Zynthetic vs. Wormhole | Two Potential Futures of Flashstaking

Important overview of this article:

  1. We have identified two possible paths forward for the Flashstake protocol which will be identified as Zynthetic + Wormhole
  2. The reason for presenting these paths is to explore opportunities & adapt to many of the obstacles of the current Flashstaking protocol
  3. As a permissionless and unchangeable protocol, regardless of the direction the community supports, Flashstake will always exist in its current technical form as long as the Ethereum blockchain is alive
  4. The goal of this article is to empower an open & transparent discussion on the possible futures of Flashstake and which paths we would like to pursue
  5. To open the discussion, it is encouraged to respond with any questions, concerns, observations, or overall thoughts on this post
  6. A livestream AMA/Review will then be held on Monday, May 10th at 5 pm UTC to review this article and respond to the questions

In a famous scene in the movie Back-to-the-Future, the Doc is attempting to explain to Marty McFly how time travel works and the implications of creating alternative realities/timelines.

At this time with the Flashstake project, we are at a crucial but opportunistic moment to capture a larger market and choose the reality we want to create.

This article will break down the two options I personally believe we have to move the project forward into the future.

Each has very strong pros and cons so we are really looking for community feedback to help us push forward. Let’s dive in.

The Opportunity

Last week, I made this tweet:

In short, the purpose of building Flashstake in the current form (for me personally) was always to observe, learn, and adapt as needed to make the best protocol possible.

Since launching Flashstake, there has slowly been a build of intrigue into this new sector of crypto we consider “time-based protocols”.

In addition to this article where we compare Flashstake vs. Alchemix, another project playing around in the space called Pendle raised $3.7M just a few weeks ago.

While some may look at these projects as “competitors”, I view these data points as validation — the market and industry are intrigued about the time travel of money protocols.

The question we must now ask ourselves is: how can we adapt and improve to be the leader in this category? What are the obstacles that are currently keeping the Flashstake protocol from leading the path forward?

The Obstacles

Before we go into the two alternative realities that we will explore in this article, it is important to take a step back and understand why we are looking to change paths to begin with.

#1: No External Yield

At this time, 100% of the yield generated through Flashstaking is internal to the protocol and based on the inflation of the native token.

While the dynamic FPY was put in place to keep this inflation to a minimum and based on free-market dynamics, this closed-loop system currently keeps the protocol from generating and integrating yield opportunities from external protocols like Aave, Compound, Curve, etc

Opening up the protocol to be more open-source would increase total yield generating capacity while allowing other protocols to more easily integrate and build on top of us.

#2: Lack of Liquidity

While Flashstake still has much more liquidity than most projects at this stage, it lacks the liquidity needed for large scale onboarding into the protocol

Not only must the Flash protocol itself have the liquidity to facilitate Flashstaking, but users also need liquidity on third-party protocols (like Uniswap) to enter and exit positions as needed.

Additionally, for a token to be flashstakable, it must have its own liquidity pool. This creates a very difficult uphill battle to continuously compete for pools and capital.

For Flashstaking to become mainstream, I believe we need to explore internal, concentrated, and sustainable liquidity incentives.

#3: Volatile Staking

A large number of people who are currently Flashstaking received their $FLASH tokens during the initial airdrop.

While it may be easier for early holders to justify a long-term stake on tokens because they received them for free (exclusively to Blockzero Labs Citizens), this is a much harder and risky commitment for new potential stakers to participate.

Although having $FLASH as the exclusive Flashstaking token gives it a unique quality, it also limits potential userbase and potential reach.

In other words, it will be extremely hard to convince 95%+ of the market to use a token that is volatile and unproven as opposed to tokens they are already holding/familiar with.

#4: Major Commitment

With Flash, when you make a long-term stake, you are making a major commitment to the protocol without much flexibility to “back out”.

If we want individuals to feel more comfortable in flashstaking, we need to offer less intimidating and more efficient ways to stake for longer durations.

