4RC x Tokemak Deep Dive
4RCapital hosted Liquidity Wizard for a Twitter Spaces -- check out the notes if you missed it!

4RCapital x Liquidity Wizard
Editor's Note: Pardon the formatting – the blog doesn't like nested bullets. More readable as a Gist.
Carson Cook Background
- Ph.D. 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 with 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 don't 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 1990s 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 for bootstrapping, 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 and 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 third-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 reduces 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/Citadel
- No pairing 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
- “What's 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 third-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, zero 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!