At 10:09AM UTC, October 18, 2024, Tapioca DAO suffered a security breach as a result of a social engineering attack targeted at a core contributor, which resulted in the loss of approximately 605 ETH and 3.1M USDC totaling $4.65M USD. These stolen funds are currently being held across several known addresses, with the primary address of the hacker being 0x69d91e56ca80f2a4d7b808b59053ea5c5505ffe2, where (as of time of writing) $3.915 million USD in cryptographic assets are being held on Binance Smart Chain.

The security breach was made possible via the attacker(s) compromising the private keys of a core contributor responsible for smart contract development. The compromised engineer had been a trusted lead smart contract engineer for Pearl Labs since inception, or for approximately two and a half years. SEAL911 identified the attackers as a North Korean group, used a "contagious interview" attack methodology to inject malware on the contributor’s computer in order to gain control of the private keys of his address to carry out the theft. The attacker(s) have been linked to several similar incidents involving contagious interview attacks by respected individuals in the space. The Contagious Interview is a tactic used by attackers, who pose either as a job seeker or recruiter, to trick the target into downloading files that appear legitimate but actually contain malware. The goal of this method is to exploit the trust typically associated with the hiring process.

The attacker utilized the control of the engineer’s private keys in order to:

• Mint 315.5 trillion USDO stablecoins to drain the USDO/USDC liquidity pool.

• Steal 29,669,866 TAP tokens from the vesting contract, valued at approximately $38 million at the time of the attack, to drain the TAP/ETH liquidity pool.

The 315.5 trillion USDO tokens were exchanged for roughly 3.1 million USDC from the USDO/USDC liquidity pool, and the 29.6M TAP tokens were exchanged for additional $1.6 million USD in ETH from the TAP/ETH liquidity pool, totaling approximately $4.75 million stolen, a supermajority of which are DAO owned funds.

This attack was made possible due to the admin controls of both token contracts being controlled by a single signer, with this signer address being a hot wallet. Security personnel and other contributors had previously repeatedly directed the compromised engineer to transfer the admin role of the smart contracts to the DAO’s 4-of-7 multisignature wallet after the June 2024 deployment of the Tapioca protocol. The engineer was only directed to implement single-signer controls for pause functionality to enable swift reaction to any security events, and to integrate Hypernative security monitoring. Additionally, the DAO provided the compromised engineer with a cold storage wallet, hardware 2FA key, and other security devices. Despite these directives and precautions, the engineer failed to follow or implement the directives, use any of the provided devices, and further additionally received and ignored a direct warning about “contagious” interview attacks less than three months prior.

The engineer, who was compromised, both stated that the directives were properly completed and created the appearance of completion by closing task(s) on ClickUp. This was mistakenly taken as fact by the DAO due to his seniority and the absence of formal compliance measures.

Attack Methodology

The social engineering attack started when the compromised engineer was targeted through LinkedIn, and further communicated through Telegram by and with an individual posing as “Alberto Flores Galvan,” who was offering the engineer a fake job opportunity.

The engineer was asked to download a malicious .env file containing malware, leading to the compromise.

Once the attacker(s) obtained the compromised engineer’s private key, they transferred the admin ownership of the TAP token’s vesting contract, stole 29.6M TAP tokens held within it via a “rescue” function, then liquidated these stolen tokens to steal the majority DAO owned ETH liquidity held within the TAP/ETH liquidity pool. Admin Ownership within token vesting contracts in of itself is a common practice within DeFi to modify vesting recipient addresses.

The attacker then added a new address to USDO’s whitelist of minters, minted USDO stablecoins, and stole the DAO owned USDC liquidity in the USDO/USDC liquidity pool with the illegitimately procured USDO. The purpose of this whitelist was similar to Aave’s GHO “facilitators”, wherein if the Tapioca DAO elected to create new methodologies to mint USDO, they could be directly added as a minter to the contract.

Attached below are the recoverable screenshots of the conversation between the engineer and attacker on LinkedIn & Telegram. The only information redacted is the first name and handle of the engineer.

To provide context for the compromised engineer’s actions, Pearl Labs began restructuring the engineering staff in June 2024, prompted by the twAML economic issue which caused the Tapioca protocol to be paused. EnigmaDarkLabs was brought in at this point to advise Pearl Labs and oversee development. Enigma then performed an analysis of development processes and recommended that both senior engineers be terminated for lack of expertise, sluggishness, and recklessness. Based on this recommendation, Pearl Labs leadership reached a compromise, one of the two engineers would be terminated, while the other, would be demoted to a junior developer role while new experienced engineers would assume the CTO and Senior engineer roles.

However, due to the timelines to employ new engineers to develop and deploy Tapioca V1.1, both engineers were retained in their existing positions to complete V1.1 under the supervision of internal security personnel while leadership carried out the restructure. As both of the original engineers' existing issues worsened, one of the two aforementioned engineers was terminated before the release of V1.1- just two days prior to this incident taking place. This termination prompted the compromised engineer to rapidly seek employment without anyone’s knowledge, making them especially vulnerable to the contagious interview attack. This, in concert with the compromised engineer’s insubordination of directives regarding contract admin controls and lack of utilization of any of the provided security devices, provided the attacker an easy pathway to carry out this simple attack.

Incident Response

The security breach was reported at 11:18 AM UTC, and within minutes, security personnel engaged SEAL911. A war room was established by 11:22 AM UTC, and the root cause was identified within five minutes: the attacker had full control of the admin role, preventing any immediate countermeasures to stop the theft. The team quickly removed liquidity from the two key Uniswap V3 pools, recovering approximately $700,000 USD.

Further investigation revealed that the attacker had 996 ETH ($2.65 million USD) in collateral under their control. With the assistance of EnigmaDarkLabs, the security team utilized an exploit to recover the ETH from the attacker before he could launder it. As a result, the DAO recovered $2.65M USD from the hacker’s control. At this time it has been advised to withhold the specifics of this exploit due to ongoing circumstances. However, as soon as possible, this will be provided as an Addendum to the Post Mortem.

Following the attack, the DAO's treasury, excluding TAP tokens, stands at ~$4.8 million, representing a 45% loss from where it stood before the social engineering attack.

