4RC x Tokemak Deep Dive

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!