Biconomy Investment Thesis

Biconomy’s mission is to solve User Experience in Web3. Biconomy simplifies blockchain transactions for applications to build on. Biconomy’s tools allow developers to build optimum UX for their users. It’s the invisible underlying layer powering the Web3 ecosystem.

Why We Invested In Biconomy

If you’ve ever used Curve Finance, Perpetual Protocol, Aavegotchi, Decentral Games, mStable, Sapien Network, or DFYN — it’s likely you would’ve interacted with the Biconomy relayer network without even realizing. As early investors in the Biconomy team, we are pleased to help them as they continue their journey toward becoming a crucial decentralised infrastructure tool for the Web3 ecosystem.

Adoption comes with simplicity. Let’s face it, Web3’s user experience is horrendous! Create a CEX account, complete your KYC, transfer fiat, buy (volatile) ETH, set up a Metamask wallet, write your seed on a secure piece of paper, transfer ETH to wallet, find dapps to sign up on and link your wallet, blah blah! And if we haven’t already lost 95% of our target user, we expect them to correctly predict and pay gas on every transaction and pray that the miner puts their transaction on the blockchain. Clearly, this is not how we will win over our users from Web2. Clearly, we need to fix this. Spotify users don’t wire money every time they play a song, and Web3 must not expect its users to either. 

Perhaps a novice user can pay for gas in a less volatile cryptocurrency? How about transactions that are gasless? The reality is that this is already a possibility! Your favorite dapp’s developers can already do gasless transactions via meta transactions. (Shoutout to Matcha’s implementation of gasless txs). However, the majority of dapps cannot afford to do so. Talent is scarce and it’s incredibly complicated for a developer to work on the core product while at the same time build the infrastructure to optimize the user experience. We don’t see all Web2 devs setting up their own physical servers or payment gateways, do we? Biconomy helps provide the tools to allow developers to build optimum user experience for their users and establishes itself as a critical Platform-as-a-Service player. It’s the invisible underlying layer powering the Web3 ecosystem.

Interoperability is another critical constraint in the user experience. Layer 1s, sidechains, and Layer-2 scaling solutions are all expected to experience explosive growth in 2021. With more users entering crypto on several chains on a daily basis, it is becoming increasingly clear that effective cross-chain bridges will be a necessary component of the blockchain ecosystem. Over the next decade, these blockchains will attract tremendous liquidity and users, and the rails connecting these ecosystems will be smooth, fast, and simple. Not only does capital need to flow freely between these chains; communication and contract calls between these chains are also non-trivial and extremely complex. Dapps and users should be able to communicate efficiently and in real time throughout the entire multi-chain web. Hyphen is being constructed to alleviate this backlog. Currently serving as a bridge between the Ethereum mainnet and Polygon for liquid assets, future Hyphen improvements will transform it into a critical infrastructure connecting several blockchain ecosystem.

Since day one, our interactions with the Biconomy team have been productive. Aniket, Ahmed, and Sachin formed a remarkable founding team due to their extensive experience coupled with STEM & Economics backgrounds, and a laser-sharp focus on the core mission to simplify User Experience. Aniket was one of Binance’s first employees. They have endured acute instability in China and India, yet have never stopped building.

We share the same philosophy with Biconomy – Crypto rewards BUIDLers in the bear market.

The Biconomy team has 3 brilliant products, each on a journey of its own, yet they never stop building. Biconomy has always been flexible to change, proactively taking feedback from developers and users, upgrading their existing suite of products and building new ones. If you know of any critical dev tooling product that can be built, do reach out to the team, and be rest assured Biconomy will set up a working group within a week. We have firm belief in the team’s ability to build world-class products and help accelerate digital asset’s adoption to billions.

What Is Biconomy?

Biconomy simplifies blockchain transactions for developers to build on and end-users to interact with. Biconomy Network is a decentralized network of nodes/relayers that relays different types of transactions within or across blockchains in a non-custodial way.

Biconomy’s relayer infrastructure is a simple Plug and Play for developers. The SDK is extensively used by a diverse range of dapps across DeFi, gaming, social media, and blockchain wallets to improve the User Experience. Biconomy’s tools allow developers to integrate a wrapper around transactions and use Biconomy’s relayer infrastructure to provide quick and gas-optimized transactions to the end-user.

Product Traction

Biconomy relayer volumes have grown at an average rate of 60% MoM in terms of transactions processed and 100% MoM in terms of US$ value in 2021. Hyphen has already done more than US$ 3M in cross-chain transfers at lightning speeds.

Challenges In Current Landscape

Imagine building a Web2 company without the likes of AWS, Stripe, Heroku, Postman. Platform-as-a-Service is an important building block while establishing the tech ecosystem. As the industry matures towards mass adoption no developer must need to build all these tools from scratch, instead, focus on the core product. Biconomy helps developers build more user-friendly products in an automated manner and serves as the invisible underlying tooling layer powering the blockchain economy.