Detailed Events Timeline

Arbitrum: Ownership of Tapioca Multicall (Deployer) contract gets transferred to attacker:

Oct-18-2024 10:09:07 AM +UTC

Arbitrum One Transaction Hash: 0x79a17d0848... | Arbitrum One

Call Transfer Ownership Function By Tapioca: Deployer on 0x302E9128...c61F7fDED | Success | Oct-18-2024 10:09:07 AM (UTC)

https://arbiscan.io

Arbitrum: Attacker adds new minter to USDO:

Oct-18-2024 10:09:27 AM +UTC

Arbitrum One Transaction Hash: 0x2ad98dd29c... | Arbitrum One

Call 0xe8bbf5d7 Method By 0x9E8897cA...140c861c5 on 0x302E9128...c61F7fDED | Success | Oct-18-2024 10:09:27 AM (UTC)

https://arbiscan.io

Arbitrum: Attacker mints USDO:

Oct-18-2024 10:09:49 AM +UTC

Arbitrum One Transaction Hash: 0x0bca43cfb5... | Arbitrum One

Transfer 315,522,735.36 B USDO to 0xc55e826D...110e9F146 | Success | Oct-18-2024 10:09:49 AM (UTC)

https://arbiscan.io

Arbitrum: Attacker swaps newly minted USDO for USDC, emptying the Uniswap liquidity pool:

Oct-18-2024 10:11:00 AM +UTC

Arbitrum One Transaction Hash: 0xaf9fe4593a... | Arbitrum One

Swap 3.14 M USDO for 3.13 M USDC on Uniswap | Success | Oct-18-2024 10:11:00 AM (UTC)

https://arbiscan.io

Arbitrum: Ownership of TAP token vesting contracts transferred:

Oct-18-2024 10:56:05 AM +UTC

Arbitrum One Transaction Hash: 0xae9559d612... | Arbitrum One

Call 0xe8bbf5d7 Method By 0x9E8897cA...140c861c5 on 0x302E9128...c61F7fDED | Success | Oct-18-2024 10:56:05 AM (UTC)

https://arbiscan.io

Oct-18-2024 10:57:07 AM +UTC

Arbitrum One Transaction Hash: 0xe62716b847... | Arbitrum One

Call 0xe8bbf5d7 Method By 0x9E8897cA...140c861c5 on 0x302E9128...c61F7fDED | Success | Oct-18-2024 10:57:07 AM (UTC)

https://arbiscan.io

Oct-18-2024 11:05:24 AM +UTC

Arbitrum One Transaction Hash: 0x2eb546873a... | Arbitrum One

Call 0xe8bbf5d7 Method By 0x9E8897cA...140c861c5 on 0x302E9128...c61F7fDED | Success | Oct-18-2024 11:05:24 AM (UTC)

https://arbiscan.io

Arbitrum: Emergency Rescue of TAP token vesting contract called, draining vested TAP:

Oct-18-2024 10:56:37 AM +UTC

Arbitrum One Transaction Hash: 0x8cf8def40f... | Arbitrum One

Transfer 15 M TAP to Tapioca Exploiter | Success | Oct-18-2024 10:56:37 AM (UTC)

https://arbiscan.io

Oct-18-2024 10:58:11 AM +UTC

Arbitrum One Transaction Hash: 0x1abb8cf0b0... | Arbitrum One

Transfer 11.77 M TAP to Tapioca Exploiter | Success | Oct-18-2024 10:58:11 AM (UTC)

https://arbiscan.io

Oct-18-2024 11:07:28 AM +UTC

Arbitrum One Transaction Hash: 0x174c3deaf5... | Arbitrum One

Transfer 2.9 M TAP to Tapioca Exploiter | Success | Oct-18-2024 11:07:28 AM (UTC)

https://arbiscan.io

Arbitrum: Swapping stolen TAP & USDO tokens on Uniswap:

Oct-18-2024 11:00:45 AM +UTC

Arbitrum One Transaction Hash: 0x9223b9970c... | Arbitrum One

Swap 26.77 M TAP for 591.89 ETH on Uniswap | Success | Oct-18-2024 11:00:45 AM (UTC)

https://arbiscan.io

Oct-18-2024 11:15:48 AM +UTC

Arbitrum One Transaction Hash: 0x76fd3a27ad... | Arbitrum One

Swap 2.9 M TAP for 13.91 WETH on Uniswap | Success | Oct-18-2024 11:15:48 AM (UTC)

https://arbiscan.io

Moves stolen funds to Binance Smart Chain:

TAP -> WETH -> USDT (Stargate transactions)

Oct-18-2024 11:04:19 AM +UTC

Arbitrum One Transaction Hash: 0x0cd1a06a99... | Arbitrum One

Transfer 1.1 M USD₮0 to Stargate: Pool USDT | Success | Oct-18-2024 11:04:19 AM (UTC)

https://arbiscan.io

Oct-18-2024 11:09:35 AM +UTC

Arbitrum One Transaction Hash: 0x8bccaabadc... | Arbitrum One

Transfer 447,833.02 USD₮0 to Stargate: Pool USDT | Success | Oct-18-2024 11:09:35 AM (UTC)

https://arbiscan.io

Oct-18-2024 09:26:03 PM +UTC

Arbitrum One Transaction Hash: 0x8b62af841f... | Arbitrum One

Transfer 36,624.48 USD₮0 to Stargate: Pool USDT | Success | Oct-18-2024 09:26:03 PM (UTC)

https://arbiscan.io

USDO -> USDC (swapped to USDT) via Stargate:

Oct-18-2024 10:13:39 AM +UTC

Arbitrum One Transaction Hash: 0x891d9be052... | Arbitrum One

Transfer 128,000 USDC to Stargate: Pool USDC | Success | Oct-18-2024 10:13:39 AM (UTC)

https://arbiscan.io

Oct-18-2024 10:15:58 AM +UTC

Arbitrum One Transaction Hash: 0xc324014cac... | Arbitrum One

Transfer 159,853.45 USDC to Stargate: Pool USDC | Success | Oct-18-2024 10:15:58 AM (UTC)

https://arbiscan.io

Oct-18-2024 10:21:19 AM +UTC

Arbitrum One Transaction Hash: 0x23816332ac... | Arbitrum One

Transfer 1.32 M USD₮0 to Stargate: Pool USDT | Success | Oct-18-2024 10:21:19 AM (UTC)

https://arbiscan.io

Oct-18-2024 10:28:39 AM +UTC

Arbitrum One Transaction Hash: 0xa95a9561dc... | Arbitrum One

Transfer 190,021.52 USD₮0 to Stargate: Pool USDT | Success | Oct-18-2024 10:28:39 AM (UTC)

https://arbiscan.io

Oct-18-2024 10:29:42 AM +UTC

Arbitrum One Transaction Hash: 0x43fabb8a2a... | Arbitrum One

Transfer 99,960.78 USD₮0 to Stargate: Pool USDT | Success | Oct-18-2024 10:29:42 AM (UTC)

https://arbiscan.io

Compromised Addresses:

