RFC: Creating an Innovative New DeFi Instrument to Bring New Exchanges to Telos
Author: Douglas Horn
This document is a request for comments on a new financial instrument that could be deployed on Telos at the chain level to provide funds specifically for securing hard currency funds for pursuing listing on top cryptocurrency exchanges more aggressively than current funding methods allow at current prices. These funds would come from the ‘tlosrecovery’ account which consists of unallocated funds that were reclaimed from Telos genesis accounts that were never used for even one action within the one-year claim period. The proposed financial instrument would be the first smart contract analogue of a bond that either is payable at maturity or alternatively can be claimed at regular intervals. By selling these instruments at a discount to face value in exchange for hard currency to fund listing on larger exchanges now, TLOS from these sales would be locked up for a period of time so that the sales would not immediately send more TLOS to exchanges to depress the price, with the intent that by the time the bulk of these TLOS are unlocked that the additional liquidity from being listed on more and higher volume exchanges would reduce the impact of such sales and allow TLOS time to benefit from the positive news it has been regularly receiving by being available to more buyers. Additionally, by structuring these instruments as nonfungible tokens (NFTs) with the ability to be sold on a secondary market, a new and perhaps vital financial market could emerge that would create a new type of DeFi product that would add value to Telos overall.
Building Value on Telos
Telos has faced many challenges over the past two years and the community has pulled together to find and build consensus around solutions using what we have had available to us. This has allowed Telos to grow and tackle its problems head on. We’ve built governance features, attracted new dapps and users, and raised the Telos profile significantly with regular articles in the crypto press to name just a few. Each of these advancements have helped Telos move towards greater adoption and usefulness. However, the Telos token price remains low compared to smart contract platforms of similar performance.
One likely reason for the low TLOS price is the difficulty for new users to purchase and trade TLOS tokens due to the small number and lower visibility of the exchanges where TLOS is listed. (Contrast this with the relative ease of selling TLOS for those who already have it or are earning it and are already signed up with these exchanges.) Getting TLOS listed on more exchanges may improve the token price. Another challenge related to price is that currently, many cryptocurrencies experiencing the most price growth are those related to decentralized finance (DeFi) products and Telos is not yet viewed among these. This RFP will propose a way to address both of these challenges by providing an innovative new DeFi product in the form of a tradeable nonfungible token (NFT) that would allow the purchase of unallocated funds from the ‘tlosrecovery’ account at a discount in exchange for a lockup period when the tokens cannot be sold or staked and therefore will not immediately create sell pressure on the TLOS price. The aim would be to use these funds to list TLOS on more accessible exchanges to general cryptocurrency investors so that the promising news stories we are generating can translate into buy orders from a broader base of investors before these tokens become available for sale.
This proposal has two purposes. First, to create a way to turn unallocated funds from the Telos Recovery account (‘tlosrecovery’ account) created when unclaimed Telos genesis accounts were liquidated in December 2019, for the express purpose of providing hard currency for exchange listing fees and for exchanging for TLOS to fill the hard currency needs of the Telos Foundation, Block Producers via the Economic Development Funds (‘econdevfunds’ account) and possibly voter-approved Telos Works proposals — therefore delaying market sell-pressure. Second, to create an innovative DeFi product to expand the Telos offerings and create more interest in Telos as a DeFi platform.
Raising Hard Currency Funds without Crashing the TLOS Market Price
Raising funds in hard currencies such as US Dollars (USD) or Bitcoin (BTC) has always been a challenge for organizations like the Telos Foundation. Each time a new expenditure needs to be made in one of these currencies, either a direct or “over the counter” (OTC) trade must be made, which reduces exchange activity and TLOS purchase demand, or the tokens must be sold on the market, which can reduce themarket price. OTC deals also can have the appearance of being “behind the scenes” or unavailable to any potential Telos buyer, whether or not that is actually the case. What would be preferable would be the ability to sell TLOS tokens without them going onto the market immediately. Typically, such a restriction on asset liquidity demands a commensurate price discount.
Telos has a source of funds that has not yet been allocated: the funds from the Telos genesis accounts that were never claimed by their owners and now reside in the Telos Recovery account. One option discussed for these would be to flow them into the Exchange Reserve Fund that powers Telos to operate without creating new TLOS tokens. Adding these funds to the Exchange Reserve would extend the period of time that this can continue, but it would not address the present problems of low exchange access for Telos due to the inability to pay sufficient amounts in exchange listing fees — a move that is hoped will have an immediate and positive effect on the price of TLOS tokens. Therefore, the advantages of using these funds are in the future, but the need for them for crucial exchange listings is current.
Expanding DeFi Interest
Telos has added a number of potential DeFi tools including continuous liquidity pools through Evolution Dex, automated Bancor swaps from Telos Swaps, multi-blockchain offerings through Transledger and BOS IBC, and Telos REX among others. These have not yet garnered interest among DeFi buyers. The difficulty of buying TLOS on well known exchanges is certainly a contributing factor. Another is that DeFi options tend to be more attractive when there is a wide array for users to combine in interesting ways in the hopes of compounding returns, and Telos does not yet have the variety of options available on Ethereum. This proposed solution could address both issues.
The proposed token would be unique among current DeFi offerings: An NFT that would be tradeable on secondary markets and allow the owners with the ability to claim funds as they are earned periodically using a claim function. This is analogous to a US Treasury Bond, or “T-bill” in NFT form. They are purchased at a discount from face value related to how long they are locked up. US T-bills and other sovereign debt instruments form the backbone of the world economy and have a market many times larger than all major stock markets combined. It is likely, therefore, that such a unique blockchain DeFi product would be of significant interest to investors and “yield farmers” in the Telos DeFi ecosystem and would possibly be used in similar ways. It would even be possible in the future to create the opposite type of instrument using hard currency reserves paid into the system to allow wrapped Bitcoin or USD token funds to be sold with similar transferable NFTs which could create a very robust and highly liquid “bond” market on Telos — perhaps the first such market in the DeFi landscape.
“Wrapped” tokens are tokens from another blockchain that have been securely transferred and are represented as a 1:1 amount of divisible and transactable tokens on the new chain for each token locked up on the native chain. Wrapped tokens hold value because they can easily be returned to the native chain to unlock the same amount of the native token and do not have to be unlocked by the same account or in the same amounts. Currently, Transledger provides a fully working solution for providing wrapped BTC, ETH, EOS and other tokens on Telos. Wrapped BTC, ETH and EOS already exist and can be traded on Telos today with a decentralized exchange coming from Transledger very soon. Such tokens could be used for purchase of the NFTs and could be withdrawn to their native chains when hard currency is required without needing to directly sell TLOS on exchanges. A further advantage of this system is that it would create additional usage and liquidity of these wrapped tokens in the Telos ecosystem, accelerating their usefulness to other dapps.
The proposed system would work as follows:
1. TLOS would be made available from the ‘tlosrecovery’ account into a Telos NFT DeFi Bond account. Likely there would be an initial amount for sale (perhaps 5M TLOS) with an additional amount added each month (perhaps 1–2M TLOS). This amount could be modified by block producer MSIG within a range set by the Telos voters.
2. Funds in the Telos NFT DeFi Bond account would be available for sale for hard currencies, either on an ongoing basis, or at specific times. There could be either a fixed discount to face value based on how long tokens are tied up, or an auction process where buyers bid for lower discounts, which is similar to how T-bills are sold. The lock-up and release of funds would be controlled by smart contracts developed by the Telos Core Developers and under the control of the Telos block producers. These NFTs could either become payable at maturity or have a constant amount of yield come available on a regular basis for claiming. Or a variety of products and approaches could be used.
3. Purchasers of these NFT tokens would have the ability to claim funds in TLOS (either continuously or only at maturity depending on the product).
4. These NFTs could be bought and sold on secondary markets in decentralized exchanges. They would provide a hedge against the prospect of dropping Telos REX returns, for example. Their actual value (in TLOS) would be calculatable at any time based on the yield and time to maturity and market forces could increase or decrease this theoretical value. These could also be used to leverage expected TLOS price action by buying and selling versus other wrapped tokens such as USD or BTC. This would provide a sort of de facto futures market for TLOS which would serve to reduce volatility. Trading bots could continuously calculate and arbitrage these NFTs, creating one pillar of a robust and sophisicated DeFi market to augment any other Telos or, with IBC solutions, EOSIO or Ethereum DeFi ecosystem.