So how do we solve these obstacles? What are the paths forward? Here are two realities we can choose to build towards.

The Paths Forward

I would expect a handful of individuals reading this to be hesitant about change. Like everything in life, humans are naturally cautious of new things and risk-averse creatures.

To clarify, regardless of the path we do or don’t choose, Flashstaking in its current form will always exist at the protocol layer.

There are no admin keys to the contract. There is no special function to upgrade the contract. Similar to Uniswap v1 and v2, these contracts will exist for as long as people use them.

Before diving deeper into the two paths forward, I would challenge anyone with reservations of change to understand:

  • While it is difficult to build the community we have, nothing is currently keeping people from forking or replicating the current Flashstaking protocol. The only defensibility we currently have is community.
  • Even if we don’t explore the below opportunities and possible paths, somebody will, and they probably already are.
  • While the downside of exploration is a little lost time, the upside of exploring these options is a potentially more efficient, scalable, and successful time-based protocol that we build & distribute ownership to ourselves.

Timeline #1: Zynthetic

Zynthetic is universal flahstaking protocol based on free-market dynamics that allows any token to be staked and earn instant upfront yield.

For example, a user could:

  • Flashstake 100 DAI for 50 days to earn ETH
  • Flashstake 25 CRV tokens for 15 days to earn LINK
  • Flashstake 2 LP tokens for 26 days to earn CRV

How does this technically work?

The following information is not necessary to understand in order to compare Zynethic vs. Wormhole. It is only for the people who want a little more technical insight. Skip this section if necessary.

To make this possible, the protocol introduces a new concept called zTokens. Each ERC token has a corresponding zToken (zDAI, zETH, zUNI, etc)

zTokens are used to allow people to speculate on current vs future yield generating opportunities. Here is how zTokens are generated and used.

  • User Flashstakes DAI
  • The DAI is then deposited into an external yield generating protocol like Aave, Compound, or Curve.
  • zDAI tokens are minted based on the user’s quantity and duration of stake
  • The user can then choose to hold these zDAI tokens or sell them for any alternative currency
  • For example, a user could immediately sell the zDAI tokens for ETH, essentially “Flashstaking” DAI for ETH
  • However, if the user chooses to hold their zDAI, they can pair it with ETH on Uniswap, stake it, and begin earning yield from the protocol
  • This yield is generated from the DAI deposited into the Aave, Compound, Curve protocols as previously performed.
  • For example, user pairs zDAI/ETH, stakes it, and may be earning 22% yield in the form of DAI

Mechanisms

When an increasing amount of DAI is staked into the protocol, two things happen:

  1. The potential future yield increases (based on DAI rewards in Compound, Aave, Curve, etc)
  2. The amount of zDAI tokens gets inflated and increased

If people believe the potential future yield will increase, they will buy and stake zDAI/ETH. This increases the price of zDAI while decreasing the APY for zDAI stakers.

If people believe the inflation of zDAI will be greater than the future yield, they will sell the zDAI. This decreases the price of zDAI while increasing the APY for zDAI stakers.

On a block per block basis, an equilibrium price for zDAI will be set — thus creating an open-market people to speculate on present vs. future yield.

What does this mean for $FLASH holders?

If Zynethtic is developed, Flash tokens would be used on top of the Zynthetics protocol. The changes to expect would be:

  • The front-end branding would remain the same. The primary difference is users would be able to select any input instead of just Flash.
  • The back-end would be changed to integrate the Zynthetic protocol.
  • The FLASH token would likely provide the highest Flashstaking APY, though the market would ultimately decide.

What does this mean for $XIO holders?

If Zynethtic is developed, $XIO would remain the governance token to turn on potential fees. For example, if the protocol was managing $1B in yield, $10M of this could be redirected to the Blockzero Vortex where $XIO holders would stake and earn.

What are the Pros and Cons of Zynthetics?