0x30EC55E70282AC3A032A3C7003Ead8B79c76Fde6 (developer address whose private key was compromised)

Security Measures

The DAO has implemented necessary actions to ensure that such issues do not arise in the future. The engineer compromised in this social engineering attack has been terminated and removed from all sensitive services, channels, and controls. Moving forward, the following changes and improvements will be enforced to strengthen the security and governance of the protocol:

Web3 Security Measures:

1. No Direct Access to Core Protocol: No individual contributor or individual will have direct access to core protocol functions or critical contract roles. This measure ensures that no single member can compromise the system through social engineering or direct attacks.

2. Separation of Duties: Contributors responsible for deployments or on-chain actions will not hold ownership roles in the protocol. The protocol's ownership will default to a Governance Executor that is controlled by the DAO or a TimelockController managed by the Tapioca multisig.

3. Multi-Party Review Process: All on-chain actions, including deployments and configurations, will be thoroughly documented, simulated, and reviewed by at least two independent parties. Once validated, the action will be queued in the TimelockController, with a mandatory two-day delay before execution. This ensures any vulnerabilities, bugs, or malicious actions can be addressed before finalization.

4. Real-Time Observability Portal: A dedicated portal will monitor the protocol in real time, displaying current roles, ownership, and token balances across all smart contracts. This portal will ensure transparency and provide immediate detection of any unauthorized changes.

5. Anomaly Detection Systems: Automated systems will continuously monitor for suspicious activity in smart contracts, bridges, oracles, and the underlying blockchain. If anomalies are detected, the protocol will automatically pause, preventing further damage.

Multisig Security Measures:

Even though the attack did not target the multisig directly, the DAO is enhancing security protocols for multisig signers:

1. Isolated Signing Environment: All signers must use isolated machines equipped with hardware wallets which will be provided by the DAO, and these machines will be reset to their original state after every reboot.

2. Transaction Simulation and Verification: Signers must simulate each transaction using tools like Tenderly or Foundry and ensure the results match across all simulations. Any inconsistencies must be reported to the security team before signing.

3. Payload Data Verification: The signer must verify that the data payload in their hardware wallet matches the transaction. Any discrepancies will prompt immediate contact with the security team.

4. Continuous Availability: Signers must be reachable at all assigned times to ensure prompt handling of urgent transactions, with direct lines of communication to other signers.

   Conclusion

   In summary, this incident was equally as unacceptable as it was avoidable, and the DAO takes full responsibility for this theft. While there was no malicious intent involved, the compromised engineer’s failure to follow basic directives combined with leadership’s misplaced trust, led to this breach.

   The two fatal and key assumptions were:

   • The compromised developer was using the provided cold storage wallet for critical actions, such as deployments and managing "pausable" roles.

   • The ADMIN role had been correctly transferred to the 4-of-7 multisig, as instructed.

   Moving forward, the DAO is committed to strengthening its security measures and ensuring much stricter compliance to prevent such breaches in the future.

   Debrief

   As of this post-mortem release, we have identified the location of all stolen funds, and relevant authorities have been notified. The Tapioca DAO team, BNB Chain security, and zeroShadow are closely monitoring the situation in real-time.

   All of the DAO contributors are deeply devastated by this attack, and are continuing to work 24/7 to assist the relevant agencies and outside collaborators to identify the exploiter and recover the funds as soon as possible. DAO Contributors are also working tirelessly on a Token Migration Plan & Mainnet Plan to be released as quickly as possible.

   Company wide punitive measures have been taken, such as the compromised engineer was terminated effective immediately, and the engineer’s contributor token allocation has been revoked. All Pearl Labs founders contributor token allocation(s) were also revoked in a self imposed fashion, to potentially be earned back over time from the Tapioca DAO. Combined, this totals 9M TAP or nearly 10% of the supply of the 15% or 15M TAP. Additionally, Tapioca Foundation’s vesting schedule will be reset on the day of the migration of the token. Lastly, further details regarding the token will be documented in the upcoming Token Migration Plan. Restructuring is actively underway of the Solidity engineering roster.

   The hacker was given the chance of returning $3.7M in exchange for a $1M USDT whitehat bounty, this offer has since elapsed and been revoked on October 22nd, 2024 at 4pm UTC, and now a 10% bounty is available for anyone who provides information which leads to the recovery of the stolen funds.

   This attack, while severe, was not sophisticated and could have been prevented by adhering to basic operational security practices, smart contract development standards, and compliance measures. The breach occurred due to shortcomings in these critical areas within the DAO and is not any one individual’s fault. Moving forward, the only path is to acknowledge these failures and focus on improving our processes. By doing so, we aim to rebuild trust and become a stronger organization simultaneously.

The goal of twAML was to iterate Curve’s Vote Escrowing or “ve”, which uses fixed outputs: for example at any point in time if you lock 100 CRV for four years you will always receive 100 veCRV (100%) in return, locking the same 100 CRV but instead for 2 years would result in 50 veCRV (50%), etc. Because the time-to-output is fixed, the system cannot dynamically modulate itself to market forces in order to reward early participants, and wield free market efficiency to keep equilibrium and maximize the total amount of CRV locked. Imagine the demand for veCRV requiring four year locks during the peak of Mitche’s CRV liquidation cascade versus the peak of the Curve Wars- time is never a stable commodity. The goal of twAML simply put was to find the free market value of time in order to lock the most liquidity possible for as long as possible (in order of precedence). Time is obviously not fixed nor valueless, or there would be no treasury bill yield curve based on duration, and simply put, you would be happy to receive $1,000,000 for either 1 second or 10 years.

After releasing Death of Liquidity Mining, Tapioca’s fingerprints immediately spread across DeFi. Today, you can hardly find a new DeFi protocol without an oTKN. Tapioca DAO consistently produces the best concepts in DeFi, and twL is no different.

How twL was produced was also no different than the production of twAML- iteration. Finalizing twL and reaching this endstate simply took taking a hard self reflective look at the end goal of twAML (and twL by extension)- which is defined as finding the free market’s value of time in order to lock the most liquidity possible for as long as possible (in order of precedence). Most importantly- we had to analyze the twAML system and take inventory- what furthers reaching the end goal and what doesn’t. This hard look was first necessitated by the release of Tapioca in June 2024 and the subsequent need to pause the protocol from twAML economically breaking due to a parameter, Epoch_Duration, not being set. Even though this was a simple parameter issue, the decision was made that twAML had too high of a chance for failures by other means because it was too fluid (which it was purposefully and misguidedly designed to be) which meant that we needed to make the system more hardened, and once that state was reached we needed to revalidate it due to this refactor. We had many small iterations throughout that improved the system. However, by the end of this revalidation process, we realized two things simultaneously; twAML had many flaws in its approach in that it had complexities that were completely unnecessary and some wholly illogical, and simultaneously that we were on the precipice of designing, building, and executing what we always dreamed of twAML being- the most powerful and elegant liquidity locking system ever devised.

“The art of simplicity is a puzzle of complexity” - this quote has never been more poignant. From this entire journey with twAML, from death to rebirth as twL, I have learned an important lesson from DeFi; functionality design needs to be centered around creating the absolute simplest architecture which meets a rigid and well defined goal. With fellow Tapioca contributors EnigmaDarkLabs revalidating twAML and assisting on the iteration that followed, the process culminated in a final discussion which brought up this very point. Sometimes it’s hard for us to dismantle our previously held thought processes and decisions, but I quickly realized while twAML was extremely innovative, many of its components in this lens were illogical or unnecessary, and between both made it frankly far too confusing for anyone to truly understand and appreciate it. Sometimes our greatest successes are born from small failures, and twl is no exception, I wouldn’t change any part of the process as I honestly don’t believe we would have ideated this final design. Many ingenious inventions seem so simple in retrospect like Velcro, Band-Aids, etc, however someone had to dream them up first. More than anything, we came at this from a standpoint of, how can we build the “X*Y=K” for token locking (foundational formula for the Uniswap AMM).

For those who aren’t familiar, the twAML formula had a few primary components. To make this as simple as possible, the first was the Cumulative which was based on the collective of each users locks Magnitude which in of itself was based on user’s lock duration. Because user’s could DDoS twAML with $1.00 locks, there was a minimum capital threshold enforced for a users lock (and associated magnitude) to effect the cumulative. The cumulative was then “smoothed” based on the number of participants to find a real market rate for time; less participants- cumulative moves faster, more partipants- cumulative moves slower. The cumulative was then capped at how much it could grow per epoch so that the lock duration requirement couldn’t grow to 10 years in a single week. Unlocks would then remove the users magnitude and allow the cumulative to decay. The problem is, what does any of this have to do with the goal? We have a puzzle of complexity, but certainly no simplistic art.

To the question of “What parts of the mechanism exist to further the goal, and which do not?” I almost jokingly responded “Consensus in DeFi is almost universally based on liquidity, right? We should just grow or decay the time duration for the output of twTAP & discount of oTAP based on if there’s more or less liquidity locked, that’s it- that reaches the goal of locking as much TAP & USDO as possible for the longest time possible, and is precisely what time weighted liquidity was billed to be as a dynamic consensus based liquidity locking system”. Ben had an idea previously of employing a set number of “buckets”, fixed output buckets users could lock into, think like Curve- 25%, 50%, 75%, 100% outputs for twTAP, 20%, 30%, 40%, 50% discounts for oTAP, but then, the time requirement for all of the buckets would grow or decay based on if more or less capital was locked into the entire system. Ben then said “Wait, what if each bucket moved independently based on the capital locked into it specifically, like if there was a lot of demand to max lock into the 100% bucket, the 100% bucket would grow and grow until it was too long, and people would naturally be incentivized to “arbitrage” and lock into the other, smaller buckets”. This may sound contradictory, don’t we want to lock capital for as long as possible? Yes, however, when people see a “good deal” they rush to receive it, and that’s precisely what behavior we want- the most TAP & USDO locked as possible, for as long as possible, in that order of precedence.

As this was laid out, everyone stated almost in unison, “This is brilliant”. “It’s as simple as -1,+1, but even better than twAML at the same time”. Thus -1,+1 was born. Four buckets, more capital locked in a bucket? +1. Less in the bucket? -1, +1, -1. Then, a Ceiling would be enforced of 52/52/52/52 for twTAP & 16/16/16/16 for oTAP (One Year & Four Month Max, respectively), and a Floor of 1/2/3/4. The first epoch will start at 1/2/3/4 (the floor), and Epoch 2 will compare to 0/0/0/0 locked in the buckets in “Epoch 0”. Thus, Epoch 2 will grow all 4 buckets, and on and on we go with comparing the TAP & USDO locked in the current epoch to the prior epoch using -1, +1. No magnitude, no cumulative, no unlocks, no voodoo magic formula that may work or may not- capital controls time, as simple as it is powerful.

twL is just as simple as ve, with much more powerful market based dynamics and control, anyone could comprehend the mechanism, with zero validation needed as it’s so rigid. Literal perfection. The game theory involved is also extremely powerful, there is an early advantage phase to participants as they can receive large outputs for a small amount of time as Tapioca is in its infancy, then an arbitrage phase where participants can find “good deals” each epoch on capturing the largest outputs with the smallest time commitment, to then culminate in an equilibrium phase where the buckets time requirements are in perfect unison with the free market to adequately price time and blackhole USDO & TAP.

As you can see above with a simple simulation, these buckets grow and decay against the -1,+1 moniker and find equilibrium. The only discernible edge case is growth occurring from a small amount of liquidity being locked into a singular bucket for two consecutive epochs, however because the growth is only +1 and decay -1, this edge case is benign. There are a number of governance controls available as well to control the buckets if need be, such as resetting the buckets, changing the floor and ceiling, adding or removing buckets, etc.

