Introducing: Tokemak | The Utility for Sustainable Liquidity
Tokemak creates sustainable DeFi liquidity and capital efficient markets through a convenient decentralized market making protocol.
Sustainable liquidity includes several factors:
- Sustainably produced — not powered by inflationary means
- Democratically sourced
- Capital efficient
- Super fluid — flowed to markets where it’s most beneficial
- Encourages a deep accumulation of assets to reduce slippage towards zero
We believe that Liquidity Mining has been an invaluable resource and has been extremely successful in bootstrapping liquidity during the early stages of DeFi’s short history. It was and is an important stepping stone for the movement, leading to an explosion of product creation and the onboarding of millions of users. Yet the fact remains: standing up liquidity for a new project is costly and inefficient. Current solutions to the problem of token liquidity are:
- Engaging centralized market makers, a costly affair
- Incentivizing their users through yield farming, an equally costly solution
Engaging with market makers creates a unique set of challenges. A market maker is an entity that centralizes three rare resources: capital [money], market knowledge [strategy], and trading/pricing expertise [technology]. Current examples of these organizations are very centralized, often the brainchild and property of just one individual. DeFi has yet to produce a primitive which is capable of disaggregating these three things, which is why we as an industry have been leaning on TradFi for this service. The small steps we’re about to take here at Tokemak will result in a big leap for the future of finance. Vive l’avenir de la France.
Meanwhile, yield farming introduces inflationary tokenomics to bootstrap liquidity, and has a creeping impact on the overall health of the project, often strangling the project’s resources for innovation. The budgeting of so many tokens in pursuit of liquidity is akin to early internet entrepreneurs spending their budget on armies of IT professionals and massive server farms. It’s redundant and there’s a better solution —during the era of Internet 1.0, the answer was AWS as a utility for cloud server hosting; for Web 3.0, the answer is a utility for sustainable liquidity: Tokemak.
Infrastructure is defined as a technology upon which other things rely in order to function. A simple example is the electrical grid, without electricity your internet does not work. Similarly, without internet your Ethereum doesn’t work and without Ethereum your DeFi doesn’t work. Deep liquidity results in healthy markets and for DeFi, liquidity is the next critical infrastructure layer. DeFi can’t function without liquidity. You can’t complete a Uniswap trade without liquidity. On the internet, high speed “data-flow” underpins applications; our aim is to usher in the broadband moment for liquidity or “value-flow” in DeFi. This broadband liquidity will enable complex new products and behaviors to emerge. A future decentralized economy requires a performant DeFi base layer with sufficient liquidity for interoperability.
Enter the Tokemak
A tokamak (with an “a”) is a reactor used in nuclear-fusion for the magnetic confinement of plasma. Inside a tokamak, gases are heated to the point that they ionize into plasma, and energy is produced through the fusion of atoms. The heat from this reaction is used to produce steam and generate sustainable energy/electricity. Analogous to this, the Tokemak (with an “e”) has been architected to gather idle tokens in order to seamlessly generate and deploy sustainable liquidity.
Each asset has its own token reactor, where the protocol token, TOKE (toe-kuh), is used to direct liquidity. TOKE can be thought of as tokenized liquidity. When staking to a given asset’s token reactor, TOKE holders control not only where the liquidity gets directed, but also what market receives liquidity, pulling from Tokemak’s reserves of ETH and Stablecoins.
Tokemak is designed to be primarily used by:
- Liquidity providers and yield farmers: any user can deposit single assets into the network to be utilized as liquidity
- DAOs: DAOs can harness Tokemak’s liquidity flow in order to strengthen and direct liquidity for their project, offering an alternative to traditional liquidity mining
- New DeFi projects: New projects will be able to inexpensively stand up their own token reactors and use the Tokemak’s protocol controlled assets to generate healthy liquidity for their project from its inception
- Market makers: MMs can take advantage of the network’s store of assets in order to direct liquidity across various exchanges
- Exchanges: exchanges can also leverage TOKE’s utility in order to gain access to deep liquidity to bolster their market depth
Tokemak is the first protocol that allows for increased transparency and democratization of liquidity provision, with the goal of becoming the primary vessel through which liquidity can flow freely and efficiently across networks.
How does it function?
