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Compared to traditional financial (TradFi) institutions, decentralized finance (DeFi) protocols offer a plethora of benefits to users. Scalability, flexibility, access democratization and transparency are among the key advantages of trading and investing on-chain rather than through banks and other TradFi entities.
However, along with its benefits, the DeFi industry’s many associated issues have put the brakes on its wider adoption. One such area is compliance with anti-money laundering (AML) requirements. Privacy of customer transactions is another area where DeFi protocols may struggle due to the public nature of blockchain platforms. To complicate things even more, AML regulations and transaction privacy are often onerous to optimize at the same time.
Pencils Protocol (DAPP), a leading DeFi application on the Scroll Layer 2 network, has adopted a number of measures to ensure that AML requirements, transaction privacy, scalability and flexibility of on-chain operations are all maintained simultaneously in a system commonly referred to as permissioned DeFi. This provides a holistic solution whereby users can enjoy both the perks of DeFi — such as efficiency, transparency and autonomy — and the benefits of TradFi, namely security and compliance. The protocol acts as a comprehensive DeFi solution that creates secure and flexible trading opportunities with products such as auctions, yield aggregator services, farming vaults, restaking and more.
Having started out in early 2024 under the name PenPad (PDD), the project rebranded to Pencils Protocol in May 2024 and launched its native token in September. Despite being one of the newest DeFi protocols in the Scroll ecosystem, Pencils Protocol has already grown to become the network's largest DeFi app (as of Oct 8, 2024), with a total value locked (TVL) of around $286 million.
Key Takeaways:
Pencils Protocol is a DeFi platform that offers users yield farming, vault strategies and on-chain auctions for blockchain native assets and RWAs.
The protocol is based on Scroll, a scalable and cost-efficient Layer 2 zkEVM network linked to Ethereum.
Launched in late September 2024, the protocol's native token, DAPP, is used for governance, token farming, auction collateral, access to exclusive vault benefits and payments in the platform's virtual shop.
Pencils Protocol (DAPP) is a decentralized app (DApp) on the Scroll Layer 2 chain that offers a wide range of DeFi products, including auctions, yield farming, vaults, liquid staking and restaking. Taking advantage of Scroll's zero-knowledge (ZK) rollup platform, the protocol features a high degree of scalability, cost efficiency, cross-chain interoperability and integration with the Ethereum (ETH) blockchain.
The protocol offers flexible and innovative DeFi products while maintaining a Permissioned DeFi infrastructure through a combination of mechanisms, such as a system of identity verification called Proof of Humanity, KYC/AML regulations and ZK technology.
The project was launched in February 2024 as PenPad (PDD) before rebranding to Pencils Protocol in May 2024. Pencils Protocol’s native token — inventively and attractively named DAPP — debuted in September 2024.
Pencils Protocol relies on Scroll's ZK technology to offer transaction scalability, security, privacy and cross-chain interoperability with Ethereum. Scroll operates a ZK-based Ethereum virtual machine (EVM)–compatible rollup platform that makes it easy for Pencils to offer a highly efficient and secure trading environment that features a variety of assets popular within the Ethereum ecosystem.
While Pencils Protocol offers a wide variety of DeFi products, the platform's three main products are auctions, yield farming, and vaults designed to run predetermined strategies. This last product type offers a variety of advanced strategies, enhanced liquidity pools and various on-chain synthetics. Pencils Protocol extensively uses Ethereum's ERC-4626 standard for tokenized vaults.
Other DeFi products on Pencils Protocols include various liquid staking and restaking opportunities via Scroll's native gateway. Additionally, in July 2024, the project team announced an upcoming crypto lending feature to be integrated into the product line.
Pencils. a community rewards points system that the protocol actively leverages, is considered central enough to operations to be rebranded under the protocol’s name. Users can earn Pencils in two primary ways: staking and participating in the project's marketing initiatives.
A major way to earn Pencils points is by using the protocol's staking service. For every 1,000 USDC equivalent staked, users can expect one Pencils point per day. Contributing to the protocol's marketing campaigns and overall growth is another way to stock up on these points. For example, anyone who contributes to the ecosystem development as an influencer, brand ambassador or business partner earns Pencils points.
