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02.03.2021

Unwrapping Wrap Protocol by Bender Labs

Bender Labs have published a whitepaper for their first open finance ecosystem product on Tezos—the Wrap protocol for asset tokenization.

This post covers the highlights of the whitepaper in question.

Version 1.0 of the Wrap whitepaper consists of four primary sections:

  1. Cross-chain liquidity and interoperability
  2. Wrap protocol by Bender Labs
  3. WRAP Token and Wrap Economy
  4. Roadmap

Cross-chain liquidity and interoperability

Wrap seeks to bring the diversity of assets and liquidity to Tezos. The DeFi ecosystem initially flourished on Ethereum because it has been the number one blockchain for token issuance ever since the ICO boom back in 2017. Right now, there are nearly 350,000 different kinds of tokens circulating on Ethereum.

Thus, what Wrap seeks to solve is an isolated case of the interoperability problem for two blockchains. Thanks to wrapping, tokens can be transferred between blockchains where one blockchain effectively acts as another’s side-chain. Wrap transforms Tezos into Ethereum’s sidechain. Later on, other blockchains will also join.

Right now, there are five ways of transferring assets between blockchains:

  1. Centralized custodians
  2. Off-chain federation
  3. Oracle aggregation
  4. Synthetic pegs
  5. Atomic swap

Bender Labs compared those solutions in six areas.

  1. Complexity. How difficult is it to implement the solution?
  2. Trust level. How decentralized is the solution?
  3. Security. How easy is it to attack the solution, how safe is it?
  4. Transaction fees. How expensive is it to use the solution?
  5. Speed. How fast is the solution from the user’s point of view?
  6. Dependencies. Is the stake of existing tools on Tezos and Ethereum enough for the solution?

This analysis brought Bender Labs to think the most pragmatic solution to optimize user experience lies somewhere in between centralized and decentralized options. They chose an off-chain federation as such. This solution is easy to implement, it lacks serious technological dependencies, requires less trust than a centralized custodian, and ensures higher security while being more appealing in terms of speed and transaction fees.

Wrap protocol by Bender Labs

Wrap enables one to wrap ERC-20 and NFT tokens on Ethereum as wTokens, namely FA2 tokens on the Tezos blockchain.

The members of an off-chain federation called Signers Quorum make sure that the number of tokens locked on Ethereum is always equal to the number of tokens on Tezos issued with their backing. Initially, the Quorum will include five Tezos community members including Bender Labs.

In terms of issuance and redemption of wTokens, a user deals with three entities: smart contracts on Ethereum, the Singers Quorum, and Tezos smart contracts. Off-chain actions of the Signers Quorum ensure the connection between smart contracts on Ethereum and Tezos.

To issue wTokens, one has to send ERC-20 tokens to the deposit contract on Ethereum and specify the recipient’s address on Tezos. At least three of five Quorum members have to confirm the deposition of said tokens. The confirmation is a transaction signed by the Quorum that commands the issuance smart contract on Tezos to issue the respective number of FA2 tokens and send them to the recipient’s address.

To redeem wTokens, one has to send them to the issuance smart contract on Tezos and specify the recipient’s Ethereum address. The issuance contract burns the tokens, and at least three of five Quorum members have to confirm that by signing the transaction commanding the deposit contract on Ethereum to send tokens to the recipient with their private keys.

The WRAP token and the Wrap economy

The Wrap protocol is a DAO: the protocol governance and profits belong to WRAP token holders.

Voting on the protocol parameters happens on-chain with the BaseDAO framework. Such parameters include the fee sums and the maximum supply of WRAP. Some other questions like adding a new asset to the protocol allow WRAP holders to vote off-chain using tools like Snapshot.

Bender Labs will issue 100 million WRAPs as ERC-20 tokens on Ethereum. They will be placed in the deposit contract Wrap to back the issuance of 100 million WRAPs as FA2 tokens on Tezos. These tokens, in their turn, will be placed in a smart contract distributing them amongst three kinds of stakeholders for seven years: the members of the Quorum, protocol users, and the protocol development foundation.

Initially, the Quorum members will get 50% of the weekly distribution, protocol users 40%, and the foundation 10%, though the DAO can alter those parameters.

The protocol usage fee of 0.15% will also be distributed among three kinds of stakeholders: the Quorum members who sign the transaction get 0.04%, while WRAP holders and the protocol development foundation get 0.1% and 0.01% respectively.

Roadmap

Wrap v1 is scheduled to launch in Q1 2021. Initially, it will work with twenty assets, five of which are custodial stablecoins backed by USD (BUSD, HUSD, USDC, USDT, and PAX). The list lacks non-custodial stablecoins like DAI, though there is MKR, MakerDAO’s governance token. DeFi is represented by credit app tokens (AAVE and COMP), DEX (SUSHI, UNI), oracles (LINK), as well as wrapped Ethereum and Bitcoin. The rest of the list focuses on tokens by centralized crediting services and exchanges (CEL, CRO, FTT, HT, LEO, and OKB).

Transferring to Wrap v2 (date unknown at the moment) implies dealing with two issues. One of them is the decentralization of the Quorum (initially it will include five members, namely Bender Labs and four Tezos community representatives), as well as the decrease of trust to the federation required from the users. The second one is the launch of a DAO run by WRAP holders on the basis of the BaseDAO framework.

Conclusion

WRAP is a fundamental building unit for the construction of an open finance ecosystem on Tezos: it can bring liquid assets from Ethereum to Tezos. The Bender Labs team says they feel they have “built an appealing seed protocol,” which echoes a well-known statement from the Tezos whitepaper. Still, it is not the final passage in the Wrap whitepaper. Its final thought is about placing the fate of Wrap v2 into the hands of WRAP holders, and it is their task to fulfill its potential.

We’ll keep an eye on the development of Wrap. Testnet experiments have already started, so subscribe to our social media channels if you don’t want to miss out on some crucial developments.

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