5. Hard currency such as Transledger-wrapped BTC would collect in the Telos NFT DeFi Bond account. When Telos has an opportunity to become listed on exchange, the block producers would approve paying the listing fee from these hard currency funds and therefore would not have to sell TLOS for BTC on the open market or through OTC deals. When the Telos Foundation or other approved entities require BTC, they would have the option of using the TLOS from their account to purchase wrapped BTC with the permission of the Telos block producers. In this way, TLOS from the Telos Foundation, Economic Development Fund, and possibly voter-approved Telos Works proposal winners, would be sold to this fund instead of on the open market, further delaying sell pressure, hopefully until a time when greater availability on prominent exchanges would create more buy pressure to offset these sales.
6. All sales and purchases would use the price from the Telos price oracles system (already deployed and in use at the ‘delphioracle’ account) for transparency.
The TEDP 2
The Telos voters recently approved the Telos Economic Development Plan 2.0 (TEDP 2), which reduced the number of tokens available to block producers, the Telos Foundation, Telos Works, and the Economic Development Fund each month. This proposal may seem counter to that initiative. That will ultimately be up to the voters to decide, but this proposal is not intended to circumvent the TEDP 2.
A primary reason for the TEDP 2 was to limit the sell pressure on TLOS tokens on the market. By locking up tokens for a period of time, these instruments would delay the availability of funds. If the thesis that it is the difficulty of onboarding new buyers to Telos due to the lack of prominent exchanges (and to a lesser degree the lack of exciting DeFi products) is correct, then the ability to free up funds now to pay multiple exchange listing fees is likely to unlock additional buy interest for TLOS to offset the sell pressure when these tokens ultimately come onto the open market.
The original TEDP designated funding to the Economic Development Fund which is a fund intended to pay for exchange listing fees and similar uses at the discretion of the block producers. However, partly due to the current TLOS price and partly due to the high cost of exchange listing fees, relying on these funds would mean that it will be many months before Telos can be listed on bigger exchanges, with no certainty due to the potential for further price erosion.
Exchange Listing Fees and Opportunities
The primary roadblock for listing TLOS on more and better exchanges is now our ability to pay listing fees. Over the past 18 months we have grown into a very respectable chain and a leader in many areas. We have also obtained a letter from an attorney with a highly reputable US cryptocurrency practice who, in fact, represents some prominent exchanges. With funds available to pay listing fees, Telos could rapidly appear on a number of high volume exchanges.
The TLOS token is currently listed on Probit (#38 on Coinmarketcap’s exchange ranking by volume), P2PB2B (#51 on CMC), CoinTiger (#59), CoinLim (#214), and Newdex (#306) exchanges. None of these are widely used compared to other exchanges. For illustration only and not to cast aspersions on any of our valued exchange partners, it is reasonable to call most of these D-level exchanges due to their volumes and general prominence. While each person has their own definitions, generally speaking, A-level exchanges would be long established, high volume, high reputability companies like Binance (#1 on CMC), Coinbase (#3), Kraken (#4); B-level exchanges would be well known but smaller exchanges such as KuCoin (#16), OKEx (#17) or Gate.io (#23); and C-level exchanges would be smaller but still recognizable exchanges with lower volume and reputation like HitBTC (#26) or Bitrue (#32).
While we cannot discuss the specifics of the exchanges where Telos is pursuing listing, these efforts are ongoing. In general, A-level exchanges take the longest to be approved for listing on and have the highest standards. Some do not have listing fees, but for those that do, the fees at this level can be high. Most B-level exchanges charge some listing fee which is usually less than A-level but occasionally more. C- and D-level exchanges naturally follow this same general pattern, although there are some more affordable options at each level and sometimes it’s possible to negotiate better rates. Additionally, there are certain exchanges where listing opens up the opportunity to be listed on popular services like Changely or MoonPay that increase trading and on- or off-ramps to fiat currencies.