Web3 applications today face major roadblocks to user adoption in the form of terrible user onboarding & transaction experience. Almost every interaction with the dapp is a complex transaction for the users. Many of these problems can be solved – but it requires developers to build their own infrastructure which is a monumental task in the ever-pacing Web3 world.

User Experience And Onboarding

• The necessity to pay gas fee
  Every time the user uses an application, they have to pay gas. Most users do not expect to pay a transaction fee every time they interact with the dApp and it deters away many new users, especially the ones who are used to the simplicity that Web2 offers.
• Users can only pay gas in ETH ( or other Layer-1 tokens)
  Users can only pay in ETH, which they may not have at the time. The current wave of retail users do not hold ETH by default nor do they intend to buy it. Moreover, users prefer to pay transaction fees in a more stable currency of their choice.
• Expensive and volatile gas
  Due to increasing congestion in the Ethereum network, users are experiencing increasingly volatile and expensive gas prices. Users also have to constantly monitor gas oracles to determine the gas price best suited for their needs.

700 gwei gas fee results in a ~ US$ 800 swap on Uniswap

• Long AND complicated onboarding process for new users 
  • Create Exchange Account: sign up, KYC, transfer funds, purchase ETH
  • Procure wallet: download wallet, transfer ETH from exchange to wallet
  • Use dApp: sign up, link wallet, pay gas for every transaction
• Proficiency in complex blockchain technicalities is required such as using MetaMask, signing transactions, understanding gas, etc. If the project is on layer 2, they need to know what that means and be able to change RPC endpoints manually.
• Pending and stuck transactions can force users to wait for minutes and even hours before they can carry on interacting with the dapp. And sometimes the transaction fails altogether.

Liquidity Fragmentation Across Chains

Ethereum, home to the largest dapp ecosystem is experiencing high demand but has limited block space and consequently high gas (transaction) fees. High transaction fees price out small retail users and dapps out of the ecosystem. Several layer-1s and layer-2 scaling solutions are working on these problems. On-chain dapp activity will likely move towards these low-cost, retail-friendly ecosystems. 

In 2021, we are finally in a multi-chain market structure. There are more than 100 active public blockchains, many of which have their unique applications, users, geographies, security models, and design trade-offs. Despite what individual communities believe, the number of these networks will likely continue to increase into the future.

This type of market structure necessitates the need for interoperability between these distinct networks.

With multiple chains coming into the picture with different infrastructure and standards, there is a lack of composability.

Different scaling solutions and blockchains will co-exist, each specializing in their own activities, economics & use cases. However, without a viable interoperable solution, we will have clusters of booming but isolated ecosystems severely reducing network effects and composability. Currently, moving between Layer-1 base layer & various Layer-2s, sidechains, & other scaling options is slow, expensive & complicated. Moving a user’s assets from Polygon to Ethereum, for instance via the Matic bridge can take anywhere from 30 mins to 7 days, several steps, and as much as US$ 100. 

It is not only capital that has to move smoothly between these chains, the communication & contract calls across these chains are also non-trivial and highly technical. DApps & users should be able to communicate efficiently across the whole multi-chain web in real-time.

Technical Challenges For Developers

Developers who want to solve the user experience issues have to build an internal relayer infrastructure from scratch. This infrastructure would involve active management and maintenance including tasks.

For managing ERC-20 payments, developers would need to hold a treasury and apply risk management for the acceptance of ERC-20 tokens for users wanting to pay gas fees. Making all of this gas efficient would require implementing gas optimization techniques such as management and deployment of gas tokens as well as transaction batching. Additionally, building such a system is a costly endeavor that distracts developers from focusing on their products.

Biconomy Solution

Biconomy enables developers to build applications easily and reduce friction between dapps and end-users. The biconomy SDK has three main products under its hood:

Gasless

Gasless allows dapps to enable gasless transactions on all their smart contracts.

How?

Biconomy does this through a technique called meta-transactions (meta-txs). In this case, Biconomy relayers pay the gas fees which then are paid back by the Dapp developer at the end of the month. Two important components of the Biconomy relayer network are Executors and Validators.

• Executors run the relayer nodes and they will be responsible for executing the meta transactions on the respective blockchain 
• Validators help secure the network by verifying the executor’s transactions.

Biconomy’s SDK (Mexa) is a javascript-based implementation that can be easily integrated into a dapp.

Meta transactions and Relayer Infrastructure

Meta transactions wrap single or multiple user transactions and send them to the relayer infrastructure which manages the gas and submits the transaction on-chain.

