The Pillars of Chronos Pt. 2— Introducing Maturity-Adjusted LPs

11 min readMar 20, 2023

Chronos has been meticulously designed to address the challenges faced by its predecessors. By incorporating innovative features and mechanisms, it aims to create an enduring model that benefits all participants in its ecosystem. In this article, we dive deeper into the maturity-adjusted LP positions and the impact they have on the Chronos ecosystem.
By carefully studying what’s worked — and what hasn’t — among other ve(3,3) DEXs and combining the very best features of each with brand new mechanisms that are designed to improve the “stickiness” of liquidity in our pools, we think we’ve come up with the optimal model — one that truly fulfills Solidly’s original vision, and aligns incentives in a way that’s maximally beneficial to every participant in the Chronos ecosystem.

Part One: The Story So Far — A Timely Recap

When the original Solidly was announced, it was touted as a “protocol for protocols” — the latest in a long line of innovations aimed at helping developers incentivize liquidity for their tokens. In crypto, as with any fledgling industry, the need for capital is ever-present. Liquidity is what helps projects grow, and having too little — especially early on in a project’s lifecycle — can lead to disaster. Projects are left with a difficult choice: either they can seek outside investment in the form of venture capital (an unattractive prospect for many teams), or they can try to incentivize users to provide liquidity for them. It’s this latter option — and the resulting “incentivization arms race” that’s followed — that’s produced the explosion in innovation and development we’ve witnessed over the past few years in the DeFi space.

What’s Cookin’?

In the beginning was the MasterChef. This token-emitting contract, first developed by SushiSwap, is still a critical piece of DeFi infrastructure to this day. The value proposition is simple: users provide liquidity to receive LP tokens, and these LP tokens can then be staked in the MasterChef to earn rewards — usually in the form of inflationary “governance tokens” — over time. The larger the liquidity position, the more LP tokens the user receives and the more inflationary rewards he or she earns from staking.

Unfortunately, while MasterChef does an excellent job of attracting liquidity in the short term, it’s less effective at sustaining liquidity for the long haul. So-called “mercenary capital” seeks out high APRs, dumps inflationary rewards into oblivion, withdraws liquidity, and moves on to the next. Protocols needed another mechanism to help their liquidity “stick”.

Stake It To Make It

This innovation would come in the form of single-staking vaults. Now yield farmers were given the option of staking their inflationary rewards to earn more inflationary rewards. The thinking here was that as long as users were staking their rewards, they weren’t selling them on the market. While this helped mitigate the effects of mercenary capital to a degree, it only delayed the inevitable. Once token prices dipped to the point that returns were no longer attracting, the end result was the same — users would unstake their tokens, withdraw their liquidity, and move on in search of greener pastures.

Locked & Loaded

Single staking would see a major upgrade with the release of the veCRV model. Users were asked not only to stake their rewards but to lock them in place for a pre-defined duration. In exchange, they were given control over the platform’s gauges — by locking their tokens, users gained the right to direct the flow of emissions to the liquidity pools of their choice. Pools that received more votes would receive a higher proportion of rewards, and these rewards could then be locked to increase the user’s voting power. While this has proven itself to be a popular model, it begs the question: what if market conditions change, and I want to exit my position? The veCRV model solved the problem for the protocol by creating a new problem for its users, and many investors were unwilling to take on the added risk that comes with locking capital in place for an extended period.

New Kids On the Block(chain)

At last, we come to the Solidly model — or ve(3,3) as it’s commonly called. Like the veCRV model, users are still incentivized to lock their emissions for an extended period in exchange for the right to vote on the platform’s gauges. Unlike the veCRV model, however, ve(3,3) introduced the idea of the veNFT. Now, a user’s locked position was represented as a tradeable ERC-721 fNFT. If a user wished to exit his or her position early, they now had the option of selling their veNFT over-the-counter through an NFT marketplace. This provided the user with an “out” in case market conditions turned unfavorable and represented a major improvement over the original veCRV design.

Part Two: The Liquidity Layer

Chronos is more than just a decentralized exchange. In building Chronos, our mission is to create a true liquidity layer for the Arbitrum network — one that benefits all participants, and makes it easy for projects of all types and sizes to incentivize token liquidity in an easy and economical way, letting them stay focused on what truly matters — building new and innovative technologies that help push the DeFi space forward.

The DEX as a Public Good

For projects looking to incentivize token liquidity, striking the right balance between short-term and long-term incentives can be tricky. Set emissions too low, and your project could fail to attract enough capital investment to become viable; set them too high, and you risk inflating away your token’s value and hurting your chances of long-term growth. Over the years, we’ve seen more than one promising project fail as a result of their inability to balance their tokenomics between these two extremes properly.

The ve(3,3) primitive is the latest attempt at solving this issue for projects. By shifting the incentivization onto a central “liquidity layer”, teams are given new options for incentivizing liquidity in a more economical — and therefore, more sustainable — over the long haul.

Option 1: Accumulate Gauge Voting Power — by amassing a large amount of voting control over the platform’s gauges, protocols can direct emissions to their tokens’ pairs. Doing so increases incentives for those pools without requiring projects to inflate their own token supply
Option 2: Offer Bribes to Voters — Projects that lack the time or the capital to build up their own veNFT position can bribe existing voters to get them to vote on their pools each epoch. Doing so requires a small capital investment but is, in most cases, preferable to high inflation
Option 3: Trade Fees — Once the tokens receive enough trade volumes that they generate substantial fees, the pools can sustain themselves as veNFT voters will vote for that pool to collect the rewards. This is the end state that all projects are ideally targeting for their liquidity.

For the DEX itself, all options are beneficial. By providing a strong incentive for protocols and other participants to lock their emissions, it helps defend the price of the native token, which helps maintain its utility as an incentive — the so-called “flywheel effect” that we covered in a previous article.

A Sticky Situation

As the latest iteration on the ve(3,3) design, Chronos hopes to address one final issue that no fork before it has done. While the mechanisms we’ve mentioned already go a long way toward attracting token liquidity, they’re less effective at retaining that liquidity over the long haul. So-called “mercenary capital” (really just users seeking the best return on their investment) is still motivated by high APRs, so while the ve(3,3) model is effective at bringing capital to the DEX, it’s less effective at keeping that capital stationary. As APRs change from one epoch to the next, liquidity providers simply move their capital to the pools that generate the highest returns. Liquidity is not “sticky” — it doesn’t stay in one place for an extended period — and these fluctuations make it difficult for protocols to accurately predict what their liquidity needs will be — and what incentives they need to offer — to help them reach their goals.

While ve(3,3) model did align the incentives of all the participants, it failed to align liquidity providers with the long-term success of the protocol.

The flywheel is robust in that there is a counter-cyclical effect helping support the DEX emission token price:

When the token price goes down, locking APR goes. Incentivizing purchasing of that token and supporting a downward price spiral.

This works in a vacuum. However, the system is very dynamic, with each participant acting in their own best interests, and the game theory has to be assessed accordingly. What we observed is a critical flaw in this flywheel: The moment the token price falls, LP incentives are lower, and TVL flees, chasing other yield opportunities elsewhere.

With a token price now down and TVL reduced, the value of locking the token is reduced (because the expected income is lower). Instead of allowing the market time to balance out the value of the token with the TVL and revenues, TVL flees and breaks the counter-cyclical effect protecting the token price and sustaining LP incentives.

This is a fundamental flaw in the model that Chronos will solve. Truly aligning all participants on the long-term health and sustainability of the platform, not just in the current moment but at all times in the future.

Part 3 — The Persistence of Time — Maturity-Adjusted LP Positions

In building Chronos, we wanted to find a solution that would make it attractive for users to keep liquidity stationary for longer periods of time. We studied every mechanism available to us before finally landing on the Reliquary — an upgraded version of the MasterChef, developed by veteran development studio the Byte Masons, that allows users to scale their token rewards in relation to time. We’re excited to be the first protocol on Arbitrum — and the first ve(3,3) DEX on any network — to implement this innovative design into our platform.

Introducing maNFTs — Maturity-Adjusted Liquidity Positions

Liquidity provisioning on Chronos works the same as on other ve(3,3) DEXs. Users deposit liquidity to receive LP tokens, which are staked to earn $CHR rewards. Upon staking their LPs in the Reliquary, users will receive a special fNFT — called maNFT — that tracks which tokens were provided and their amounts, as well as the amount of time that has elapsed since the position was staked.