Because the system is so simplistic, you can very easily model it with AI tools! You can see above in this simplistic example, the buckets simply grow or decay by +1 or -1 per epoch as stated, and after 25 epochs in this randomized scenario, the ending results (in twTAP terms) are: 1 Epoch Lock for 25% Output, 4 Epoch Lock for 50% Output, 11 Epoch Lock for 75% Output, and 12 Epoch Lock for 100% Output.

I truly feel we have devised something extremely special with twL. The brilliance is in it’s simplicity, and this is a system we can not only all trust and comprehend, but has obvious power in reaching the true value of time and capturing the maximal amount of locked liquidity. With oTAP, we very palpably impacted the entire space of DeFi with it’s broad employment in new DeFi protocols, and twL I wholeheartedly believe will have a similar long term impact. With the last three months of hard work and ingenuity, Tapioca V1.1 has all the tools necessary for a successful mainnet release. Without all of you Tapiocans and your unwavering passionate support, none of this would be possible

MAKE DEFI GREAT AGAIN!

el jefe, twmatt

TAP is the heart of Tapioca DAO, an omnichain stablecoin ecosystem. It serves three roles within the Tapioca ecosystem- voting power within Tapioca DAO ecosystem governance, a claim on Tapioca ecosystem fees, and as an economic stimulus through Tapioca’s pioneering call option incentive model.

The TAP token is a LayerZero OFTV2 (Omnichain Fungible Token), an omnichain extension of the ERC-20 token standard which supports both EVM’s & non-EVM’s. The TAP token will first be deployed on the Arbitrum Network, the preeminent Ethereum scaling solution.

The TAP token has a finite supply of 100,000,000- there will never be more than 100,000,000 (100 million) TAP tokens.

For a glossary of terms used in this article, please visit this section of the Tapioca documentation.

DO NOT INTERACT WITH ANY TAP TOKEN CONTRACT UNTIL AN OFFICIAL DEPLOYMENT ANNOUNCEMENT IS MADE FROM THE TAPIOCADAO X & DISCORD.

Why Now?

DeFi has become stagnant, filled with low effort forks and new inventive ways to package money grabs for insiders and venture capital groups to extract profit. Tapioca was started by passionate DeFi users fed up with the space’s lack of innovation, transparency, and community focus. Tapioca is rooted in a vision of creating and scaling an omnichain fully decentralized and over-collateralized stablecoin ecosystem to propel the DeFi space forward from its now trademark fragmentation, while also reestablishing its core tenets. This vision was then polished into the shining Pearl that Tapioca is today collaboratively with thousands of like-minded Tapiocans over the course of a year. Many have witnessed first hand Tapioca’s embodiment of the phrase “community first”, and that will persist as we put the entire Tapioca ecosystem- painstakingly crafted by 15 individuals pouring their blood, sweat, and tears over two years into making a dream many said would never become reality- completely into the hands of our glorious community, day one.

Closer Look:

The TAP token acts as the backbone of the TapiocaDAO ecosystem which is made up of six core sub protocols:

Big Bang USDO (OmniDollar) Creation Engine

Singularity Isolated Lending & Borrowing Engine

Yieldbox Token Vault, Successor to Bentobox

Pearlnet LayerZero DVN (Decentralized Verifier Network)

tOFT Liquidity Reunification Module

twAML Economic Consensus Engine

TAP purposefully has no functionality within the Tapioca ecosystem until it is Time Weighted (akin to being locked). Upon Time Weighting, TAP is transformed into twTAP. twTAP or “Time Weighted TAP” is represented by a LayerZero ONFT-721, an omnichain extension of the ERC-721 NFT token standard.

twTAP grants the holder the following benefits:

1. Voting Power within the Tapioca DAO & Option Gauges

2. Pro-Rata Share of Ecosystem Fees which is distributed every epoch (week) in the form of Tapioca’s omnichain stablecoin- USDO.

Genesis TAP Token Distribution:

The Genesis supply of the TAP token will be 7,630,000.

83% of the Genesis supply will be allocated to the Tapioca community, of which:

-50.3% (3.84m TAP) is set to be distributed in a Genesis Auction via Balancer Liquidity Bootstrapping Pool (LBP)

-32.7% (2.5m TAP) is set to be distributed via Call Option Airdrop

The remaining 17% of TAP circulating at Genesis (1.29m) is allocated to Supporters who bootstrapped the costs to execute the vision of Tapioca DAO.

Genesis Auction (LBP):

For the Genesis TAP Token Auction, a self-hosted Omnichain Balancer Liquidity Bootstrapping Pool (LBP) was chosen as it was deemed the most equitable mechanism for launching the TAP token. The LBP’s configuration is as follows:

Duration: 48 hours

Starting Weights: 1% USDC & 99% LTAP (170,000 USDC & 5,000,000 LTAP)

Ending Weights: 80% USDC & 20% LTAP

Swap Fee: 0.3%

The proceeds of the LBP will be awarded to the Tapioca DAO Treasury, and used to seed initial liquidity for TAP/WETH 0.05% & USDO/USDC 0.01% Uniswap V3 pools on Arbitrum, and the USDO/DAI 0.01% Uniswap V3 pool on Ethereum.

LTAP serves as a 1:1 receipt token for TAP, and was strategically employed to deter malicious end users from deploying a TAP/WETH Uniswap V3 pool before the LBP has concluded and the DAO can configure and deploy the pool itself. LTAP can be redeemed immediately for TAP at a 1:1 ratio after the deployment of the Uniswap V3 pool. There is no vesting nor lock-up implemented.

Everyone is equally free to participate in the LBP at a level playing field, there are no whitelists, special pricing, etc. Anyone who participates in the LBP will become eligible for the call option airdrop, with the airdrop distribution occurring upon the LBP's conclusion. To contribute to the LBP, individuals can prepare Native USDC (USDC.e is not supported) on the Arbitrum Network, or can utilize the integrated Stargate Router to participate with USDC from any supported network. Users are able to both submit purchase and sell orders throughout the LBP duration.

