State of the Reactor - February 10, 2023


Lessons Learned From Tokemak v1

  • The Tokemak team has used the experience gained from last year’s volatile market conditions to architect an improved iteration of the protocol.
  • DAO governance token markets are high-volatility and low-volume, and do not generate enough revenue or fees to remain profitable.
  • Pool2 incentives led to predatory farming practices rather than aligning the various participants.
  • These incentives are a double-edged sword: while their impact is typically positive during a bull market, they tend toward a death spiral in a bear market.
  • Large players hold an unfair advantage over smaller players.

Tokemak is Expanding into Tokemak GP [9:09]

  • Tokemak GP, “General Purpose,” is a major v2 redesign of the protocol that aims to serve all token holders in crypto, rather than focusing on DAOs.
  • V1 was implemented with 50/50 AMMs (such as Uniswap) in mind, but the new mechanics will be generalized toward any liquidity needs in DeFi.
  • The new design will work to match the supply and demand for liquidity.
  • Risk and return will be much more favorable to the Tokemak protocol, with the protocol no longer bearing the cost of unprofitable deployments. This reimagines Tokemak from being a decentralized market maker to a more generalized liquidity network.
  • Rather than be dependent on fees earned from liquidity deployments, Tokemak v2 will earn platform fees, which will result in more consistent revenue and rate discovery.
  • The new design will allow for rate discovery for the cost of liquidity in DeFi.
  • A limitation of v1 was the need to perform offchain actions, such as liquidity deployment and Cycle rollovers. V2 will be implemented fully onchain, allowing the protocol to be easily deployed to layer-2 networks.
  • The foundation of Tokemak GP is the introduction of Liquidity Management Pools (LM Pools), which are able to accept external supply and rewards while being managed by the Pool Coordinator Logic. This liquidity is then deployed to external venues.
  • Tokemak GP allows custom LM Pools to be configured through a three-step process:

    1) Users may configure an IL pool or like-for-like (e.g., stablecoin pairs), provide assets, choose a deployment venue, select access restrictions, and provide external supply and rewards.
    2) The LM Pool must then pass TOKE governance.
    3) The pool is then deployed onchain and is ready for deposits.

  • The pool creation process is similar to that of Curve factory pools.
  • Tokemak GP will launch with a handful of pre-selected LM Pools.
bullet point list comparing Tokemak v1 with Tokemak GP
via Discord
diagram showing the basic building blocks of Liquidity Management Pools
diagram showing custom configurations of Liquidity Management Pools

Highlighting Tokemak v1 Achievements and Preparing for v2 [16:00]

  • Tokemak v1 has been operating in a “safe mode” throughout its life, but has still managed to generate material revenues.
  • Tokemak has safely operated with no hacks for over a year!
  • The treasury is currently valued at $29 million, with $17 million in stablecoins. This ample runway will allow the Tokemak team to continue to build out the full vision of the project.
  • Since launch, Tokemak has continued to tweak its reward structure toward users, and has gained valuable understanding of incentive design for the rental rate of liquidity.
“Introduce a transparent, free marketplace where these rates for liquidity rental are efficiently determined.” - LiquidityWizard
  • Tokemak has continued to support its Reactor projects and LPs throughout the incredibly turbulent market conditions. The team is proud of surviving conditions that caused many other projects to fail.
  • Serving DAOs will continue to be a pillar of v2 design. However, v2 will aim to serve more desirable markets, with increased flexibility to adjust to market conditions.
  • Throughout the past Cycle, the team has worked with partners to gain insight into their liquidity needs and struggles. This knowledge has been instrumental in the v2 design. [20:30]
  • One of the primary goals of v2 is for Tokemak’s rates to become the market rates.
“The Singularity point becomes when the demand for this liquidity marketplace fully meets the needs for the LPs who are looking for an efficient form to deploy their assets. When the two overlap, the Tokemak rate becomes the market rate.”
  • Achieving this goal will allow Tokemak to become the plug-and-play solution for protocols to deploy liquidity with predictable incentives and no upfront cost.
  • In Tokemak v1, ETH exposure is added to token pairs, which reduces the addressable market. V2 eliminates this requirement, but the design continues to create a flywheel effect for the utility of TOKE.
  • The vision for Tokemak GP is to create a symbiotic relationship between parties willing to provide liquidity, and to be utilized by both LPs and DAOs.
  • Additional functionality, such as a DAO-centric dashboard, could be built on top of Tokemak to cater to the needs of specific types of users.
  • Compared to v1, there will be fewer restrictions in the guardrails for deployments and less dependence on Protocol Owned Assets for mitigations, which will enable more efficient deployment of liquidity.
  • A common misconception with v1 is that a larger TVL was better for the protocol. However, in v2, the increase in efficiency will allow higher TVL to be utilized in beneficial ways for the protocol.
  • V2 will be a phased launch, prioritizing the markets that are most useful to participants.
  • V2 introduces significant UI updates that will allow users to get a clear understanding of their liquidity deployments.
  • More details will be shared during the next State of the Reactor!
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