These maturity-adjusted liquidity positions earn boosted $CHR emissions over time — 0.33X per epoch for 6 epochs — before maxing out at a 2X boost after 6 weeks.

After 6 weeks, the rate at which these maNFTs increase their earning potential will level off and continue earning rewards at the boosted rate until such time as the user chooses to withdraw their liquidity.

A linear curve was selected to ensure new LP depositors will still receive a fair share of rewards that will grow lock-step with their time at Chronos. It also maxes out at 6 weeks to ensure very early, and long-holding LP positions do not put the pools out of balance by receiving an extraordinary amount of fees, leaving none for new entrants.

Overall this will also mean new pools launching on Chronos should garner liquidity much faster as LP providers recognize the value of entering early and growing their boost over time. This is a benefit to protocols looking to source effective and long-lasting liquidity.

There is no locking requirement for maNFTs. Users are free to withdraw their liquidity at any time with no penalty. However, by doing so, they will forfeit any boost they’ve earned up until that point. If, for example, a user chooses to withdraw their liquidity and move it to another pool, they can, but they will enter that pool at the unboosted rate and will have to wait for it to build back up over time.

Users will also have the option of selling their maNFTs over the counter using an NFT marketplace like OpenSea or NFT Earth. In time, Chronos plans to release its own fNFT marketplace in cooperation with some of our partner protocols to help facilitate an active and frictionless trading environment for these liquidity positions.

This is also a method of introducing time value to liquidity. In a market where maNFT positions can be sold in a mature state, that liquidity position will be worth more than the sum of its underlying contents. This is because there is a time value to the maturity of the position in the form of boosted rewards.

A key market opportunity that will help support sticky liquidity on Chronos is the ability for maNFT LP position owners to sell their position on a secondary marketplace for a premium to the underlying assets. So instead of withdrawing their assets, they can get a premium for keeping them locked and passing them on. This is because potential buyers can realize increased yields vs. providing that liquidity themselves.

In this way, LP positions can become “liquidity bonds” that carry underlying yield; not only this, but they also appreciate over time.

This also means that liquidity providers with mature positions will be more anchored to Chronos, and in moments of temporary volatility, will be encouraged to stay in their LP position because abandoning their position comes with a cost — the cost of time.

All in all, the maturity-adjusted LP model benefits both the liquidity provider by introducing a time value component to their LP position, and it supports the protocol by creating a more sticky and robust TVL that will optimally support $CHR emissions.

At Chronos, time is money, and our liquidity providers will be rewarded for their time with us.

A More Mature Investment

The introduction of maturity-adjusted LPs marks a significant step forward for the ve(3,3) model. Best of all, it introduces exciting new incentives and game theoretical elements that have the potential to positively impact the Chronos flywheel and create new earning opportunities for all of the system’s participants.

Protocols — benefit from persistent, predictable liquidity. Capital will be less likely to shift from pool to pool each epoch in search of the highest APRs; liquidity providers will now have to weigh their options more carefully between short-term incentives and long-term earning potential. Projects can also easily increase their amount of protocol-owned liquidity by purchasing maNFTs directly from the secondary market.
Liquidity Providers — benefit from boosted APRs over time and have the potential to sell mature liquidity positions at a premium on the secondary market
$veCHR Voters — benefit from a supercharged bribe marketplace, as protocols compete to offer better incentives and higher APRs to lure liquidity away from competitor’s pools. Further, they can expect more predictable revenue streams as TVL will be less volatile.
Everyone — benefits from an improved flywheel effect, as mature positions help curb the effects of mercenary capital on the protocol health, and move maturity-adjusted positions into the hands of protocol participants that are more likely to lock their $CHR to $veCHR

Conclusion — A Timeless Solution for the DeFi Space

Through the introduction of maturity-adjusted liquidity positions, Chronos solves a fundamental flaw in the current ve(3,3) models' ability to attract and retain TVL. Because TVL is the lifeblood of a decentralized exchange, this will be a game changer in the current DEX market.

Chronos will stand as a testament to the power of innovation and the persistence of time. Its introduction of maturity-adjusted LPs marks a significant step forward for the ve(3,3) model, evolving from an exciting but experimental primitive to a base layer liquidity building block on Arbitrum.