Intro:
DeFi 2.0, which is meant to be the next phase for Defi Protocols, has been debated even meme’d into quite a vocal conversation in recent weeks. Two protocols have been the topic of great discussion due to what they’re trying to change for liquidity sources in DeFi, these are Tokemak & OlympusDao. The similarities in their approach are when we look at the two methods they are using in order to try and do this. One with lower cost rented liquidity and the other with Protocol owned Liquidity. This research was used as a helpful comparison to distinguish where the two cross over.
The DeFi Link To Trad-Fi
A reminder of DeFi 1.0
Decentralised Finance (‘DeFi’) is a system that takes the concept of traditional financial (‘TradFi’) instruments and then builds them on decentralised infrastructure & systems. The goal is to create and provide global access to Finance whilst being more transparent and resilient than traditional financial systems in place.
DeFi 1.0 — Trad-fi concepts in trustless protocols
- Borrowing, Lending
- Staking, Liquidity Providers, Yield Farmers.
- High cost to Liquidity
What is Defi 2.0? — Novel concepts enabled exclusively by trustless protocols
- Upgrade on 1.0
- Reducing the Cost of Liquidity.
- Decentralising further ‘Traditional Centralised Structures
- More complexity to Product Structures.
- Long term focus through Protocol Owned Assets
It’s essential to understand the Decentralised Finance & Traditional Finance relation when speaking about these two projects.
So first off, we look at Municipal bonds, which are Debt securities ( products ) issued by a range of states, cities, counties, and other governmental entities to fund day-to-day obligations and then finance capital projects such as public expenditures.
Now, if you are the purchaser of these municipal bonds, you are, in effect, lending money to the bond issuer (supplying Liquidity) in exchange for regular interest payments in addition to a return of the original investment. These maturity dates vary (when the bond’s issuer repays the principal) may be years in the future.
Another way of looking at this is looking at it from the liquidity provision perspective. Capital is provided here in this exchange, which supplies the Liquidity so the duties of these entities can be carried out. The function they need to operate needs this to be satisfied and is when an agreement is made between the two parties.
Understanding the role of Liquidity is key to understanding both as it’s an absolute necessity for DeFi applications. If they don’t have it, they could die. Liquidity is the Food source these protocols need to survive & Users are the Water — You can only survive so long with only food, and the same goes for water, but with both, you have a better chance at long-term survival.
There are two forms of Liquidity to understand in simple terms
- Primary Layer — How much is available to trade
- Secondary Layer — Trading Volume (Users Buying & selling on the exchanges)
In Primary Layer Liquidity ( Which concerns these two projects) :
- Increases depth of pools or making buys and sells — AMM Models ( Sushi, Balancer, Uni etc.)
- Deepening the Bids & Offers — Order Book models
Liquidity is bolstered by a range of sources with different incentive mechanisms. Traditionally in Crypto, one option is Liquidity Mining (LM) or centralised Market Makers (MM), who have the Tech, Money, Manpower & Infrastructure. Both have their pros and con:
- Pros of LM its Decentralised, Cons its short-term solution and expensive
- Pros of Centralised MM Experience, Expertise & have their own capital; Cons can be Costly & Not Decentralised
Other options in DeFi offer to provide Liquidity-as-a-service, with Olympus Pro (Part of OlympusDAO) & Tokemak via C.o.R.E reactors. Both try to increase the transparency of the liquidity process, creating a longer-term liquidity solution.
- Tokemak — Reactors ( Generalised Liquidity Director )
- Olympus Pro — Bonds-as-a-service & Custom Treasury ( Protocol-Owned-Liquidity-as-a-Service )
Recent Developments between $TOKE & $OHM
Recently OHM was selected for a place in one of the first 5 C.o.R.E Reactors. For this to happen, $TOKE must have been staked in reactors to have been selected. Stacking in pools would have meant you would have been entitled to votes that could have been used to vote for a reactor of your choosing.
The development here is not Olympus Pro; this is related to the core project OlympusDAO; however, this is an example of how collaboration can work. $OHM / OlympusDAO is the primary beneficiary here as it benefits $OHM:
- It offers a secondary form of Liquidity, meaning there is no sole reliance on having just one stream, which would be their bond system.
- Emissions don’t increase; as a result, it means renting could be a more cost-effective solution.
It is worthwhile to look at the chart’s purple section, representing the OHM-DAI liquidity bonds. These bonds account for about 20% of OHM emissions of the $OHM token.
By utilising a secondary form or ‘rented’ Liquidity from Tokamak, it doesn’t then contribute to rising emissions as it is an external form of Liquidity, which doesn’t need incentives/emission paid to it. Cost of renting < minting.
