allowing its holders to cast votes and generate bribe income. This bribe market is a useful tool for governance coordination, as it enables WMX holders to sell their governance power on the secondary market, providing them with an additional source of income.

FRAX-MAI-USD+ Pool on Wombat Exchange and Wombex

At present, the total value locked (TVL) of the FRAX-MAI-USD+ Pool on Wombat Exchange amounts to $1.08 million, with FRAX accounting for 32% of the pool.