BZx DeFi platform launches new governance token

The smart contracts based bZx platform is built on top of the Ethereum (ETH) blockchain. bZx allows users to lend, borrow, and trade in the decentralized finance (DeFi) ecosystem. The bZx Litepaper says the platform offers traders and lenders the ability to loan and trade tokens “without risking moving their assets onto a centralized exchange that can be compromised.”

The bZx protocol had been successful in attracting other companies to build on it. In June 2019, Fulcrum, a trading front-end that utilizes the bZx protocol was launched, followed by Torque, a lending front-end in October 2019.

According to DeFi Pulse, bZx has assets to the value of $812.6k locked in its platform. However, bZx is ranked 30th on the DeFi Pulse leaderboard, ranked by the total value of assets locked. The number one position is held by Compound, which surged to the top of the table last month after an explosion of interest in the yield farming phenomenon.

Yield farming or DeFi Liquidity mining is an incentive structure used by DeFi protocols to attract new liquidity. To achieve this, the protocols distribute governance tokens that give users who provide liquidity, governance rights to the network.

Users of the Compound Finance DeFi lending protocol recently voted to begin distributing the protocol’s native governance token, COMP. Compound is now the largest application in DeFi in terms of value locked into the protocol, with over 27% of the DeFi market.

How does bZx work?

The bZx protocol is based around a three token ecosystem, the BZRX token, the iToken, and the pToken. When users borrow or lend money on the bZx platform, their crypto assets are deposited in or taken out of global liquidity pools that are shared between decentralized exchanges. When they deposit funds, the lenders receive iTokens which represent a share of ownership of tokens they have deposited into a pool and automatically generate interest for holders. At any point, iTokens can be redeemed for original funds plus the interest accumulated.

When users borrow money to open a trading position they automatically receive pTokens. These are “position tokens” and represent exposure in the trader’s desired short or long position. When the mint function of a pToken contract is called, it fills a loan using the appropriate iToken lending pool. A pToken such as pLETH4x represents a 4x long ETH exposure and when a trader opens such a position the representative ptoken is deposited into their wallet.

When the BZRX token was launched it was originally designed to be a medium of exchange token similar to 0x (ZRX). A recent blog explains that this model was scrapped because the “medium of exchange model would not provide the kind of value capture required to align the incentives of protocol stakeholders.”

A second model for the BZRX token was launched in 2019 as an example of a non-extractive value capture mechanism. In this model, BZRX tokens could be redeemed for a proportional percentage of the insurance fund. The bZx protocol collects 10% of all interest earned by lenders and aggregates it into an insurance fund. This fund is designed to pay out if that a lender loses money from a borrower that was not liquidated quickly enough. As protocol activity generates a larger insurance fund, the tokens become more valuable.

The newly launched BZRX token model launches with a tiered model for governance that incentivizes participation through staking rewards. Under this new model, active participation in governance is rewarded with an ever-increasing share of protocol ownership. Token holders not participating in governance slowly lose their ownership of the platform. The new token model also launches with a fee-sharing model and protocol disbursement initiative and can be seen as another example of a DeFi yield farming token.

On bZx, each trade made, loan originated and debt serviced generates a fee for the protocol. The three fees are; a 0.09% origination fee, a 0.15% trading fee, and a 10% interest rate fee for loans. Fees are paid in the native assets they originate from. A recent blog post explains that “the protocol supports a large number of assets, the fee pool contains a large number denominations of assets as well.”

In the new BZRX token model, these fees are directed to two pools on the Balancer platform, an asset management platform that acts as an automated portfolio manager, liquidity provider, and price sensor on the Ethereum blockchain. Users who stake their tokens earn a share of bZx fee revenue through receiving Balancer Pool Tokens (BPTs). The BPTs represent a claim on the assets in the revenue pools. Additionally, while the assets remain in the Balancer pool they earn fees because they are providing liquidity to users of Balancer.

The protocol disbursement initiative is designed to “distribute ownership of the protocol” to bZx users. In total 20% of the token supply of bZx tokens has been allocated towards rewarding users of the protocol.

17% will be allocated through fee rebates. Each time a user pays a fee, 50% of the value of the fee is refunded to them in the form of BZRX.

3% will be allocated through the usage of the protocol. During the first three months following the allocation, 0.25% of the BZRX token supply will be disbursed each week to protocol users based on the amount of fees generated during that week. This is intended to bootstrap activity on the protocol by compensating early adopters for the risks they bear.

The bZx team has chosen an alternative to the crowdsale model. The team suggests a crowdsale “requires a large amount of coordination, considerable after-sale maintenance to ensure a liquid secondary market, and a host of potential legal/securities concerns.” The tokens that would have been allocated to the crowdsale will be placed in a 4-year vesting contract with a 6-month cliff, starting from the time that the token is unlocked. The token was officially unlocked on July 14th and the supply of the token will be broken down as follows: