On July 3, 2018 MakerDAO and bZx announced a strategic partnership. These two infrastructural projects for the crypto economy are complementary in many ways, with several points where their two protocols assist each other in network growth and development.
In this article, we examine this crossover and explore what this partnership can lead to.
bZx, the 0x Protocol, and MakerDAO
Currently, decentralized exchanges provide several advantages over centralized exchanges in terms of security and anonymity. However, existing decentralized exchanges, such as IDEX, the Waves DEX, and the Stellar DEX, still fall short in terms of liquidity and functionalities. Traders that want a wide array of functionalities still have to go to centralized exchanges and hand over control of their funds to these intermediaries.
One key missing functionality of decentralized exchanges is the option for margin trading. Margin trading allows traders to use leverage and short their assets, increasing both risk and opportunity, and is a very popular tool on centralized exchanges. However, in order to margin trade you first need a third party to lend you the money, which has not been possible on DEXs thus far.
The bZx protocol was created to change this. The bZx project is a margin-lending protocol designed to bring margin lending to decentralized exchanges which have implemented the 0x protocol. bZx is a decentralized protocol that enables lending and borrowing for margin trading.
It can easily be integrated into new as well as existing exchanges. It allows for peer-to-peer margin trading in which users can lend out their tokens for a lucrative interest to margin traders.
The bZx protocol is directed by its smart contracts framework, eliminating the need for trusted third parties in the process. Decentralized exchanges that implement the protocol can add trading functionalities that are high in demand, which will in turn lead to higher liquidities and a potential reduction of trading fees since the decentralized exchange protocol adds a new source of revenue.
The rapidly growing 0x project has developed a protocol to support decentralized exchanges. This protocol is focused on ERC-20 tokens and can be integrated by any Ethereum-based dapp. By integrating the protocol, dapps connect to each other through relayers, which together form an open, permissionless decentralized exchange network that allows for lower transaction fees and less pressure on the Ethereum network.
Maker, Augur, and Status are examples of dapps that have already integrated the 0x protocol.
Finally, MakerDAO is a highly complex and innovative blockchain project that was launched to provide the crypto market with decentralized stablecoins. The first successful stablecoin provided by the Maker Decentralized Autonomous Organization was an Ethereum-collateralized stablecoin whose value is pegged to the US dollar.
Just recently, the popularity of Dai led to a raise of the debt ceiling, allowing for the issuance of $50 million for Dai stablecoins.
All these 3 projects are working on the infrastructure behind the crypto economy, specifically the Ethereum network economy. This is also the reason for the strategic partnership between the MakerDAO and bZx protocols, both of which see the true potential of the 0x protocol and want to strengthen its ecosystem.
MakerDAO’s stablecoin, the Dai, plays a key role in this partnership. Stablecoins are touted as the Holy Grail of cryptocurrency, and for good reason — they allow people to use the advantages of cryptocurrency without putting themselves at the mercy of the market’s extreme volatility.
The 3 main domains for the strategic partnership between MakerDAO and bZx are:
- The Dai as a unit of account for bZx margin traders
- Use of the bZx protocol to create a secondary market for the Dai
- Use of bZx tokens to as a tool for collateralizing new stablecoins and for offsetting stability fees
Unit of Account
Decentralized exchanges will need a stablecoin to maintain volumes and liquidity. This is because if there is no stablecoin, capital will leave the DEX during bearish sentiments. Stablecoins are even more important for margin traders, who need a shield from extreme volatility to protect their capital.
Tether is not exactly trusted by the industry and most other stablecoins are either unusable for decentralized exchanges or present too much risk. The Dai has been tested and proved itself to be a reliable stablecoin.
Secondary Dai Market
Through the bXz protocol, cryptocurrency holders can lend out their digital assets to margin traders in return for interest. This cryptocurrency can also be Dai, which margin traders can use to mitigate risk.
For example, if margin traders expect Ethereum to go up, they can use their current Ethereum holdings as collateral to obtain more Dai and buy more Ethereum. Because Dai’s stable value, it will likely be used a lot by margin trades, much more so than a cryptocurrency with its own volatility.
bZx’s iToken Usage
iTokens will be used in the bZx protocol for tokenized margin loans, thus enabling the margin loans based on collateral such as Ethereum. iTokens are fully collateralized and redeemable for the collateral, which makes them suitable for collateralizing stablecoins from MakerDAO too.
For opening such a stablecoin loan (known as a CDP), the creator of the loan pays a stability fee. These stability fees are vital to the Dai stablecoin ecosystem and incentive structure. Because iTokens generate interest, they are loaned out, which can offset the stability fees.
Infrastructural projects, especially the ones focusing on backing up the crypto economy, are critical to the long-term success of cryptocurrencies. The partnership of MakerDAO and the bZx protocol is a great step towards making this infrastructure work.
Decentralized exchanges will need stablecoins and margin trading to even come close to rivaling their centralized competitors, something that this partnership is aiming to provide. It’s an exciting strategic partnership between 2 highly innovative projects that are laying the critical foundation of a decentralized, digital economy.