Pencils points offer a variety of benefits and exclusive access features:
Exclusive allocations during token launches for projects on the protocol
Purchases of NFTs and other products through Pencils Protocol's online store
Priority access to the protocol's airdrops
Access to high-leverage opportunities available within the protocol's vault products
Pencils Vaults are tokenized vaults designed to optimize yields through deposit staking and LP staking. Their deposited assets are used for yield farming, and are reinvested through multiple platforms via predetermined yield strategies. Users can invest in these vaults using liquidity provision (LP) tokens from the Pencils Protocol Vaults Pool.
Vaults support leveraged trading and offer users great flexibility and customization when it comes to setting their preferred leverage levels. To further increase yields, users can draw on the vaults to borrow additional funds to invest. The interest they pay on these borrowed funds is used to reward those participating in Pencils Protocol's yield farming.
Yield farming and leveraged yield aggregation services are also among the key products on Pencils Protocol. These products allow DeFi traders to maximize asset utilization and benefit from competitive yields. Farming yields are funded mainly through the interest paid by borrowers on the protocol, as noted above. The following types of assets are supported for farming on Pencils Protocol:
The protocol will also support Scroll's native cryptocurrency upon its launch. In addition to yields, the farming products on the protocol also provide rewards in Pencils points.
Pencils Protocol also offers auction services for various assets, such as blockchain-native assets and tokenized real-world assets (RWAs). It's an all-inclusive auction platform on which both digital and physical assets in tokenized form can be listed and traded. Users can benefit from these auctions by snapping up assets at discounted rates. As of early October 2024, Auctions products available on the protocol are limited, with the project mainly focused on its Vaults and Farming offers.
However, it's likely that auction services will also catch up in the future, as clearly indicated by the protocol’s positioning of Auctions as one of the essential products in its communications.
Pencils Protocol's native crypto token, DAPP, is used extensively throughout the platform for the following functions:
Governance: Token holders can participate in governance votes to decide on changes to and the future direction of the protocol.
Token farming: Earn yields and rewards by staking DAPP in the protocol's farms. Stakers are issued the pDAPP token, DAPP's staked version, at a ratio of 1:1 as confirmation of their deposits. The pDAPP token can then be staked or used for liquidity provision to earn additional yields.
Collateral in auctions: In order to list their assets in the protocol's Auctions, sellers need to lock a requisite amount of DAPP as collateral. This requirement acts as a safety measure to help prevent fraudulent auction listings.
Exclusive benefits for vaults: Vaults funded using DAPP provide additional benefits, such as access to exclusive strategies and higher leverage ratios.
As a payment asset in the protocol's virtual shop: DAPP will be used in the platform's virtual shop to enable flexible trade in a variety of items, including non-fungible tokens (NFTs), RWAs, derivatives products and reward points.
The DAPP token’s launch in late September 2024 was accompanied by an airdrop campaign that allocated 3 million DAPP to eligible users. Two-thirds of this amount will be distributed based on users' Pencils points holdings, while the remaining 1 million is reserved to reward active participation in the protocol's activities.
DAPP’s total supply is 100 million. The chart below shows the token's supply distribution shares.
The DAPP token is available on Bybit as a Spot pair (DAPP/USDT). Additionally, you can take part in a campaign dedicated to the token to grab a share of the total 200,000 DAPP prize pool. Valid through Oct 11, 2024, this campaign rewards new Bybit users who deposit at least 125 DAPP, or deposit 100 USDT and trade 100 USDT worth of DAPP in their first Spot trade. Existing users can also earn DAPP rewards by trading at least 1,000 USDT worth of DAPP on Bybit’s Spot market.
As of today (Oct 8, 2024), the DAPP token is trading at $0.2163, which is 79.5% lower than its all-time high of $1.06 on Sep 27, 2024, and 2.3% higher than its all-time low of $0.212, recorded earlier today.
Long-term price forecasts for DAPP are generally bullish. DigitalCoinPrice predicts an average rate of $0.65 in 2025 and $1.88 in 2030, while CoinCodex expects the token to rise to a high of $1 in 2025 and to decline slightly to a potential high of $0.84869 in 2030.
With its focus on innovative farming and vault products, Pencils Protocol is emerging as a next-gen decentralized platform for active DeFi users. In addition to its core products, staking and restaking opportunities are also available on the platform. Once the protocol begins offering a richer variety of auction opportunities, it will certainly qualify for the title of a comprehensive DeFi solution. If yield optimization, advanced strategies and/or access to discounted assets are up your alley, Pencils Protocol might be well worth checking out.
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