Tranchess V2 and the AMM Pools: the Background, the Basics, and the Benefits
Ever since Bancor first introduced the raw model of a decentralized exchange without a centralized “clearing house” as an intermediary back in 2017, DEX has quickly grown and evolved as more and more talents join the space and help develop the ecosystem. It is now one of the most essential applications in the DeFi space. AMM pools, as the fundamental building block of any DEX, had also flourished with the emergence of different models and mechanisms catering to the broader needs.
AMMs are so essential and natural for the overall DeFi ecosystem that, when Tranchess initially launched its V1 in June 2021 with not a DEX swap, but an orderbook matching market, many of the questions we encountered revolved around our reason of choice. The orderbook model was one of our many attempts to merge the benefits of CeFi with the flexibility of DeFi. Launched at a time when the market was relatively neutral, we wanted to boost the utilization of ROOK with an efficient way of order fills with no slippage and is able to settle at the exact price users desired. It allowed users to place orders at different price windows simultaneously for complex trading strategy executions without piled-up gas fees. Considering the nature of on-chain activities and our standard on protocol security, the original Tranchess Swap adopted a 30-min TWAP pricing mechanism, using price quotes from reliable decentralized price oracle networks. Although the design might have inevitably hindered the orderbook model from performing at its best, it had effectively prevented the protocol from flash attacks and price manipulation attacks. A year into its first appearance, the orderbook on-chain matching model is still a unique experiment with its innovative design and complex technical implementations.
Tranchess V2 and the brand new AMM pools reflect the thinking and growth of the development team over the past year. With the complete revamp of UI/UX, we wanted the AMM:
- To further elevate the overall user experience with Tranchess
- To serve as a backbone in supporting many other features of Tranchess V2
- Most importantly, to further highlight the different strengths and characteristics of BISHOP and ROOK.
Since the dev team decided to implement the AMM models at the beginning of the year whilst brainstorming Tranchess V2, the team had spent a lot of time determining how to make the pools integrate better into the overall ecosystem of Tranchess, and which of the tokens should the AMMs be designated for. A month into the launch, we are happy to see that the AMM has met and exceeded our original expectations.
If Tranchess V1’s emphasis was on its ability to track different crypto assets and provide additional yield on top, then in Tranchess V2, the focus was definitely for all three tokens to have their own stage to shine. QUEEN, BISHOP and ROOK each has its own unique utilities/usages and cater to distinctively varied needs of different investors. As one of the most important features we have for Tranchess V2, Tranchess Instant Swap frees up the distinct abilities of Q/B/R tokens separately with instant buy/sell of BISHOP and ROOK. Combined with instant creation and redemption of QUEEN, Tranchess users can now freely choose and switch between QUEEN, BISHOP and ROOK based on their need at the moment without a long waiting period and potential miss of opportunities.
Tranchess Swap successfully started with 4 AMM pools: three BISHOP-BUSD pools for the current three funds respectively, and one nQUEEN-BNB pool. With the four pools, Tranchess is now able to support not only instant swaps for BISHOP and ROOK, but also instant creation and redemption for all QUEENs and their corresponding underlying assets. It is also exciting to note that Liquidity Providers (commonly known as the “LP”s) for the three BISHOPs will receive:
- Trading fees from all the transactions within the pools
- Interest paid to the BISHOPs they provided in the pools
- And the weekly CHESS emission.
To help our users better understand the design of the AMM pools and how to make the most out of AMM rewards, let’s take a closer look at the different AMMs, starting with the three BISHOP pools as shown below.
BISHOP is the stable-like token in the Tranchess ecosystem. It’s 100% collateralized by design and backed by ROOK and QUEEN to form a stable triangular structure that supports each other coherently. Besides swapping between BUSD and BISHOP, BISHOP swap also supports instant swapping between different BISHOP tokens. Through the design, we hoped to emphasize the common structure and similarities of all BISHOPs among the three funds. All BISHOPs collect a steady interest for their ROOK sub-tranche and are insensitive to the price fluctuation of their underlying assets. BISHOP’s NAV hovers around 1 and grows gradually as the interests it collects accumulates. In Tranchess V2, in order to better distinguish between the current trading prices and the underlying values of the Q/B/R tokens, we use the term “fair value” instead of NAV. Users can calculate each BISHOP’s current NAV, or fair value, using the indicated prices, as circled in red in the first screenshot above. For example, for nBISHOP, its fair value would be 1.0067*(1–0.26%)=1.00408.
Another way for our users to further enhance their yield with the “stable-like“ assets they have on hand is to become LPs of the BISHOP AMM pools.
