HYPE — Liquidity locking protocol
What Is HYPE?
New DeFi projects often struggle to attract liquidity, resorting to inflating the token supply and overpaying rewards to incentivize liquidity pools (also known as “pool 2’s”). These liquidity mining schemes often only attract temporary liquidity providers which lead to price pumps and dumps when they enter and subsequently leave, hurting other stakeholders without growing liquidity that lasts. HYPE aims to help solve this dilemma.
Hype is a liquidity locking protocol, made by BuildDAO, which creates and maintains liquidity for new ERC20 currency pairs on decentralized exchanges. It’s purpose is to grow liquidity for BuildDAO’s umbrella of projects, and new tokens chosen by the community.
It does so by incentivizing liquidity providers with rewards that are funded through a 1% transfer tax, and a 20% LP withdrawal tax on the token pair in question. These taxes ensure a perpetual supply of yield incentives are available to bootstrap new liquidity pools, without resorting to uncapped inflationary emission schedules.
In short, HYPE is a protocol that harnesses and taxes speculative trading (and opportunistic liquidity farming behaviors) in order to provide permanent liquidity for the DeFi community.
In economics jargon, HYPE uses a Pigovian tax on negative externalities that is redirected to the funding of public goods (in this case, ensuring the long-term stability of liquidity for the long-tail of illiquid currency pairs).
How Does HYPE Liquidity Mining Work?
Fig 1. HYPE tax scheme
As in other liquidity mining projects, users contribute funds to a 50/50 HYPE/X Uniswap liquidity pool, then stakes their LP receipt tokens (UNIV2_LP tokens) at https://hypeup.finance.
In the HYPE protocol, all HYPE transactions are taxed 1%, and all liquidity provider (LP) withdrawals from designated liquidity pools are taxed 20%. Any time someone sells or sends HYPE, a 1% tax revenue is generated. Any time someone removes their liquidity from a HYPE/X pool, 20% of the withdrawal is taxed for redistribution (40% of the HYPE in the 50/50 pair).
From these tax revenues:
- 75% is redistributed back to liquidity providers in each respective HYPE/X pool,
- 6.25% converted to BUILD and sent to BUILD DAO treasury (a community of builders),
- 6.25% gets distributed to the BUILD/ETH liquidity providers, and the remaining
- 12.5% goes towards incentivizing the next HYPE/X liquidity pool, chosen by community vote.
Figure 2 (below) outlines these tax revenue flows. The APY boost to new HYPE/X pools bootstraps and grows the TVL of locked liquidity, resulting in a new source of tax revenues for HYPE and BUILD stakeholders.
Fig 2. HYPE revenue allocations
The 12.5% tax allocated to bootstrapping new HYPE liquidity pools helps HYPE incentivize just the right amount of liquidity. While other liquidity locking projects such as CORE lock as much liquidity as possible, there are diminishing returns to increasing TVL for a liquidity pool — liquidity locks are effectively “overpaying” for liquidity at some point, a deadweight loss.
With HYPE, liquidity rewards spill over to the next HYPE pool, preventing HYPE from overpaying for liquidity too much. And if transaction volumes are low, new pools will only be created sparingly, keeping yields high for existing pools. Liquidity grows proportionally with transaction volume, and where it’s needed most.
How Hype Accrues Value
HYPE accrues value through feedback loops of recycled liquidity which compounds farming yields and reinforces the depth in liquidity pools. Each pool produces tax revenue streams that are used to bootstrap yet another new liquidity pool, creating new streams of tax revenues, and the cycle repeats. The feedback loops work as follows (see Fig. 3):
- As transaction volumes increases, more tax revenues are generated;
- Boosting yields, which attracts more LPs.
- As LPs move out of pools, more tax revenues are generated to create new pools;
- As more pools are created and successfully seeded, more streams of revenue begin to flow;
- As more pools are added, and as prices between currency pairs diverge, more triangular arbitrage opportunities are created, incentivising arbitrage bots to contribute yet even more transaction volumes and tax revenues for HYPE and BUILD stakeholders.
Fig 3. Feedback loops in the HYPE protocol, and how it enables perpetual farming yields.
This all happens because HYPE acts as a medium of exchange between all HYPE/X pools. A pair such as HYPE/ETH and HYPE/wBTC will enforce HYPE price stability through triangular arbitrage. The act of arbitrage itself creates more HYPE transfers, resulting in more HYPE taxes that get directed back towards supporting HYPE yields.
These feedback loops and value accrual mechanisms, along with recycled liquidity incentives for perpetual farming, serve to reinforce a price floor for the HYPE token and BUILD stakeholders.
Why Withdrawal taxes instead of permanently locking liquidity?
One of the first questions we get about HYPE is the decision to tax withdrawals, as opposed to permanently locking the liquidity (as in CORE).
With locked liquidity, early LPs are diluted by later LPs and will need to resort to a secondary market for trading LP tokens when the yield they signed up for initially no longer holds. We believe that disincentivizing behaviors (LP withdrawal) is more economically efficient than preventing it outright. Vitalik provides some (https://vitalik.ca/general/2020/11/08/concave.html) opinions on this matter:
“An outright prohibition on some behavior may cause more than twice as much harm as a tax set high enough to only deter half of the people from [withdrawing]. Replacing existing prohibitions with medium-high punitive taxes (a very concave-temperamental thing to do) could increase efficiency, increase freedom and provide valuable revenue to build public goods…example of effects like this in the Laffer curve: a tax rate of zero raises no revenue, a tax rate of 100% raises no revenue because no one bothers to work, but some tax rate in the middle raises the most revenue” — Vitalik
What is the purpose of HYPE, aren’t there other liquidity locking projects?
HYPE was built by the BuildDAO primarily as a liquidity incentivization protocol for all of BUILD DAO’s umbrella of projects, including Metric Exchange (a DEX aggregator), BuildDAO itself (a decentralized Y-combinator), Percent.finance (a lending protocol), and upcoming projects such as OTCMarket and more.
As a result, the BuildDAO needs some control over “liquidity generating events” for all of BUILD’s future projects in the initial stages. HYPE is not just farming for the sake of farming. HYPE serves a critical purpose integrating all of BUILD DAO’s projects, which after the initial testing and calibration phase, will be directed towards helping the growing DeFi ecosystem build liquidity that lasts.
How do I unpool my liquidity?
To unpool, you must first unstake from the HYPE/X pool on https://hypeup.finance. After unstaking, a red button to unpool your HYPE/X LP tokens back into HYPE and X tokens will appear on the same page at https://hypeup.finance (minus the HYPE withdrawal tax). Going to unpool from Uniswap directly will not work.