4RC x Tokemak Deep Dive

4RCapital hosted Liquidity Wizard for a Twitter Spaces -- check out the notes if you missed it!

4RC x Tokemak Deep Dive

4RCapital x Liquidity Wizard

Editors Note: Pardon the formatting, the blog doesn't like nested bullets. More readable as a Gist.

Carson Cook Background

  • PHD in Physics
  • Fintech
  • Wealth Management
  • Got into crypto 2018
  • Wanted to solve liquidity issues in the crypto space

General Thesis

  • internet of value replacing internet of data
  • value flow is new data flow
  • liquidity plays paramount importance
  • liquidity is bandwidth
  • “broadband moment” unlocks potential of apps
  • “broadband moment” of liquidity is Tokemak

Thesis Details

  • Partner w/ builders and market makers to solve liquidity issues and market making issues
  • Market making started on CEX, moved to DEX
  • Passionate builders and teams were building DeFi protocols, web3, that dont have direct connection to financial industry
  • there needs to be a DeFi native solution to enable builders to get to market
  • get rid of headache for DAOs and builders

“Liquidity == Servers”

  • Compare liquidity to servers as pieces of critical infrastructure
  • Tokemak flips the economics
  • Effectively, analogy is “each building team is trying to solve bootstrapping liquidity. For each project. Lots of mindshare, exorbitant fees to MMs”
  • Like the 90s where IT had to deploy massive expensive servers. now, easy with AWS
  • Expensive to pay market makers or inflation via emissions
  • “Liquidity as a Utility”
  • More capital efficient

“Touch on Sustainability”

  • Post DeFi-summer, 3-4 yrs worth of dev happened in a few months
  • Why? Liquidity mining, staking, yield farming was good to bootstrapping, but powered by inflation “for a good thing” but not sustainable.
  • How can we move off of inflation?
  • Like pumping oil, limited reserves, need to find sustainable energy source. Same with liquidity. Inflation worked at first, but now we need sustainable liquidity.
  • Get started with emissions (inflationary rewards)

Participants

  • LPs provide assets into system
  • LDs: holders of TOKE, direct liquidity wherever needed across DeFi
  • Balance is supply & demand.
  • Lots of LDs, LPs get more APR
  • Lots of LPs, LDs get more APR
  • At first, LPs are paid via TOKE emissions to bootstrap

"Phase 2"

  • After paying out TOKE, internalize rewards (fees, spreads (diff between bid and ask), asset rewards)
  • Protocol takes these assets, PCA grows
  • Argument 3rd party liquidity supply
  • Eventually, protocol (and therefore TOKE holders) own these assets.
  • Can stop paying TOKE emissions, use PCA as liquidity
  • THE SINGULARITY: All L1s, L2s, can be supplied by PCA liquidity

“Single Sided Liquidity”

  • As an LP, you are better aligned by providing liquidity / staking on Tokemak
  • Lended tokens can be used to express short position
  • Token-as-liquidity reduce friction of value flow
  • Can only help improve fundamental reach and value of project you are supporting
  • LPs are wired to think pooling equals ASSET:ASSET
  • We break this apart
  • New users can be confused by this complex process
  • Tokemak simplifies this via abstraction
  • Not capital efficient — LPs need both sides
  • Tokemak is single-sided, like a pool 1
  • but has benefits of pool 1&2
  • Also get back tAssets
  • System mitigates IL by advanced surplus mechanic
  • removed IL risk from LPs and routed to other parts of the system
  • remove friction for liquidity flow and users
  • “To summarize, the advantages are”
  • Not needing to worry about IL
  • not needing to track various returns, managed my LPs
  • Carson: “Front page of liquidity”
  • never worry about paring, wallet-efficiency
  • (will be rapidly increasing supported tokens, any token hash)
  • Very attractive rewards
  • Tokemak controls APRs
  • Initial group of
  • Balancer, Uni, Sushi, 0x
  • Quickly expand to other venues
  • “How would you compare to Bancor”
  • Tokemak is meta-liquidity layer, can add Bancor as a venue
  • Uniswap to Coinbase, we are to Jump Trading / Citidal
  • No paring against TOKE, not dominant asset (value doesn’t flow across TOKE)
  • TOKE == tokenized liquidity
  • We don’t trigger market selling/buying
  • we have sidelined reserves for ILP
  • TOKE Curing, TOKE Holders have assets seized to resolve IL
  • “Whats after Exchanges”
  • Expand across exchanges
  • Other dimensions
  • What is supported as liquidity
  • expand beyond ERC20 into ERC721
  • Where is it supported
  • Expand into money making protocols, vaults. e.g. Yearn.
  • Go to different L2s and cross chain to other L1s
  • System is designed to operate on liquidity cycles
  • Evolve into an Any-Any protocol
  • LDs could direct liquidity cross chain regardless of L1