This external form of Liquidity now bears less pressure on $OHM mints. Higher $OHM mints mean an increase in the supply of $OHM tokens, which contributes to inflation of the token. So this particular collaboration works in OHM’s favour.
Olympus Pro & Tokemak Reactor Similarities
- Both offer a form of Liquidity-as-a-service.
- Both started with using Emissions in their core products to grow and grow their treasury, building Liquidity.
- Both are looking at the Long-term & to combat the inflationary dynamic of Liquidity Mining, as both see it as short term solution.
- Both have the goal to internalise sufficient assets to end toke emissions.
- Both the Original projects both have a Token.
Olympus Pro & Tokemak Reactor Differences
Olympus Pro
Features:
- Owned Liquidity
- Part OlympusDAO.
- Targeted at DAO’s & New DeFi Projects
- Design
Tools and infrastructure are provided for other platforms to gain Liquidity and become their own source of Liquidity.
The method it uses is through Utilising BaaS (Bonds-as-a-Service) for its Protocol-owned-Liquidity-as-a-service
These Bonds acquire assets or ‘liquidity’ for the project that uses it. Bonds are a mechanism that a Protocol can use to trade its native token in exchange for assets. Instead of renting Liquidity from third parties ( Liquidity Mining ), it purchases them outright. Once the bond is created, the protocol owns those assets. Thus, Olympus Pro enables ownership of Liquidity (not renting). Olympus Pro incentivises users to permanently sell to the protocol for a discount instead for the short term — like with Liquidity Mining.
- The OlympusDAO Treasury take a 3.3% fee on all volume from Olympus Pro
- Olympus Pro services are to promote $OHM as a treasury asset and liquidity pair token for other protocols
- Approach to Impermanent Loss (IL):
Olympus Pro maintains a user with no exposure to impermanent loss. As long-term holders are not incentivised to provide Liquidity, they do not experience impermanent loss. Instead, this loss is shifted onto the protocol, aligning both LPs and the protocol.
Tokemak & Reactors
- Rented Liquidity
- Primary Product
- Moves / Directs Liquidity
- Design.
Tokemak is designed to generate Liquidity sustainably for new & established DeFi Protocols.
How?
Well, initially with a single-sided yield platform, where it’s possible to deposit reserve assets into their single-sided Pools. Tokemak is simplifying the process of being a single-sided LP for users. As users now do not need to have an equal amount of assets (e.g. ETH / USDC in a Uniswap pool) when wanting to LP.
This also helps to mitigate a protocols responsibility & potential cost of having >1 Pool. Having >1 LP Pools would mean >1 emissions payouts to LPs. So, having 1 pool instead of 2, Tokamak can potentially HALF the cost of paying out emissions.
Votes will take place, and then Tokemak will direct the Liquidity into Automated Market Maker (AMM) pools and other market-making opportunities. This does not exclude DAO’s, New DeFi projects & $TOKE being used as Utility on Exchanges.
Protocol-Controlled Assets (PCA)
In the beginning, the goal is to use inflation to externalise Liquidity Mining rewards to internalise revenue to its Protocol Controlled Assets (PCAs). This is fundamental to $TOKE, as eventually, it aims to Direct Tokemak liquidity from their reactors. In time Tokemak will own their own Liquidity, and emissions will cease once the PCAs can sustain the demand for Liquidity.
Tokemak uses Reactors & Staking & Pools
- The $TOKE Token
$TOKE supply initially increases due to incentives for liquidity provision.
Its seen as a short-term strategy, as the inherent value of $TOKE will eventually allow the protocol to evolve beyond the need for further $TOKE emission.
The aim will be to ensure that the utility aspect of $TOKE will be accepted as Tokenised Liquidity.
This will add value so that the protocol will evolve beyond the need for further $TOKE emissions, contributing to inflation.
So eventually, $TOKE acts to collateralise the network.
$TOKE holders, in return, will form the TokemakDAO.
Here $TOKE holders control not only where the Liquidity from Reactors gets directed, but also what market receives Liquidity, pulling from the Tokemak reserves of ETH and Stable-coins (USDC currently)
The Tokemak Approach to Impermanent Loss (IL)
Tokemak shifts the IL typically meant for LP’s by shifting it to LD’s & Reserves.
I understand this through what is called Bailout mechanics:
Which work to:
Make LP’s whole whilst making sure the Protocol Controlled Assets are in a neutral state.
How:
- Then the first action to take is taking it from the surpluses from across the system that is aggregated into the PCA reserves — if there is IL on one side of an LP pair, there is an impermanent gain on the other.
- The next is the $TOKE staked to that reactor — this $TOKE can be slashed ( as minimally as possible), impacting LD’s
Could They Be Use Together?