The initial price of TAP in the LBP is configured at $3.52, following Balancer's recommendation for the starting price to be four times higher than a “realistic valuation”, which following previous LBP’s was configured as two times the price of TAP during the bootstrapping raise. The formula:

($0.44 [Supporter Price] x 2) = $0.88 x 4 = $3.52 [TAP LBP Starting Price]

It is very important to understand the starting price is not a ceiling, nor indicative of a realistic valuation, but is instead set well above what is considered to be a realistic valuation for the purpose of discouraging front-running, sniping, and arbitrage bots. The swap fee is set at 0.3%. LBPs allow for purchase & sell orders throughout. The Tapioca LBP was configured using best practices from Balancer, and using recommendations from successful LBP operators, such as Perpetual Protocol.

An LBP is not similar to Dutch or Batch auctions. In a Batch auction, there is a set cap of a total amount being raised, whereby whales can purchase a majority of the token supply, like what was observed in the Stargate STG Token Launch Auction, where Alameda Research purchased the entire genesis supply of STG. Conversely, in a Dutch auction, the token linearly decreases from a starting point until all of the tokens are sold, and is not supply/demand responsive, which like batch auctions allow whales to purchase a majority of the supply, as well as also creating incentives for malicious actors to collude to purchase at a mutually agreed upon price. In both Dutch & Batch auctions, the token ends up well above or below a realistic market price, and the final distribution heavily favors whales & insiders.

Above is a chart showing the Merit Circle $MC LBP, the Perpetual Protocol $PERP LBP, and the Timeless $LIT LBP, and finally the Tapioca $TAP LBP (without any purchase or sell orders). This is for educational purposes only, and is not a representation of potential performance.

An LBP instead maintains constant downward pressure on the TAP token's price, which is juxtaposed with users' purchase orders creating upward buy pressure, which together aim to keep the price of TAP oscillating around a realistic market value. One entity cannot purchase all of the TAP tokens, or even near a majority. For simplicity's sake, you can think of an LBP as being most similar to a normal AMM liquidity pool. Because of this, slippage & price impact can become extremely high with large purchase orders. Contributors are therefore incentivized to split up large purchase orders into smaller tranches throughout the LBP’s durations.

Tapioca LBP Simulator.xlsx

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http://docs.google.com

Option Airdrop:

The Tapioca airdrop will be a first of its kind call option airdrop via airdropped oTAP, referred to as "aoTAP," an American-style call option with a 48-hour expiry. This call option airdrop will bear a discount ranging from 25% to 50% against the market price of TAP at the time of distribution, which will occur in four phases after the completion of the LBP. aoTAP may be redeemed with Native USDC on the Arbitrum Network. Recipients are permitted to redeem as many times as they wish within the expiry period, until they have no aoTAP remaining to redeem. Tapioca created the Option Airdrop to establish stronger alignment between the protocol and loyal community members while simultaneously discouraging sybil attacks which are incentivized in traditional airdrops.

Notably, this is achieved through the airdrop not being distributed freely- you can think of a normal airdrop as a -100% discount call option- but instead carrying a substantial (but not 100%) discount against the market price of TAP at the time of distribution. Consequently, the protocol will generate POL (Protocol Owned Liquidity) from the proceeds of redeemed airdropped call options, which will be awarded to the Tapioca DAO Treasury. The option airdrop thus economically deters parasitic airdrop farmers from participating, since participation is not without cost. On the other hand, loyal community members will be happy to bear this cost, and receive an outsized reward in kind due to the economic barrier to sybil attackers & airdrop farmers who typically receive a large share of the total airdrop rewards.

Four cohorts will become eligible to redeem aoTAP; in the following- order, discount level, expiry, and total allocation:

1. LBP Contributors: 50% Discount, 48 hours, 1,500,000 TAP

2. Guild: 25% to 50% Discount (depending on role), 48 hours, 500,000 TAP

3. Pearl Club NFT Holders: 50% Discount, 48 hours, 500,000 TAP

4. twTAP Lockers: 33% Discount, 4x 7 day epochs, Unclaimed TAP*

Phase 1: All contributors to the LBP will receive an estimated proportional 30% share of aoTAP to their final LTAP holdings after the conclusion of the LBP. Therefore, if a user owned 100 LTAP at the conclusion of the LBP, they would receive an estimated 30 aoTAP in the first airdrop phase, bearing a 50% discount to the final LBP price.

Phase 2: Tapioca Guild members are long standing & dedicated Tapioca community members who participated in the original Taptalk live episodes, and obtained Tapioca POAP or Galaxe OAT NFTs which granted them access to Tapioca Guild roles. These roles are now locked. Tapioca Guild roles which are eligible for the Option Airdrop are:

OG Pearls 50% Discount, 200 aoTAP each

Tapiocan’s 40% Discount, 200 aoTAP each

Oysters 33% Discount, 190 aoTAP each

Sushi Frens 25% Discount, 190 aoTAP each

Each Guild member will receive their respective aoTAP in the second phase, or two days after the completion of the LBP, with a 25%-50% discount to market price at the time of distribution, depending on their specific Guild role. Community members can have multiple roles, and will receive the reward for each role they obtained. There are 2695 unique addresses eligible within this phase.

Phase 3: Pearl Club NFT’s were distributed for free to Guild members who provided useful feedback during the beta test phase of the Tapioca protocol, and can be found on OpenSea. Each PCNFT will be able to claim 714 aoTAP in the third phase, or 4 days after the LBP, with a 50% discount to the market price of TAP at the time of distribution. The PCNFT airdrop does not work off a whitelist or snapshot, and therefore the PCNFT aoTAP allocation is redeemed on demand by PCNFT holders. The reward is additive for those that own multiple Pearls.

Phase 4: twTAP lockers in the fourth phase will receive a pro-rata share of the total unredeemed aoTAP from the 3 previous phases, 6 days after the LBP. This aoTAP distribution will bear a 33% discount to the market price of TAP at the time of distribution. The twTAP airdrop phase will change from the prior 48 hour epochs to a seven day epoch, and the distribution of the unclaimed aoTAP will occur over four seven day epochs to twTAP lockers.

Transparency is 🔑:

Regarding Tapioca’s Supporters, there were two distinct cohorts:

Early Supporters & Supporters

Early Supporters: 3,500,000 TAP (3.5% of total supply) was sold during Q2 2022 at $0.22 per TAP, implying a $22m FDV (Fully Diluted Valuation), generating $770,000. This allocation will be distributed with a 24 month linear per block unlock schedule, with a Genesis unlock of 6%. This cohort was composed of 26 unique angels, DAOs, protocol contributors, and communities.