“Who can be a Liquidity Director”

  • Relevant LDs
  • Users (active trading, farming)
  • DAOs
  • Investors, VCs
  • Exchanges
  • Market Makers
  • “All DeFi Participants”
  • Mostly power users
  • Inundated with requests from DAOs
  • VERY POWERFUL FOR DAOS
  • Working with groups to replace Pool 1 and 2 with tAsset staking
  • Pool 1 exist to remove sell pressure
  • i.e. collateral and governance
  • not much utility or value
  • Pool 2 supports liquidity
  • DAOs carve up pie
  • t1 Pool, instead of ABC is tABC pool
  • Incentive users to stake in tokemak
  • users get paid same amount even with single asset stake
  • liquidity is provided across defi
  • protocol earns TOKE
  • DAOs becomes powerful LDs
  • Exchanges
  • Sushi, Uni
  • Tokemak has $500mm in TVL
  • Exchanges will want to acquire TOKE
  • Instead of directing liquidity for a certain token
  • Exchanges want to route liquidity to their venue
  • Exchanges will fight to control reactors in order to have deeper liquidity and tighter spreads

Tokenomics

  • Read Medium Article
  • 34% earmarked for LPs/LDs in system
  • May never need to reach 100mm max cap
  • system dynamically adjusts APR
  • LD/LPs actions affect each other
  • “Play Balance the Reactor”
  • like a real reactor
  • LPs will be on left, LDs on right
  • If overweight on one side, increase APR on other side
  • can max out emissions that occur during peak efficiency
  • more value system provides, more emissions
  • efficiency == more rewards

“Long Tail effect of fee capture”

  • ex. Sushi
  • you earn SUSHI
  • these fees/rewards are internalized into the PCA
  • DeFi-trading weighted portfolio grows via the PCA
  • TOKE changes from being “Tokenized Liquidity”, into being “Your share/claim on the portfolio of PCA”
  • Intrinsic value of TOKE is backed by PCA
  • e.g. Tokemak has 50b of PCA owned free and clear
  • Could vote to redeem/burn TOKE for share of PCA assets
  • “In addition to benefits of LP experience is the benefit of a crowdsourced yield farm pool”
  • Despite paying out TOKE rewards, long term you earn a claim on a yield farm portfolio via PCA

THE SINGULARITY

  • “How profound of an event is this”
  • The Singularity is point in time where the system no longer needs 3rd party LPs. Protocol owns enough assets free and clear
  • Thesis that liquidity is bandwidth, want spreads to go to 0
  • If you remove friction, market price should == market price.
  • Protocols can be highly efficient users, 0 spread allows value to move without waste
  • How does Tokemak monetize if there are no spreads?
  • can introduce new decentralized participants
  • post singularity, instead of withdrawing share of PCA, you can intro a decentralized manager e.g. Fund Manager that can do various trading strategies to generate returns on a huge pool of PCA

What’s next on the roadmap?

  • Next big event is the CORE event on September 28th.
  • Collateralization of Reactor Events
  • Community decides which reactors to launch
  • anyone with TOKE can vote to decide which of 25 assets to launch into the first reactor
  • can allocate any amount of votes
  • Week long period
  • A few weeks later, LD goes live.

Gas Optimization

  • Gas sucks right now, how do we optimize?
  • LPs and LPs (assets, or toke holders) only interact with surface contracts
  • manageable expense once in system
  • reallocating votes just requires a signature from wallet
  • handled by Tokemak DAO
  • Should be a nice UX

Dumb Down ILP. Who is picking up the bill?

  • Earnings in early phase, rewards are in TOKE
  • How do we protect the user’s principal
  • sidelines reserve of underlying asset
  • has done lots of modeling under varying circumstances
  • asset (put up by DAO)
  • if this surplus doesn’t cover, local TOKE is pulled from LDs
  • LPs are always made whole 1:1
  • Surplus mitigates most of IL risk
  • LDs then carry remaining risk

“What are you excited about?”

  • Team has been teasing NFTs
  • Can reward active users who have participated in degenesis, CORE
  • Utilize tAssets w/ NFTs

Hop in #the-leaky-reactor!

twitter contribute