Meta transactions allow fee absorption by developers. This smoothes out the UX for users:

• Easy on-boarding: no exchange account or wallet required 
• No need to worry about gas fluctuation

Meta transactions on Layer 2 are becoming increasingly popular as they make user acquisition easier and cost-effective for dapps. 

Transaction Batching

Meta transactions are used for transaction batching which helps the developers by providing:

• Gas Optimization: pay the gas fee once for multiple transactions 
• Transaction Management:
  • Decrease dapp response time
  • Lowers transaction dropping 
• Network improvement: 
  • Reduce on-chain load which decreases the frequency of network congestion 
  • Decrease gas fee volatility

The batching process can be achieved by using the relay subsystem as a layer that also opens up the scope for off-chain scaling and many other governance derivatives.

Dashboard

The dashboard allows developers to manage all dapps & their users, apply meta-tx limits on API/user level, create APIs for smart contract methods. The dashboard is accessible to all dapps using the Mexa SDK.

Forward

Forward allows dapps users to pay their gas or transaction fees in any ERC-20 token.

For many dapps, especially DeFi dapps, it is impractical for teams to cover for their users due to the sheer number of transactions, and users have the funds to cover the gas (but not necessarily in ETH). 

Biconomy relayers handle the ETH gas fees in the backend – pay optimal gas fees and make sure transactions are never stuck. In any moment of congestion, relayers automatically detect this and gradually bump up the gas fees. More about how that works here.

This feature opens a ton of opportunities for developers to build various use cases such as:

• DeFi protocols and wallets can improve their user experience by allowing their end-users to do everything without having to own ETH
• Dapps can onboard new users in seconds by giving a sign-up bonus of their own tokens. Users can start interacting by paying gas using these tokens
• Financial applications can allow users to pay gas in stablecoins. Users of such dapps prefer to save up their ETH and would rather pay gas in DAI, USDT, USDC, etc
• Blockchain games can allow players to pay fees in their own tokens

Hyphen

Hyphen enables speedy, gas efficient deposits and withdrawals between Layer 1-Layer 1, Layer 1-Layer 2, Layer 2-Layer 2, and eventually cross-chain.

Hyphen will:

• Connect all Layer-2 and base layer platforms seamlessly, allowing for cheap and gas-efficient fund transfers
• Facilitate smooth flow of liquidity across various platforms, increasing the capital efficiency in the system
• Provide a way to exchange data across chains (cross-chain interoperability), allowing apps within those chains to read and write state to each other (also called composability). 
• Navigate various blockchains through frictionless user experience. Users don’t have to address issues of moving assets from one chain to another. 
• Allow for faster onboarding and exit from Ethereum Layer-2s.

Overall, the platform will provide a range of use cases leveraging and extending the composability of DeFi across various blockchains. It will promote liquidity migration and encourage developer efforts to build on emerging chains and solutions. All of this will eventually lead to a thriving multi-chain ecosystem. 

How?

Hyphen leverages the Biconomy network of validators and executors. Each chain has a liquidity pool that earns a portion of the transfer fee for supplying liquidity to the cross-chain transfer. To ensure maximum capital efficiency Biconomy performs periodic rebalancing whenever there is less liquidity on a particular chain. 

Let’s say a user wants to transfer 100 USDC from the source chain Blockchain 1 to the destination chain Blockchain 2 via Hyphen.

1. User initiates the transfer, and the protocol takes her 100 USDC & deposits to the source chain Liquidity Pool Manager contract.
2. Validators see this deposit transaction on the source chain and create a Biconomy chain transaction.
3. Once a majority of the validators reach consensus and the deposit information is verified, the data is added to the next block in the Biconomy blockchain.
4. The executor listens to this Biconomy chain for cross-chain transfer transaction and initiates a transaction on the destination chain as per the user’s request.
5. This transaction will release the funds from Liquidity Pool Manager (on the destination chain) to the user wallet address after deducting the fee. (This receiver address can be different from user’s wallet address as mentioned in the deposit transaction)

What’s a cross-chain contract call and how does Biconomy do it?

Simply speaking, cross-chain contract calls allow users to communicate with smart contracts on other blockchains. Cross-chain contract calls open up Web3 users to a myriad of smooth multichain actions.

Let’s say a user has funds on Ethereum (Blockchain 1) and wants to add liquidity to QuickSwap on Polygon (Blockchain 2).

1. She initiates the contract call on Ethereum (source chain) & sends 100 USDC to be added as liquidity.
2. The call data of this contract call contains the necessary information to add this liquidity on QuickSwap on Polygon.
3. The smart contract on Ethereum forwards that call to the Gateway Smart Contract (GSC) on the Ethereum chain (blockchain 1).
4. Validators see this GSC transaction on Ethereum and each validator verifies this information and puts it in the Biconomy chain as a Biconomy transaction.
5. The executor listens to this Biconomy chain transaction and interacts with Polygon GSC (destination chain).
6. Polygon GSC calls the QuickSwap Smart Contract on Polygon (blockchain 2) and passes the call data to it.
7. The USDC sent by Mary gets added as liquidity to QuickSwap on Polygon.

