- Shell Protocol is building off the work of many other stablecoin pool providers, including Balancer and Curve Finance.
- Shell’s greatest advantage is the tokenization of its liquidity pools which adds even more liquidity.
- It’s largest obstacle, however, will be to bootstrap the same level of liquidity as Curve Finance.
- The team behind the project has a background in economics and software engineering, and has already earned the attention of some notable figures in the DeFi space.
The DeFi news category was brought to you by Ampleforth, our preferred DeFi partner
Share this article
In the first of our Project Spotlight series, we’ll be walking readers through a platform called Shell Protocol, built by the team at Cowri Labs. The purpose of these articles is to present up-and-coming DeFi projects that may not quite be mainstream yet.
For the uninitiated, Cowri refers to the small shells, called “Cowrie shells,” that humans first used as money.
And because projects selected for our Spotlight series are so nascent, documentation is scattered across the internet. So, we’ve done the work for you. From Discord channels, Twitter handles, and GitHub repositories, we’ve scoured the web to centralize all the most essential information.
After reading any of these posts, you should walk away with more info about many of the exciting projects still on the horizon. You’ll also be ahead of the game when crypto Twitter finally discovers the platform.
In the following guide, readers can learn about how Shell Protocol works, what are its key differences compared to other platforms, the team behind the project, and what the future holds.
What Is Shell Protocol Trying to Do?
Shell Protocol is a decentralized exchange (DEX) that facilitates low slippage stablecoin swaps.
Slippage is a common term in finance used to describe the difference between the expected price at which a trade is made with the actual price. Sometimes these prices can be very different, especially when markets are moving fast.
You may set a buy order at one price, only to see that at the time of execution, this price has changed. That’s slippage. It isn’t always negative, but low slippage improves market efficiency and trader’s precision.
Shell Protocol utilizes the structure of an automated market maker (AMM) to enable trustless trading through a liquidity pool. In traditional finance, a market maker is a third party that provides liquidity for trades that may not have happened otherwise.
Anyone can become a liquidity provider (LP) by depositing stablecoins in one of Shell’s liquidity pools. Each time a new deposit is made into a pool, the protocol mints a fungible token that represents the user’s share in the total pool.
But why is this important?
Stablecoins are the backbone of DeFi. Thus, an inter-stablecoin DEX can significantly benefit users as DeFi’s dependence on these assets grows. The primary use case of such a DEX would be to improve profitability for traders.
Each Uniswap or Balancer pool has varying degrees of liquidity. As a result, sometimes changing the base stablecoin can help traders get a better price.
If a large trader, for instance, wanted to buy ETH with 30,000 DAI, but there’s a Balancer pool of ETH-USDC with immense liquidity, the trader could benefit from swapping their DAI for USDC and purchasing ETH via this Balancer pool.
Unfortunately, these pools are not structured to cater to low slippage stablecoin transfers.
Arbitrageurs, or “yield farmers,” also find value in stablecoin-focused DEXes. If the lending yield for DAI is 2% on Aave, but USDC lending rates are near 6%, profit-seeking actors will look to close that gap by supplying USDC to Aave’s pool.
But not every arbitrageur will own USDC. Some may even withdraw their DAI from Aave and exchange it for USDC.
However, if swapping one stablecoin for another forces a trader to take on high slippage, this would be unviable. And if most lending rate arbitrage is unviable, money markets will remain incredibly inefficient.
Shell Protocol’s stablecoin-optimized AMM fixes this.
Swapping 10,000 DAI for USDT results in a 3.53% slippage on Uniswap v2, at the time of writing. This means only 9,653 USDT is received for 10,000 DAI.
Using a stablecoin-specific DEX almost entirely removes this slippage, resulting in better profitability for arbitrageurs and market efficiency for DeFi.
Shell Protocol & The Competition
Curve Finance is the primary competitor for Shell, as both are limited-purpose DEXes to offer DeFi users better terms for stablecoin-to-stablecoin trades.
Curve Finance uses a custom algorithm to enable inter-stablecoin transfers with minimal slippage. Liquidity providers receive LP shares when they deposit into a Curve liquidity pool.
Since Curve was deployed on mainnet in January 2020, it has facilitated over $250 million of volume. On Jun. 14, 2019, Curve recorded over $18 million of volume in a single day.
Inter-stablecoin swapping has undoubtedly found a product-market fit in DeFi.
Other than Curve, general-purpose DEXes like Uniswap, Kyber, and Balancer also compete with Shell (and Curve) for stablecoin volume. While Kyber offers lower slippage than both Uniswap and Balancer in this regard, it still cannot offer better terms than Curve.
Shell’s Advantage Over Competition
Curve Finance’s risk disclaimer reads, “if one of the stablecoins in the pool goes significantly down below the peg of 1.0 and never returns to the peg, it’ll effectively mean that pool liquidity providers hold almost all their liquidity in that currency.”