Given the nature of BISHOP tokens, LPs for BISHOP pools don’t have to risk a high impermanent loss for the reward like for many other volatile assets. Moreover, besides the usual staking reward and trading fees that most LPs are familiar with, the LP token of BISHOP pools also collects the interests that ROOK pays to BISHOP proportionally, depending on BISHOP’s weight in each pool. For example, as marked out in red in the screenshot above, for each bBISHOP-BUSD LP token, the LP provider collects 2.7% * 47.75%=1.3% interest from ROOK.
Weekly CHESS emission on Tranchess is now distributed across six sections: three BISHOP pools, and three funds. Users receive CHESS emission for their BISHOP tokens, whether they have staked BISHOP directly or added BISHOP together into the AMMs as LP. The specific percentage for the weekly CHESS emission split is determined by community voting on a weekly basis, so make sure to vote under the governance page for your preferred split.
The 20% trading fees from BISHOP AMM pools join treasury and become part of the weekly income distribution program, making BUSD the fourth crypto asset veCHESS holders now receive in their weekly rebate.
With BISHOP pools and the newly available instant creation and redemption of QUEENs, Tranchess now supports also instant swap of ROOK tokens.
After users enter the desired amount of ROOK they’d like to buy or sell and choose the slippage tolerance, Tranchess will provide an estimated amount of BUSD required to complete the transaction. The detailed transaction that happened in the click of the swap is explained in Tranchess Docs, and users will receive at least the amount of ROOK they entered. After a recent integration, Tranchess now uses both Pancake Swap and Biswap for transactions of the underlying assets and automatically chooses the optimal and most cost-effective route for every ROOK swap. In case anyone is curious and would understand further, the rule of thumb for the route undertaken is based on the size of the transaction. The swap is usually completed within the Tranchess ecosystem using QUEEN swap for very small, i.e. test trade size transactions. For middle-size trades, most would go through Biswap for its low transaction cost; and for larger trades, the transactions take the Pancake Swap route for its adequate liquidity, which effectively minimizes slippage for the trades.
A month into the launch of Tranchess V2, it is encouraging to see many of our users already taking advantage of instant ROOK swapping to capture short-term market opportunities. It is also one of the goals for the Tranchess revamp: For BISHOP and ROOK to better fulfill the purpose of their original designs, which is to cater to the needs of different investors. Whilst promoting the use of ROOK as a mild leveraged tool had been the original goal from the year before it was after the launch of V2 instant swaps that we could finally see the use cases grow.
Besides BISHOP pools, Tranchess V2 also comes with one unique AMM pool: the nQUEEN-BNB pool. Tranchess BNB fund is an Alpha-enhanced fund, with most BNBs delegated into Tranchess’ validator node on BNB Chain for the extra alpha yield. To maximize earnings for the fund, Tranchess keeps only a fraction of the BNBs as a buffer for redemption, and for more significant-sized redemptions, it will require an extra waiting period for the undelegation process on BNB Chain to complete. nQUEEN-BNB pool was designed to ensure users would still enjoy the instant redemption of QUEEN just like the other two funds regardless of the reserve status of the BNB fund; The pool also facilitates nROOK swapping within the ecosystem. Recently, Tranchess DAO proceeded with a successful proposal to adjust the A value of the pool from 5000 to 200, which will conclude on August 11. The adjustment effectively reduces the divergence risk from the imbalance of nQUEEN and BNB in the pool, keeping the swapping ratio consistent with the primary market rate. In the future, we will continue to dynamically adjust the parameters to ensure that the pool can always serve our users effectively.
Just as we always say when introducing Tranchess, Tranchess is a yield-enhancing asset tracker, designed to cater to the needs of different investors with varied risk appetites. With the instant primary market functions and instant swaps all available, the product positioning that we have been emphasizing is now presented to users in a more straightforward fashion; For all users, types to experience conveniently and hassle-free. As users become more and more familiar with the distinct characteristics of the three tokens, Tranchess also looks to explore external collaborations for the ecosystem tokens separately -The potential is unlimited.
Tranchess V2 also serves as a solid foundation as we plan for the big event of the ETH merge. Its successful launch marks the beginning of our next journey. In the next few months, Tranchess will continue working on improvements to the current version and communicating closely with the community as well as our TotMs. Besides the educational materials we look to release in order to facilitate user experience with the platform, we also have exciting community events planned ahead as the dev team is busy preparing for the coming ETH merge. The first half of 2022 has been very special for the DeFi industry and decentralized finance. DeFi protocols, running on-chain by smart contracts and strictly following the rules pre-set by open codes, proved their resilience over systematic risks. As DeFi continues to grow and improve itself, we as industry participants will grow with it with consistent building, active thinking and dynamic collaborations. Tranchess had celebrated its first birthday with the launch of V2, and we look forward in anticipation to the second birthday and all the excitement that will happen in between.