The funds that are currently available via the Economic Development Fund are sufficient to get listed on one or two new C-level exchanges every 3–5 months, or perhaps one new B-level exchange every 5–7 months. If the price of TLOS rises, the available funds would increase, but the reduction of TLOS sent to the Economic Development Fund would also be reduced by the TEDP 2, which would work against this. Due to the high price of exchange listing fees, it will take a long time to become listed on the larger number of exchanges that could finally allow a large number of new buyers to have access to TLOS trading. We had hoped that because Telos had never performed an ICO or because Telos is now one of the highest capacity/activity blockchains or one of the most advanced governance blockchains, or that Telos is now appearing in top crypto news outlets weekly, that exchanges would wish to list TLOS without charging a fee or at least at a reduced fee. But this has not been the case and that appears unlikely to change until TLOS trading volume increases significantly — which requires more exchange listings.
Improving Telos value
In short, Telos could be seen as being in a chicken-and-egg situation that will not naturally resolve itself for the better. To resolve this situation requires freeing up funds for new exchange listings more rapidly than the TEDP 2 Economic Development Funds alone will allow. This proposed action is intended to break Telos out of this situation by selling TLOS via NFT “bonds” that delay the time when these TLOS can be sold in exchange for present hard currency funds at a discount so that the hard currency funds could be used immediately to pay for listing fees on more prominent exchanges, which will open up TLOS trading pairs to investors who currently cannot purchase them without opening accounts on the more boutique exchanges where TLOS is currently listed. If the difficulty of buying TLOS on its limited exchanges is, indeed part of the explanation for the current low TLOS price despite constantly improving dapp and user onboarding and other Telos advancements, then the increased ease of purchasing TLOS on more and more prominent exchanges could be expected to offset the current sell pressure from TEDP 2 funding. Further, some of these TEDP 2 funds could also be exchanged via this pool of funds, further delaying current sell pressure until a future time.
This RFC requests comments from members of the Telos community about this approach, whether it is deemed worth pursuing and various details about the implementation still to be decided before submitting a formal Telos Amend proposal. Ultimately, only the Telos voting community can decide if this is a prospect worth trying. Fortunately, we have the ability to achieve consensus on this type of proposal fairly rapidly and with a high level of transparency.
Claiming continuously or at maturity
Should the NFTs use continuous daily or weekly claiming periods, where the amount of tokens available to claim are released at a regular interval, or should they work more like a savings bond where no funds are released until the maturity date? As a DeFi product, continuously claimed NFTs would gradually lose value up until their expiration, while claim-at-maturity bonds would gradually gain value. There are analogs in traditional financial markets for both approaches.
Claim-at-maturity NFTs would tie up funds longer, but would therefore require a higher discount to face value. This would also create a regular bolus of funds coming available at roughly the same time that would potentially create price fluctuations at these maturity times. Continuously claiming NFTs would spread this claiming over a longer period of time. It’s also possible to have both types of products.
Token sales limits
How many TLOS tokens should be drawn from the Telos Recovery account? Should there be an initial amount to start the program and allow rapid payment of new exchange listing fees? What should the ongoing monthly amount be? Should there be a set amount, or should the block producers manage this on an ongoing basis based on anticipated needs?
As an initial proposal, 5M Telos to start and 2M Telos per month thereafter would allow Telos to immediately be listed on a number of new exchanges. However, allowing the block producers to set the number based on anticipated need would allow even more rapid onboarding. There seems to be a number of C- and B- level exchanges that would list TLOS almost immediately if funds were available for exchange fees.
How much yield should be paid on these NFTs or what discount to face value would they receive? TLOS token holders who stake their tokens in Telos REX can expect a reasonably predictable rate of return with full liquidity. Therefore, the yield/discount should be greater than this anticipated REX return. The greater the yield/discount, the more attractive the NFTs would be and the faster they would accrue hard currency funds.
When should this program end or “sunset”? Is there a maximum about of TLOS that should be sold? Is there a maximum amount of time? Is there a maximum number of exchanges that should be funded? Should the program be offered indefinitely as a DeFi product? The Telos Amend governance system allows for updating the system as needed if it is not meeting the community’s needs, but some initial goals should be determined.
Approved hard currency purchasers
Should certain entities such as the Telos Foundation and others receiving TEDP 2 funds be allowed to sell TLOS against hard currencies in this pool as a way to further reduce or delay market sell pressure on TLOS? Who should this apply to? Could this eventually become an open liquidity pool, possibly with market or auction rates to create yet another DeFi offering on Telos?