Olympus Pro and Tokemak-Reactors could be powerful tools if used together to supplement one another.
As Tokemak directs Liquidity & Olympus Pro Sources it. Liquidity obtained via Tokemak could be used in the Olympus Pro bond-buying and gradually begin to enable access to owning your own Liquidity and perhaps faster.
Examples of this could be with Exchanges seeking a better depth of Liquidity, or even Market Makers who want more Liquidity to make more trades so they can make increased returns.
If ONLY Tokemak was also used then, a Protocol would not have exposure to bonds that Olympus Pro would provide, meaning a protocol would be vulnerable to changes in $TOKE reactors and preferences decided by Liquidity Directors, putting it out of their control. This could represent an opportunity cost for a protocol.
Example of Steps:
- Newly set up Protocol (A) needs Liquidity so decides they want to own rather than rent their own Liquidity thus sets up infrastructure from Olympus Pro, which provides tools necessary for setting up their own bonds.
- Additionally, Protocol (A) wants to use Tokemak, then it needs $TOKE to become LD’s or need their users who hold $TOKE to use their voting rights. Protocol (A), however, can stake their assets in pools or swap collateral with Tokemak in exchange for $TOKE tokens.
- Now $TOKE tokens make you an LD, meaning you can vote and try to direct the Liquidity from the reactors to Protocol (A) ‘s Protocol-owned bonds. A more significant amount of votes provides a higher chance of getting selected for a C.o.R.E Reactor.
- If successful single-sided pools open and assets begin to be staked and eventually get directed to a Protocol (A)
- Using Olympus Pro, Protocol (A) incentivises users to permanently sell to the protocol for a discounted rate meaning the Liquidity.
- So then Liquidity from the reactors gets directed into Protocol (A) ‘s Bonds and in return gives out, let’s say, “$A token,” which represents the token given in exchange for Liquidity. Meaning a protocol now has protocol-owned Liquidity & Directed there using $TOKE incentives.
Alternatively, Tokenmak could utilise Olympus Pro bonds to grow its own Liquidity.
Steps
- Tokemak sets up Olympus Pro-Bond uses it to grow & a step closer it Protocol Owned Assets (PCAs) faster
- Olympus DAO benefits through fees generated which can go to increases their $TOKE holdings
- The $TOKE holding can then be used on Tokemak
- This $TOKE could then be used to Direct Liquidity not just to be deployed to Olympus but also direct Liquidity anywhere
Could This Foster Unfairness?
Utilising Tokemak exchanges will battle amongst each other for Liquidity.
An interpretation of this is that votes act as the currency that you can use to Push Liquidity from Tokemak. Therefore, a large wallet holding a large amount on ‘XYZ’ could potentially shift the balance of votes in reactors. As if you were LPing’ X’ amount of tokens, it means more $TOKE staked, meaning more votes. So, It would be interesting to see now or in time if C.o.R.E Reactors are actually voted for using organic community-based votes or VC or founder bought votes.
We saw an attempt with this from the founder of Synthetix. So it means incentives could exist for this to happen and boost voting power. He didn’t manage to tip the scale, but it was close as Synthetix ended 6th.
Complexity & Complex Systems
Finance is notoriously rife with complexity, DeFi is still in its infancy, but protocols like these look to take Crypto to that next stage in development for the long term. This is because it introduces new mechanisms & dynamics for
- Incentives
- Gamification
- Number of Agents
All are essentially making DeFi more sophisticated in its unique decentralised way.
Conclusive remarks
Similarities exist between the two, but the fundamental design approach is different to which the problem they’re trying to solve is done differently. This can be a good thing as to be irreplaceable, one must offer something different that isn’t yet done by others. However, both are naturally aimed to be broadly used across the DeFi space & see liquidity mining as a short-term solution to Liquidity. It’s just that one directs Liquidity, and the other provides the tools that enable Protocol-owned Liquidity; sourcing it. Time will tell how successful collaboration of these protocols will be. But, I know that it introduces further complexity in a new era for DeFi 2.0.
Read more About OlympusDAO & its Pro Product here:
- https://twitter.com/chasedevens/status/1445800257325912064
- https://olympusdao.medium.com/?p=d8db3052fca5
- https://www.youtube.com/watch?v=QZOaZ9dd-ms
Read more about Tokemak here
- https://medium.com/tokemak/introducing-tokemak-the-utility-for-sustainable-liquidity-8b99a4757301
- https://twitter.com/ishaheen10/status/1443256070684614657
Podcasts
Tokemak by Bankless https://www.youtube.com/watch?v=vum5l-acbm0
Tokemak By Delphi https://www.youtube.com/watch?v=abmkg0zT9QM
