Competition for Ethereum DeFi? Binance launches “Liquid Swap”

  • Binance has announced the launch of the new product called “Liquid Swap”.
  • Liquid Swap could become a potential challenger for Ethereum’s Uniswap and other DeFi applications.

It was only a matter of time before crypto exchanges would want to participate in the “DeFi Fever”. Binance now appears to be the first centralized exchange to do so with the introduction of its own automated market maker (AMM), called Binance Liquid Swap. With the new product, Binance mimics the mechanism of decentralized protocols, such as Curve or Uniswap protocol, two of the most important protocols of Ethereum‘s DeFi market.

Binance’s automated market maker is based on liquidity pools, just like Curve. Therefore, users will be able to deposit two tokens or coins for each pool and get rewards. The Binance mechanism is automated and, the exchange claims, will provide more “stable” prices and low fees for large transactions. The exchange explains the operation of Binance Liquid Swap as follows:

Select a pool of liquid trading pairs and deposit an amount (collateral) into the pool. The system will convert the amount into two tokens according to the price ratio of the current trading pair pool and fill the liquidity pool with a certain amount of pool share. After staking, the pool share can be redeemed at any time, and the redeemed pool share will be saved.

An alternative to Ethereum’s DeFi?

Binance Liquid Swap will have a 0.04% transaction fee and, at the time of publication, has been enabled for the following pairs: USDT/BUSD, BUSD/DAI and USDT/DAI. Regarding the source of revenue for Binance Liquid Swap, the exchange revealed that staked tokens receive a portion of the pool’s transaction fee. In addition, tokens receive “flexible savings interest”.

However, users are also exposed to risks, as with Ethereum DeFi protocols, if very large price fluctuations occur on the market. To calculate the savings interest, the exchange will apply the following mechanism:

At 00:00 (UTC+0) each day, the interest-bearing principal is calculated by using “the current token-pool asset – the amount added in yesterday + the amount removed yesterday” and also the flexible savings interest rate of the token-pool from the previous day. If a token does not have a corresponding flexible savings product, it does not generate flexible savings income.

To calculate how much a user can earn for providing liquidity to the pool, the exchange will use a formula based on a mortgage. For example, if a user has 2 pool shares for the BUSD/USDT pair his total share will be 10. Therefore, the pool will be made up of 10 BUSD and 11 USDT with a value of 21 USD. Then, the user will have a share of 20% composed by 2 BUSD and 2.2 USDT with a total value of 4.2 USD. Binance explains it as follows:

At each time you adding tokens to the pool, the system calculates the cost price of the pool share based on the pool share acquired at the time and the value of the pool share at that time. The revenue is calculated when you remove your share. Revenue = share value at removable – share cost value.

In the crypto community, the announcement has been received with mixed responses. In that sense, some users with experience on the operation of DeFi protocols have pointed out that Binance’s product does not indicate which AMM formula it uses. In addition, they have pointed out that the gains with Binance Liquid Swap could be quite low compared to those on Ethereum DeFi protocols. This is because Binance’s product has to most likely spread the profits in arbitrage, as one user pointed out:

My guess is also APY would be low due to two reasons. AMM swap fee is less 0.04 and no reward coins.