Shell Protocol mitigates this risk. Chief economist Kenneth White said in the project’s official Discord server, “our pool has built-in safety if a stablecoin loses its peg. In other pools, this could drain all of the assets and leave LPs with nothing. In our pool, LPs still lose money but not their entire deposit.”
Shell Protocol users can deploy their own liquidity pools with a custom weight per stablecoin. As seen with Balancer, giving users this freedom tends to attract a swathe of liquidity providers.
Curve also has several liquidity pools, but the team that operates the protocol decides with which assets to deploy the pool. This, however, could change as Curve introduces a governance token to decentralize the protocol further.
Time for a quick announcement.
Curve is working on decentralizing its ownership through a Curve governance token. All liquidity providers since the inception in January 2020 will be considered for the initial distribution proportionally.
Details on supply/demand to follow soon!
— Curve (@CurveFinance) May 30, 2020
Shell’s most significant advantage is the tokenization of its liquidity pools.
Curve Finance’s liquidity providers mint non-fungible LP shares when they deposit funds in the liquidity pool. Shell Protocol’s liquidity providers mint a fungible token that represents their claim on the pool’s assets.
Introducing a token for each pool allows Shell’s liquidity providers to create a secondary market to trade their claim on the pool’s asset. This not only enhances Shell’s liquidity but also creates a resilient meta-stablecoin.
For example, the current liquidity pool is 13.6% DAI, 37.2% USDC, 34.2% USDT, and 15% sUSD. If one Shell token is issued for every $1 deposited in the protocol, each Shell token would represent a claim on .136 DAI, .372 USDC, .342 USDT, and .15 sUSD.
The value of each Shell would be the value of each token added up along with the annualized yield for the pool at that point in time.
Shell’s offering would be the DeFi equivalent of sovereign Treasury bills, as they represent a claim on a currency that is being put to productive use and earning a return.
What Are Shell Protocol’s Weak Points?
The disadvantages of Shell mostly revolve around the fee structure. But there are also a few other quirks that need to be ironed out.
Shell won’t be able to recreate the Balancer effect until it issues its native token – or rather, a governance token – to liquidity providers, akin to Balancer’s liquidity mining initiative. Beyond that, the incentive structure is broadly the same as Curve’s.
Further, Shell doesn’t yet have the ability to allow any user to create their own pools. It lacks the same degree of customizability as Balancer.
When it comes to fees, there’s a certain point where a trader can wreck the fee structure, pushing the protocol’s base fee and rate of increase in said fee higher. But this isn’t technically slippage, as the fee is the component being pushed higher.
Consequently, this turns out to be a bane for users but a boon for liquidity providers.
Finally, Curve Finance has seen roaring growth in the six months since it was deployed to mainnet. Competing with Curve at this point will require Shell to propose compelling incentives that trounce Curve.
Shell may find it challenging to bootstrap liquidity early on as it’s current incentive structure more or less mimics the already liquid Curve Finance.
Community & Team
Depending on where you look for Shell Protocol, you may only read a few Tweets here or there.
Often the platform is batched in with many of the other protocols listed in this article too. Part of this is simply because it takes time to discover and describe new projects, especially ones as complex as Shell.
->They’re all Constant Function Market Makers!
I’ve written a Medium post explaining what this means, why it’s a 0-to-1 innovation in finance, and how it works:https://t.co/k17Ix7rz8S
— Dmitriy Berenzon (@dberenzon) April 23, 2020
A trademark of early projects is often the use of different names. It is unclear, for instance, whether the official name is either Shell Protocol, Shells Exchange, or Cowri.
Shells were the oldest form of money, and now they are the newest.
— Shell Protocol (@ShellProtocol) February 28, 2020
Ric Burton is perhaps the most prominent promoter so far and has helped the team with design suggestions for the platform’s first steps.
White’s background is in public policy around the equitable distribution of energy, like oil and gas. He worked at the King Abdullah Petroleum Studies and Research Center (KAPSARC) for two years after earning both a Bachelor’s and a Master’s from Stanford University in economics and public policy, respectively.
For his part, Foley has extensive experience as a software engineer at the Economic Space Agency, a think tank working at the intersection of value, art, environment, and health. He graduated from the Pennsylvania Academy of Fine Arts.
Stablecoins have claims to legitimacy because they avert the supposed principal flaw of cryptotokens: their price volatility. But what is stability? Whose stability is stable? https://t.co/wMB6eeeSO9
— Economic Space Agency (@ecospaceagency) January 8, 2020
As far as community outreach, there has been very little due to the early stage of the platform. White did, however, pen an edition of Ryan Sea Adams’ Bankless in April 2020. In it, he outlines the evolution of money, the benefit of programmable money, and the obstacles still facing DeFi and stablecoins.
White has indicated that a formal launch will happen after the code has been audited and verified.
Disclaimer: Crypto Briefing was in no way compensated for writing the above article.
Credit: Source link