As depicted above the possibilities via this technology are vast. Borrowers can lock collateral on one chain and borrow on another. DEX aggregators can route transactions through multiple chains and yield aggregators can deploy assets on multiple chains. Yield farmers can provide liquidity on one chain and farm rewards on another chain. Essentially, most projects deploying multi-chain strategies can utilize Biconomy’s tech stack to smoothen cross-chain operations.

Features Of Hyphen

• Security
  The Biconomy bridge’s security relies on the underlying Executor node network. This network can initiate withdrawals from the liquidity pool. But each transfer is possible only when it’s approved by 2/3rd of the network’s executors. Biconomy plans to decentralize the Executor network as much as possible. The goal is to have 80+ Executors on the network.
  
  If more than 2/3rd of the network’s nodes are found malicious, Biconomy has designed a backstop mechanism to prevent them from stealing any amount more than what they’ve staked. In any given transaction, the Executors can’t make a transfer larger than 2/3rd of the network’s total stake. The nodes involved in ill-intentioned activities will have their stakes slashed. These stakes will be awarded to affected users. That is, if user funds are lost, they’ll be reimbursed through slashed collateral.
  
  Thus, Executor nodes are disincentivized if they’re bad actors. The rewards of being honest outweigh the cost of being malicious.

• Optimization of Staked Capital
  The staked supply needs to scale proportionally with the economic throughput being facilitated. This will be achieved by:
  • Adding more Executor nodes
  • increasing minimum stake requirements as cross-chain transaction volume increases
  • As the volume grows, rewards for validators will also increase in line with it
• Scalability
  Hyphen’s design can accommodate not just cross-chain asset transfer but also contract calls. The Biconomy team is currently researching this as part of the product’s future roadmap.
• Speed
  Hyphen is one of the fastest cross-chain bridges out there today. A cross-chain transaction between Ethereum and Polygon can be achieved in seconds through the platform as opposed to more than twenty minutes through the native bridge.

Partnerships 

Find the full list of partnerships here.

Business Model

Biconomy is monetizing their plug and play, custom APIs, and SDKs through

1. B2B: Monthly subscriptions
2. B2B/B2C: Per Transaction fee

Biconomy native token is $BICO.

• BICO is a Governance and a Work token
• BICO will be staked by the decentralized relayer nodes to facilitate transactions and receive fees
• Network fees are paid by the dapps and the end-users 
• Token holders can vote on decisions related to protocol standards and treasury fund allocation

Network activity will accrue value to the BICO token and vice versa

Milestones And Roadmap

Biconomy plans to move to a decentralized model in 2022 with the token launch. The decentralization of Biconomy Network is covered in the litepaper here.

Team

The Biconomy founders come with significant experience in the evolving blockchain technology. 

Ahmed is the CEO of Biconomy. Previously, he was the MD at Viewfin, a Shanghai-based blockchain service company, for a couple of years, before he moved to Dubai to strengthen the company’s MENA network. Founder of the Encrypted podcast which is MENA’s largest podcast dedicated to blockchain.

Aniket looks after Operations at Biconomy and was previously at Binance. In 2018 he became an angel investor and advisor for a few blockchain projects. He is an MBA graduate from Fudan / MIT Sloan School of Management. He is an advisor to the Matic network and has worked with Viewfin’s research team.

Sachin leads the technology development, he was the technical lead at Stack City, a Chinese blockchain company. He was previously a blockchain developer and he has 8+ years of full-stack software development. He has worked with Samsung & Make My Trip.

The trio came together to help developers of dapps with Biconomy. ‘Bi’ refers to ‘token’ in Chinese; Biconomy, therefore, signifies a ‘token economy’. With the seven-member team geographically dispersed across India (Delhi) and the UAE (Dubai), daily calls on tech and strategy ensure progress and planning for the lean startup.

Resources

Website Medium Documentation Litepaper Telegram Twitter Github Mail

Disclosure and Risk Warning

Woodstock Fund is an investor in Biconomy. Every financial product, asset class, or investment has risk. A cryptocurrency (also known as digital tokens, digital coins, or crypto(s)) is no different. That is why it is important for users and limited liability partners to be aware of the potential risks present in cryptocurrency and blockchain projects. You should not invest funds in the cryptocurrency market that you are not prepared to completely lose; i.e., only allocate risk capital to digital tokens. Furthermore, we will not accept liability for any loss or damage that may arise directly or indirectly from any such investments.

Author: Kratik Lodha