Supporters: 13,500,000 TAP (13.5% of total supply) was sold in Q2 2023 at $0.44 per TAP, implying a $44m FDV, generating $5,940,000. This allocation will be distributed with an 18 month linear per block unlock schedule, with a Genesis unlock of 8%. This cohort was composed of 98 unique angels, DAOs, protocol contributors, and communities.

Both Supporter unlock schedules begin at the conclusion of the LBP.

Venture Capital funds were purposefully excluded from making financial contributions. The maximum amount of TAP tokens any single individual was allowed to purchase was capped at 1% of the total supply, or 1,000,000 TAP. Of 124 total Supporters, only 3 Supporters reached this cap. The average contribution was $75,600, the median is $20,010, and the average allocation of TAP per Supporter is 129,891 TAP, and the median is 56,818 TAP.

In addition to the TAP tokens designated for the two Supporters cohorts, there exists two other predefined TAP token distributions.

Firstly, Chaos Labs has been allocated 284,090 TAP tokens, vested linearly over 18 months, with an 8% unlock at Genesis, following the Supporter terms. In addition to the allocation of TAP, 350,000 USDC will be paid out over the course of a year. This is in exchange for Chaos Labs’ risk monitoring and parameter recommendation services being provided to the Tapioca DAO for a period of a year.

Secondly, ProtocolGuild has been allocated 100,000 TAP tokens to its Arbitrum multisig (0x29031805D0f40E5dcDE21A236FB4a69e6e0423B2) to be distributed in linear monthly increments. This allocation aims to both acknowledge Ethereum contributors for establishing the foundation of DeFi of which Tapioca would not exist without, and to ensure the continued stewardship and advancement of Ethereum by offering incentives to contributors of Ethereum.

Both allocations were informally approved prior to Genesis via informal temperature checks conducted in the Tapioca Community Discord to ensure consensus before the finalization of both agreements.

No other arrangements were entered into for TAP token(s), including (but not limited to): CEX listing agreements, advisory arrangements, loan arrangements, token warrants, or agreements with market makers. The decision to allocate TAP tokens for any purpose moving forward will solely be at the bequest of the DAO through transparent negotiation on Tapioca’s Governance forum and a subsequent successful Snapshot vote.

Tapioca Foundation’s June 2023 announcement of the completion of the Tapioca fundraise can be viewed here.

(Incomplete) List of Supporters: @fisher8cap, @LayerZero_Labs, @crypto_condom, @dcfgod, @coinflipcanada, @noahseidman, @vfat0, @JonesDAO_io, @SmallCapScience, @icebergy_,  @redphonecrypto,  @blocmatesdotcom, @squirrelcrypto, @DewhalesCapital, @CapyCapital_

As we at Tapioca believe everyone has a right to know the full terms for financial contributors, we also believe you have a right to view financial contributors addresses, their allocations of TAP, even the Tapioca Guild airdrop address whitelist. This practice will hopefully become a requirement for any new entrant to DeFi.

Complete list of all Supporter wallet addresses, TAP token allocations, and addresses eligible for the airdrop (Guild only).

Final Token Distribution:

There are no "team tokens" allocated. Instead, 15,000,000 TAP, constituting 15% of the total supply of TAP, is allocated to the Tapioca Foundation to serve as incentives for core contributors ongoing stewardship & advancement of the Tapioca ecosystem. The Foundation’s TAP allocation will undergo a one-year lockup period, followed by a linear unlocking schedule spanning three years thereafter. This lock-up and protracted vesting period was implemented to guarantee sustained commitment from core contributors to the Tapioca DAO, reinforcing their long term dedication to the ecosystem.

The Tapioca DAO Treasury is allocated 8,000,000 TAP, equivalent to 8% of the total supply. The Treasury’s TAP tokens are only circulated upon DAO governance instruction. Possible applications of this allocation encompass seeding new TAP liquidity pools on Ethereum or other networks, initiating new incentive programs, and any other strategic initiatives guided by the DAO.

Supporters, as aforementioned, are allocated a combined 17,000,000 TAP, or 17% of the total supply between both cohorts. For comparison, Tapioca’s financial contributors have less ownership of the TAP token supply than Arbitrum (17.53%), Liquity (33.9%), Radiant (17.5%), and many other protocols. Early Supporters will receive a 6% unlock at Genesis, and the remainder will unlock linearly per block over 24 months. Supporters will receive an 8% unlock at Genesis, and the remainder will unlock linearly per block over 18 months.

Finally, the DAO Share Options (DSO) Incentive Program inherits the remainder of the total supply of 52,500,000 TAP, or 52.5%. This allocation is immutably utilized in the DSO Call Option Incentive program (oTAP), marking the inception of the first ever self-perpetuating & sustainable economic stimulus in DeFi- a concept first introduced in the infamous R.I.P. Liquidity Mining Mirror article (abridged version linked). oTAP is exclusively distributed to Singularity lenders with lock positions every epoch (week) over the course of 6 to 10 years.

DSO/oTAP Issuance:

In each epoch (week), the maximum potential TAP issuance available for redemption through oTAP American call option incentives follows an immutable exponential decay curve. This decay curve entails a reduction of 0.88% in the maximum potential issuance each subsequent epoch, and its calculation is determined by the following formula:

$$E(x)= E(x-1) - E(x-1) * D$$

E = total supply x epoch

D = decay rate (0.0088)

TAP from DSO enters circulation only when a Singularity lender with a lock position exercises their oTAP call option(s). In the event oTAP expires, which typically would only occur if the market price of TAP dropped below the strike price of any unredeemed oTAP call options, the TAP that the call option could have redeemed is instead "rolled over" to the subsequent epoch. This mechanism allows the DSO Program to dynamically extend well beyond its minimum six-year lifespan. The minimum six year DSO lifespan is based on the improbable scenario of 100% of the oTAP incentives each epoch being redeemed. The DSO incentive program establishes a natural price floor for TAP, enforced by the "strike price" of oTAP. The chart below shows how DSO extends itself with lower percentages of total oTAP being redeemed every epoch:

The strike price is the price at which TAP can be OTC (over-the-counter) purchased at by lenders with lock positions when exercising their oTAP call option incentives. The minimum discount a lender with a lock position can receive against the TAP tokens market price at the start of the epoch is 0%, and the maximum discount is 50%. A new lock position’s discount level is decided by the current AML (Average Magnitude Lock) at the time of lock through weighing the proposed lock duration and the amount of capital being locked against the current economic consensus of users in the Tapioca ecosystem. The strike price is computed at the onset of each epoch using the following formula:

Starting_Epoch_Average_TAP_Market_Price X Discount Level = Strike Price.