While these are my personal list of pros and cons — everyone is encouraged to share their list on the Blockzero Dashboard so we can review them during the Youtube livestream.

Pros:

  • Opens up Flashstaking to the larger addressable market
  • Internal, consistent, and more predictable liquidity incentives for LPs

Cons:

  • While we would no longer need liquidity on Uniswap, each individual token would still need a fair share of liquidity (zDAI/ETH, zLINK/ETH, etc)

Timeline #2: Wormhole

William of Ockham, a scholastic philosopher, has a principle called Occam’s Razor that states:

Plurality should not be posited without necessity

In other words, of two competing theories, the simpler explanation of an entity is to be preferred.

While it is extremely difficult at times to condense seemingly complex technologies and visions into “simple” products, every now and then you catch lightning in a bottle and see this principle come to life.

Uniswap, for example, may seem complex — but the solution and interworkings of the protocol are actually quite simple and elegant. The formula that powers the entire AMM is as follows.

x * y = k

When comparing the two possible paths ahead, Wormhole has slowly become my favorite option because of its scalability, deep liquidity incentives, market potential, and most importantly — simplicity.

What is Wormhole?

Wormhole is a universal flahstaking protocol based on DAO-governance that allows any token to be staked and earn instant upfront yield.

At a high level, Wormhole works similar to Zynthetics, with a few removed complexities.

Instead of having the open market set the interest rates, $WORM holders are responsible for setting the interest rates when users flashstake.

In exchange, $WORM holders are able to take a fee for this service.

How does this technically work?

The following information is not necessary to understand in order to compare Zynethic vs. Wormhole. It is only for the people who want a little more technical insight. Skip this section if necessary.

Let’s get a little more granular with how Wormhole works:

  1. Any user can stake any yield-generating ERC asset for any predetermined amount of time into the Wormhole protocol.
  2. Examples of yield generating assets include DAI, Uniswap LP tokens, ETH, or any of the borrowing tokens from Aave/Compound/etc
  3. The staker is immediately minted a token called $WORM

The user can do three primary things with $WORM

  1. Sell: If the staker wants to earn instant, upfront, yield — the staker can immediately sell $WORM for ETH (and then for any other token after)
  2. Stake: If the staker wants to earn a consistent yield — the user can pair the $WORM with $ETH on Uniswap. If they stake this LP token, they will earn consistent revenue of fees generating from the Wormhole protocol.
  3. Burn: If the staker wants to remove their initial capital before the end of their stake duration is completed, they can burn $WORM and remove it.

Wormhole Business Model

  • DAI currently has an interest rate of 10% on Compound
  • User stakes $1000 DAI for one year into the Wormhole protocol
  • The Wormhole protocol gives back $80 worth of $WORM, immediately
  • The staker now has $80 today.
  • The wormhole protocol now anticipates $100 of yield over the course of the year.
  • This delta ($20) is revenue for the Wormhole protocol and $WORM holders
  • Note: This 20% delta was just an example, though it can be increased/decreased over time
  • As people make larger and larger stakes, the potential delta/fee generation gets larger and larger
  • Example: $800M paid in $WORM + $1B anticipated revenue = $200M net generated fees for the protocol

The Flashstaker is essentially taking a slight reduction in total earning capacity for capital today and passing this on to the $WORM token holders for taking the risk of tomorrow.

What about liquidity?

Liquidity is possibly the main reason this model is more scalable than the others. As opposed to Zynthetic that must maintain multiple liquidity pools (zDAI/ETH, zLINK/ETH, zUNI/ETH, etc)

There is only one liquidity pool that we must maintain/grow

ETH/WORM

If ETH/WORM has liquidity, then users will essentially be able to trade their WORM for ETH and then into any various tokens through the exchange of their choice.

As a reminder, similar to Zynthetics, users must stake ETH/WORM to receive the consistent yield generated from the protocol. This is what gives WORM present-day value.

