Pilot Manual: Introduction to Tokemak


Tokemak is a protocol that enables sustainable DeFi liquidity.

Liquidity is the term used to describe the depth of assets within a market. In a DEX, liquidity is extremely important for enabling high-volume trades without causing large price slippage.
Liquidity Providers provide assets to be used as liquidity, and receive a share of returns via fees or emissions as rewards.

The Problem

  • Protocols have a difficult time coordinating users to pool liquidity across exchanges. They can incentivize users through high APY inflationary means (liquidity mining), but this is inefficient and extremely expensive.

The Solution

  • A protocol that eliminates the need to liquidity mine by allowing projects and users to pool tokens single-sided in a “Reactor.
  • This Reactor can have its liquidity directed to Sushi, Uniswap, Balancer, 0x, etc.
  • TOKE holders have the power to decide where this liquidity is directed — it essentially allows protocols to retain control over where liquidity goes, rather than have to incentivize users via emissions.
A Reactor is a liquidity pool on Tokemak composed of ASSET:TOKE. Liquidity Providers stake an asset (single-sided) into a Reactor, while Liquidity Directors stake TOKE in order to direct that liquidity.
Liquidity Directors stake TOKE in a Reactor in order to direct a proportional amount of liquidity to various venues. Directors receive rewards in TOKE.

Value Capture

  • Tokemak pays TOKE rewards to LP/LDs, but keeps the liquidity yield for itself.
  • Long term, The Singularity occurs. This is when the Tokemak protocol has generated (via yield or partnerships) enough non-TOKE assets to be self-sustainable and no longer need third-party LPs.
  • The protocol ‘spends’ TOKE in the form of Reactor emissions to gain ETH, SUSHI, YFI, WBTC, etc., via fees. This gives TOKE inherited value — it is effectively backed by these "protocol controlled assets."
  • In addition to the value of liquidity directing, TOKE has the backing value of its treasury of protocol controlled assets.
Protocol Controlled Assets are assets controlled by the Tokemak protocol. Includes ETH and USDC received during the DeGenesis event and future LP fees generated by Reactor liquidity. High yield is sought after by directors — the revenue from that yield is added to the PCA.

DAO Partnerships

A project’s DAO could decide to buy a large amount of TOKE (or do a fair swap directly between the DAOs), and create a “Reactor” pool for their token, rather than emit costly APR of their token to incentivize users to pool on various DEXs.

Now, they have a Reactor with a large pool of TOKEN, as well as the TOKE voting power to decide where to direct that liquidity.

For example, they project may decide that they want to add liquidity to the Sushi pool, so they vote to direct their Reactor towards Sushi.

Liquidity Directing

As the Tokemak network bootstraps itself, it needs third-party liquidity from users.

That liquidity is pooled to various places, like Sushi, vaults, farms, etc. Liquidity directors (TOKE holders) decide where to move this hot ball of liquidity -- generally expected to seek high yield/returns.

This directed liquidity earns yield. For example, pooling at Sushi can earn you SUSHI. This yield goes to the Tokemak protocol. Users are rewarded in TOKE emissions, but the protocol itself is rewarded with these non-TOKE assets, which are added to the protocol controlled assets.

The Singularity

Eventually, the Tokemak protocol will earn enough yield from the liquidity deposited, as well as from non-TOKE assets that are accumulated via partnerships (as described above), that it doesn’t need users to deposit ALCX, FOX, OHM, etc.

The protocol itself will have a vast treasury from yield-seeking behavior. At this point, Tokemak is self-sustaining. TOKE emissions stop, and instead, TOKE holders are now entitled to decide how to use their power – e.g. they can vote to pay themselves some of the non-TOKE generated fees.

There will always be massive utility for TOKE as an asset that can direct this hot ball of liquidity, and after The Singularity, TOKE itself will effectively be “backed” by these protocol-controlled-assets, giving it intrinsic value via the index of assets it controls.

Most protocol treasuries are “valuable” only in the sense that their own token has market value. But if that token gets dumped, the treasury also becomes worthless. As The Singularity approaches and comes to fruition, the Tokemak protocol's TVL will be comprised of non-TOKE assets, effectively causing TOKE to be an index of the various assets it's backed by.

The value of TOKE comes from the inherit value of the protocol controlled assets it represents, as well as the value of being a super-powered governance token that allows stakers to direct liquidity.

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