Vx-PaX Protocol ERC-2055:

Denominating ERC-20 into ERC-1155 tokens by deriving NFT balances from ERC-20 balances in realtime as storage efficient reflections

Cryptogenik 1/11/2024

Abstract

The Vx-PAX Protocol introduces a novel financial instrument by integrating ERC-20 and ERC-1155 standards, enabling bidirectional synchronization of token balances between different types of tokens. This enables the creation of denominations of ERC-20 tokens into “larger bills”. Larger denominations of tokens are useful to enhance liquidity management within the DeFi ecosystem and also minimizes market impact during large transactions. By coupling traditional token transactions with fractionalized ownership represented through ERC-1155, Vx-PAX facilitates large-scale financial operations with reduced slippage, promoting more stable and efficient market conditions.

Introduction

In DeFi, liquidity and market stability are extremely important. Traditional approaches often lead to significant market swings, especially when large volumes are involved. The Vx-PAX Protocol addresses these challenges by automatically using the NFT-1155 tokens to create larger packs of ERC-20 tokens, specifically VaultX. This integration allows for innovative liquidity management and operational efficiency, particularly beneficial in scenarios like Whale Pools, where substantial token bundles are managed collectively without adverse market effects in the faster paced DEXs where liquidity is instant albeit slippy.

Functionality

Core Mechanism

The Vx-PAX Protocol leverages the ERC-1155 standard’s ability to represent assets in multiple denominations (e.g., 100K and 1M tokens) as a means to control large volumes of ERC-20 tokens (e.g., a stablecoin or a utility token) in a more granular and efficient manner. Each ERC-1155 token corresponds to a fixed amount of ERC-20 tokens, enabling users to transact large sums without directly impacting the underlying token’s market.

ERC-1155 to ERC-20 Synchronization

When a user transfers an ERC-1155 token, the protocol automatically transfers the equivalent value in ERC-20 tokens to the recipient. For instance, transferring one “100K” ERC-1155 token would result in 100,000 ERC-20 tokens being moved from the sender’s to the recipient’s account, maintaining a consistent and synchronized balance between the two token types.

ERC-20 to ERC-1155 Reflection

The protocol also reflects changes in ERC-20 token balances in the user’s ERC-1155 holdings. If a user acquires enough ERC-20 tokens to meet the threshold for an additional ERC-1155 token, the system recognizes this change and adjusts the user’s ERC-1155 balance accordingly. This bidirectional synchronization ensures that movements in ERC-20 balances are accurately mirrored in the user’s ERC-1155 token holdings.

Use Cases

Whale Pools

Whale Pools, collections of substantial token holdings managed collectively, stand to benefit significantly from Vx-PAX’s functionality. By transacting in ERC-1155 tokens that represent large quantities of ERC-20 tokens, participants can execute sizable trades without the usual market slippage. This capability is crucial for maintaining price stability and ensuring fair market conditions.

Slippage Reduction

In traditional DeFi trading, large orders often cause significant price impacts, resulting in unfavorable slippage for the trader. Vx-PAX mitigates this issue by allowing large volumes to be moved in a manner that doesn’t directly interact with the market until smaller, more manageable portions are exchanged. This system provides a mechanism for high-value transactions to occur with minimal impact on the market price.

Efficient Liquidity Management

Vx-PAX facilitates more efficient liquidity management within DeFi protocols. By enabling the fractionalized ownership of large token pools, liquidity providers can more easily allocate and rebalance their contributions across different pools or investment opportunities, enhancing capital efficiency and optimizing yield strategies.

Conclusion

The Vx-PAX Protocol represents a significant advancement in DeFi operations, addressing critical issues of market impact and liquidity management for large-scale transactions. By integrating the functionalities of ERC-20 and ERC-1155 tokens, Vx-PAX offers a robust solution for handling substantial token volumes with precision and stability, paving the way for more sophisticated financial instruments in the DeFi space.

Implementation Guide

ERC-20 Token Extension:

setERC1155ContractAddress(address _erc1155Address)

• Purpose: Allow the ERC-20 contract to know the address of the corresponding ERC-1155 contract for calling its functions.
• Access Control: Restricted to contract owner or designated admin roles to prevent unauthorized address updates.

_beforeTokenTransfer(address from, address to, uint256 amount) internal virtual

• Purpose: Hook to perform operations before any transfer, including minting and burning. Specifically, to notify the ERC-1155 contract of the balance change.
• Implementation: Override this function to include a call to the ERC-1155 contract, notifying it about the token transfer. This step is crucial for the ERC-1155 contract to reflect ERC-20 balance changes accurately.

ERC-1155 Token Extension:

• Constructor with ERC-20 Token Address Initialization
• Purpose: Initialize the ERC-1155 contract with the address of the corresponding ERC-20 token contract it’s tied to.
• Implementation: Accept an ERC-20 contract address as a parameter in the constructor and store it for future reference.

setERC20ContractAddress(address _erc20Address)

• Purpose: Allow updating the address of the ERC-20 token contract. This is useful if the linked ERC-20 contract ever changes or needs to be updated.
• Access Control: Restricted to the contract owner or designated admin roles.
• Implementation: Include checks to ensure the new address is valid (not zero).

balanceOf(address account, uint256 id)

• Purpose: Override the standard balanceOf to dynamically calculate and return the balance based on the account’s ERC-20 token holdings, for specific ERC-1155 token IDs.
• Implementation: Calculate the balance representation based on the linked ERC-20 token balance, translating it into quantities of specific ERC-1155 token denominations (e.g., 100K, 1M).

safeTransferFrom(address from, address to, uint256 id, uint256 amount, bytes memory data)

• Purpose: Override the standard safeTransferFrom to transfer the underlaying ERC-20 token amount relative to the VPax virtual token transfer.
• Implementation: When performing the ERC-1155 token transfer, calculate and perform an ERC-20 token transfer from the sender to the receiver, based on the ERC-1155 token’s denomination instead and emit events.

updateTokenBalances (address from,address to,uint256 fromBalance,uint256 toBalance,uint256 amount)

• Purpose: Called by ERC-20 contract on transfer of any tokens to emit events related to changes in the ERC-1155 Virtual Balances.
• Implementation: Determine the delta in changes of balances of VPax of each denomination and emit the appropriate events to simulate the minting, burning and transferring of NFT denominations.