Mechanisms

Instead of an algorithm, in this model, the $WORM holders have complete governance over what the rates are. This means, $WORM holders set the individual APY of various tokens (and thus, set the inflation rate expectations)

If the $WORM holders want to increase flashstaking demand, they can increase the interest rates.

If the $WORM holders want to decrease the inflation rate and make the asset more scarce/potentially valuable, they can reduce the interest rates.

*Similar to MKR holders in MakerDAO setting the DAI Stability Fee, $WORM holders ultimately take the risk, reward, and responsibility of the protocol

What are the Pros and Cons of Wormhole?

While these are my personal list of pros and cons — everyone is encouraged to share their list on the Blockzero Dashboard so we can review them during the Youtube livestream.

Pros:

  • Opens up Flashstaking to the larger addressable market
  • Internal, consistent, and more predictable liquidity incentives
  • Massively concentrated and singular liquidity pool to maintain
  • Potentially easier to develop than Zynthetic

Cons:

  • Some may argue human governance is not as efficient as algorithmic governance.
  • Possibility to operate at a loss if poorly managed by $WORM holders

What does this mean for $FLASH holders?

If Wormhole is developed, Flash token holders would receive a 1:1 ratio airdrop of $WORM tokens.

This would allow each individual Flashtronaut to decide for themselves which reality they would like to follow and support. The market would ultimately decide the fate of each project to decide which solution is best.

There would be one snapshot. Each $FLASH holder would receive an equal amount of $WORM — regardless of where their $FLASH tokens are located.

  • If user has 100 FLASH staked for 444 days at time of snapshot, they would get 100 WORM immediately at launch
  • If user has 500 FLASH + 1 ETH paired as liquidity in the FLASH protocol at time of snapshot, they would get 500 WORM immediately at launch
  • If user has 100 FLASH sitting on metamask at time of snapshot, they would get 100 WORM immediately at launch

Note: There would likely need to be a new brand and site developed. The images you see above are just placeholder brands, though I do like the look and feel of them at this time.

What does this mean for $XIO holders?

Since the Blockzero Vortex currently holds over 4.5M $FLASH, it would also receive over 4.5M $WORM.

Depending on the motivation of the Blockzero Citizens + Council, these $WORM tokens could be airdropped to existing $XIO holders or earned through staking $XIO.

Summary

To summarize, with Zynthetic:

  • No new primary token would be developed but the front-end would enable any ERC token to be flashstaked.

With Wormhole:

  • All $FLASH holders would also get $WORM and could support the protocol they believe is best. Flashstakers could even in theory Flashstake using the Wormhole protocol.

Always important to mention, this is simply a proposal that I personally felt was needed to help move the project forward based on the weaknesses and opportunities I see in the Flashstake protocol.

Ultimately, as Blockzero operates as a DAO, the decision will be taken to our official Voting system.

FAQ

This section will be a running and updating list of questions that I see come in. Feel free to ask questions about the proposal here.

When would we vote on Zynthetic vs Wormhole?

The goal of this article is to open the discussion with the group. Before a proposal can be made on Snapshot, a lead for the project needs to be decided.

If you think you can lead a dev team to build this, please message john at john@blockzerolabs.io

Why not just use Flash? Why Worm?

The Flashstake protocol is non-upgradable. This means, the model for $WORM requires a different smart contract.

$WORM is not meant to be flashstaked itself. It ismeant to govern and capture fees.

To accomplish the Worm model using “Flash”, you would need to do a token swap/migration, which would get extra messy while removing people’s ability to stake their flash

This model allows people to choose their own destiny.

How long would Zynthetic or Wormhole take to develop?

While this is difficult to estimate until we start getting code into contract, it is my belief that Zynthetic would take a bit longer than Wormhole given the complexities of zTokens.

If we did Wormhole, what would happen to the Flashstake brand?

This is still an open question, though I believe the path of least resistance is allowing Flashstake to retain its current brand/token model while creating an alternative website/logo for Wormhole.

Creator of Blockzero Labs