A “simple” breakdown of the network roles and functionality:
- Liquidity Providers (LPs) deposit assets into a token reactor. LPs will earn yield on their single asset deposits in the form of the TOKE. Initially, there will be select whitelisted projects that will have a token reactor in which to deposit (eventually this will be opened up to more projects). These assets will then get deployed as liquidity across various exchanges with various pairs, and mitigated exposure to impermanent loss.
- TOKE is the native network token that is earned through participation in the protocol. It’s utilized for directing liquidity (more below) and governance. TOKE holders will comprise the Tokemak DAO, which will oversee the accrued protocol controlled assets and grow the allowed whitelist of assets and markets. TOKE also acts to collateralize the network (conceptually similar to AAVE, in this case used for the aforementioned IL mitigation). IL risk is transferred from LPs to LDs via the TOKE staking mechanism. This will be explained in finer detail in an upcoming tokenomics post.
- Liquidity Directors (LDs) utilize TOKE to control liquidity direction. They stake their TOKE into a given reactor and use that stake as voting power to direct liquidity to an exchange of their choosing. Voting power from TOKE in a given reactor is directly proportional to the amount of TOKE staked and the amount of assets in that specific reactor.
- Pricers: For any non-AMM exchange (order book or RFQ venue) where a third participant is required to provide real time pricing, Tokemak sources Pricers (normally these would be called ‘market makers’) in order to set the bid/offer prices. More information coming soon on the Pricer network.
- Cycles: Tokemak operates on a cyclical basis, and a ‘Cycle’ will initially be set to one week (something that a DAO may later vote to change). Mid-Cycle, assets can be deposited and LDs’ votes can be rearranged. Assets are deployed when a new Cycle begins. LPs may also request to withdraw their assets mid-Cycle and may withdraw during the Cycle’s conclusion.
- t(Assets): When an LP deposits assets into a reactor, they’ll receive a corresponding amount of t(Assets) which is reflective of their claim for the deposited assets. The t(Assets) are then burned upon redemption of their underlying funds. This is conceptually similar to c(Assets) on Compound or a(Assets) on Aave.
Incentives and Keeping a Token Reactor Balanced
In its simplest form, users are playing a game of balancing the reactors. The reactors incentivize a ‘balance’ between the value of assets deposited and TOKE staked through a variable APY.
If there is a significant amount of assets deposited into a given reactor, and a minimal amount of TOKE directing that liquidity, the APY will be boosted on the LD side of the reactor, encouraging LDs to stake more TOKE and participate in directing that liquidity. The same logic holds in reverse — if there is a large amount of TOKE staked in a reactor, but a small amount of assets deposited, the LP side of the reactor receives an increased APY to incentivize further asset deposits.
This balance creates an incentive feedback that encourages more liquidity to flow when TOKE stakers (LDs) are requesting it, while also ensuring a sufficient supply of TOKE is directing the liquidity and collateralizing the system.
TOKE emissions will be detailed in an upcoming tokenomics post.
The Black Hole Effect
As Tokemak pushes liquidity across the ecosystem, it will pull in value. Over time, this value can be used to supplement the LPs’ assets and ensure the protocol can provide liquidity and market making services without third party participants. This will enable Tokemak (and TOKE holders) to generate more value in addition to the base function of liquidity provisioning. This “black hole effect” will be described in more detail in a future post.
Cycle Zero will mark the beginning of Tokemak. Cycle Zero will be comprised of three phases in the following sequential order:
The DeGenesis Event: There will be a preliminary period in which DeFi users will have a chance to participate with ETH and Stablecoins for access to the first emissions of TOKE.
Collateralization of Reactors Event (C.O.R.E.): C.O.R.E. will be the initial collateralization period where a group of whitelisted token reactors will compete to be the first active projects selected for Tokemak’s full launch.
Genesis Pools: There will be an additional pre-launch phase where users will be able to stake single assets: ETH, USDC, DAI, and sUSD in order to earn TOKE emissions. These pools will remain competitively incentivized even after Cycle Zero, in order to continue to accumulate the necessary pairs to deploy liquidity.
The launch date and more details of Cycle Zero will be announced soon in an upcoming Medium article.
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Get ready to fire up the reactor. ☢️