DOMANI Protocol - zkSync 2.0 testnet integration announcement
We are excited to announce that DOMANI Protocol is deploying on the zkSync 2.0 testnet along with hundreds of other projects to help bridge the scalability gap and onboard the next generation of DeFi users.
Tesnet is live here: https://zksync-testnet.domani.finance/
So, why zkSync?
Security, scalability, and cheap fees.
DOMANI Protocol is an asset management protocol that facilitates portfolio tokenization, active rebalancing, and trading of a multi-token position via the recently launched multiswap DEX.
DOMANI Protocol is available today on Ethereum and Avalanche.
DOMANI (formerly known as DEXTF) Protocol was conceptualized 4 years ago when gas fees were at 2 gweis. The exponential growth in users also pushed up transaction fees by 20-30x to around 40-60 gweis when we finally launched DEXTF v1 in Sep 2020.
XTF (or XAV as they are known on Avalanche) fund tokens act similarly to ETFs, but they differ in one vital aspect: decentralization. Anyone has the right to build their ETF based on market opinions and change the allocations as markets shift.
We introduced the rebalancing module in Sep 2021, an optional function that enables exactly that. You can now essentially actively manage (add/remove assets and increase/decrease allocation weight) the basket of assets of your XTF (or XAV if you are on Avalanche) to match your ideal portfolio. If done on Ethereum, this is still a costly transaction, despite gas fees going lower during the market lull.
Predictably, users were massacred by the rising gas fees as DeFi summer began. In other words, right when creating baskets of assets (XTF) to be sold on the open market would have been ideal, gas was uninviting.
To achieve the mission of bringing ETFs to DeFi, we realized that fees matter.
But let’s start from the beginning.
Who are DOMANI’s users?
DOMANI, at a high level, lets users (Investors) delegate the management of their tokens to savvy Portfolio Managers.
We can identify three types of users on DOMANI: Portfolio Managers, Investors, and Arbitrageurs.
1. Portfolio Managers
Portfolio Managers will have a much-improved user experience as creating and rebalancing funds will cost a fraction of the transaction fees on L1 Ethereum
There are two types of Investors:
These are usually savvy capital allocators, typically owning wallets with large balances, and as a result, less likely to delegate the management of their tokens. Power Investors would make great Portfolio Managers.
These users have a moderate amount of investable tokens in the range of $1,000-$10,000 and usually do not want to allocate capital independently.
Therefore, capital efficiency and transaction fees are critical for this subset of investors.
General Investors are fee-sensitive and will never mint or burn fund tokens with fees at $50-$100 (based on the gas limit of 50-100 gweis) because fees alone will eat the expected returns.
These users take advantage of price differences between the tokenized portfolio available on different platforms.
Tokenized portfolios consist of a basket of individual assets with their price.
When listed on an exchange, tokenized portfolios are subject to the same rules of demand/supply, resulting in price differences that arbitrageurs can profit from. Ultimately, the market decides whether to trade the tokenized portfolios at a premium or a discount versus the sum of the individual tokens.
Suppose the tokenized portfolio trades at a higher price than the sum of the individual tokens. In this case, an arbitrageur can profit by minting the tokenized portfolio through the dApp and selling it on the exchange where it is trading at a higher price (minus the transaction fees and slippage).
If the tokenized portfolio is trading at a lower price than the sum of the individual tokens.
Then, an arbitrageur can profit by purchasing and burning the tokenized portfolio through the dApp and selling the individual assets on the market and obtain a higher value versus how much was paid to purchase the tokenized portfolio (minus the transaction fees and slippage).
High transaction fees are a non-starter for arbitrageurs. If price differences persist, the tokenized funds will be less attractive to users, resulting in smaller pools that increase the slippage and makes the arbitrage even less appealing.
A big challenge we are facing at DOMANI is:
Power Investors do not need to use the service
Transaction fees excessively tax General Investors
Resulting in tokenized funds' TVL becoming smaller
Making arbitrage less appealing (due to higher slippage) to arbitrageurs
and tokenized funds less interesting for General Investors
Therefore, transaction fees have been the ultimate deciding factor in usage and adoption.
Why zkRollups? A brief analysis of Rollups
At this point of the story comes Rollups.
Rollups help scale layer 1 and reduce fees by 100x (soon more with EIP-4844 and full DankSharding).
Rollups enable small users to participate as:
Mint or Burn fees become sufficiently low (a few cents/transaction) for General Investors.
Once the supply matches the demand, General Investors can buy and sell tokenized portfolios and instantaneously delegate their management to savvy Portfolio Managers.
Arbitrageurs will trade away any price differences delivering those savings to General Investors in the form of lower slippage, making tokenized portfolios more attractive.
But there are many solutions that reduce fees, Rollups are attractive because they do so without sacrificing the Security and Decentralization properties of Ethereum!
And finally zkRollups: within the Rollups solutions, zkRollups are the most interesting solution because they have no security assumptions on top of the math. While Optimistic Rollups need to make some Game Theoretical assumptions to work.
A higher performance (they are already the cheapest and will probably remain so forever)
Validity proofs, which means less reliance on trusting validators (more future proof)
Separation of Data Availability and Execution means higher throughput (higher TPS) and negligible fees.
zkSync was our main choice because it is an EVM-compatible zkRollup which allows us to reuse most of our battle-test and audited codebase and to rely on the infrastructure we have deploy from Developer Tools to Data Analytics to On-Ramps.
One of the highly expected features, zkPorter, will provide one further option to the user that wants to limit their transaction fees to a stable $0.01 per swap. With this addition, users can therefore choose between:
zkRollup account with high security + 20x fee reduction compared to L1 Ethereum
zkPorter account with a different security profile (higher still than sidechain) with 100x reduction
Integrating zkSync is fundamental in lowering the entry-level barriers for users that are simply paying too much in fees.
About DOMANI Protocol
DOMANI Protocol is an asset management protocol that facilitates portfolio tokenization, rebalancing, and a multiswap DEX to trade a multi-token position in a single transaction.
DOMANI Protocol is available today on Ethereum, Avalanche and soon on zkSync testnet.
zkSync is an open-source Layer-2 blockchain that eliminates Ethereum’s costly gas fees, scaling constraints, and performance barriers using zero-knowledge proofs. Built by a distributed team of leading cryptographers and engineers, zkSync is designed to unlock the full potential of blockchain technology while scaling the core values of Ethereum.
Bootstrapped by initial funding from the Ethereum Foundation, zkSync has powered over 10 million transactions, fuels major web3 applications including Argent and Gitcoin, and recently launched the first EVM compatible zero-knowledge rollup allowing developers to deploy general-purpose applications written in Solidity.