Example: $10.00 (Average Price of TAP at Start of Epoch) X 0.50 (50% Discount [Maximum]) = $5.00 (Strike Price)

In the context of DSO, Tapioca will utilize the TAP/WETH Uniswap V3 TWAP Oracle to obtain the price of TAP via three one hour price snapshots taken the day prior to the new epoch, which are then averaged to prevent attempts at price manipulation of TAP when formulating the spot price of TAP. This average is then used at the start of each epoch to calculate each oTAP holders strike price. For more information, please visit this section of the Tapioca documentation.

Inflation:

Generally, DeFi protocol tokens require untenable and infinite hyperinflation to sustain the system's rented liquidity. Using a recent example, a protocol based on a fork of the Liquity codebase released their token with a circulating supply of around 1 million at their Genesis. After two months, the circulating supply of this token now stands at over 17 million, thus inflating by an eye watering 17X in this very short time frame.

Through estimating 50% of all oTAP emissions being redeemed in the first year, the circulating supply of the TAP token will inflate to 28,607,614 TAP, an increase of only 3.8X from the Genesis supply of 7.63m TAP. Inflation continues decreasing year over year following an exponential decay curve until there is no TAP remaining for the DSO Incentive Program. It is also important to note, unlike typical DeFi protocols which employ liquidity mining (distributing free tokens as rewards for temporary liquidity provision), each TAP emitted brings permanent value (POL) to the ecosystem, as new TAP is only issued against a redemption of an oTAP call option.

By again using 50% of all oTAP emissions being redeemed, it would take ten years for the TAP supply to reach full distribution. Because of this and the normal hyperinflationary DeFi token model like the above examples aforementioned, the TAP token’s low float (small percentage of circulating tokens) may appear negative to unfamiliar onlookers. This design decision wasn’t made lightly, but rather was necessary to ensure the ecosystem could sustainably grow economically over a long time horizon via housing a sufficient amount of uncirculated TAP to use as incentives, while retaining programmatic finality with a finite supply of TAP tokens, and predefined expected inflation. Upon the conclusion of TAP token inflation, Tapioca will have captured enough POL to perpetuate itself forever without requiring further inflation. Tapioca’s token model was thus designed to be a paradigm shift to a sustainable, long-term oriented, value capture focused inflation design.

The end goal of Tapioca’s economic model is to create the largest DAO Treasury ever conceived in DeFi, in order to both bootstrap & scale USDO. It has often been argued that CDP (Collateralized Debt Position) stablecoins cannot scale due to their reliance on over-collateralization to remain stable. However, reducing collateralization to 100% akin to the reserve backed model like FEI or Ethena’s USDe results in centralization and enormous amounts of infrastructure and upkeep requirements (fail points) to maintain peg to the U.S. Dollar, and reducing below 100% collateralization as in the case of the algorithmic backed model like UST has resulted in losses of billions of dollars. The core problem with the so-called “stablecoin trilemma” boils down to stablecoin liquidity needs and reliance on employing unsustainable monetary policy, like liquidity mining, in attempts to acquire & maintain rented mercenary stablecoin liquidity. Maker has been the sole success in scaling the CDP stablecoin, thanks to their PSM (Peg Stability Module) which allows Maker to create on-demand liquidity for DAI at the cost of centralization (USDC/USDT directly backing DAI). Tapioca will be able to utilize its POL captured from oTAP incentives as a permanent source of USDO liquidity cross chain, while retaining full censorship resistance / decentralization.

Please visit this Dune Dashboard to view the issuance schedule in an interactive graph.

Time Weighted TAP (twTAP):

Within the Tapioca ecosystem, the TAP token bears some similarities to Curve's CRV token, as TAP, like CRV, lacks purpose unless locked—referred to as Time Weighting within the Tapioca ecosystem. Time Weighting represents an evolution of Curve's Vote Escrowing (ve), through its ability to dynamically adjust the stimulus based on economic consensus derived from Tapioca’s twAML within the Tapioca ecosystem.

TAP can be Time Weighted (locked) for a duration ranging from a minimum of one epoch to a maximum of four times the current Average Magnitude Lock (AML), which caps out at 100 years. The AML, or Average Magnitude Lock, serves as a user-controlled measuring stick that evaluates all new locks. As the number of locks and overall demand for twTAP increases, the AML rises, necessitating longer and longer lock durations to attain the maximum 100% output of twTAP for an input of TAP + Time. Conversely, with fewer new locks being initiated, pre-existing locks expiring, and overall demand for twTAP decreasing, the AML will begin to diminish, resulting in progressively shorter lock duration requirements to achieve the maximum 100% output. This makes twTAP’s output ratio supply & demand responsive, no longer fixed at arbitrary durations as with vote escrowing (4 years always = 100% output of veCRV for any input of CRV, for example, no matter the economic state of Curve).

When Time Weighting TAP, users obtain an output of twTAP based on their chosen lock duration and the amount of TAP being locked, ranging from a minimum of 0% to a maximum of 100%. For instance, if 100 TAP is locked, the user may receive anywhere from 0 to 100 twTAP. twTAP is a LayerZero ONFT-721, an Omnichain LayerZero extension of the ERC-721 NFT standard. Unlike veCRV, twTAP is transferable, and the users balance of twTAP does not linearly decay. Time Weighted positions are immutable- they cannot be modified or unlocked prematurely. Once the predetermined lock duration concludes, users may then withdraw their underlying TAP.

Each epoch (week), twTAP holders receive a pro-rata share of all Tapioca ecosystem fees obtained, which are then distributed as USDO. 100% of all ecosystem fees goes to twTAP lockers. These fee sources include:

-USDO Creation Fee (0% - 1%)

-Big Bang Interest (3% - 3.5%)

-Liquidation Fee (5% of total liquidation bonus)

-Flash Mint Fee (0.001%)

-Yieldbox Collateral Performance Fee (0.25% - 1%)

-DAO Owned LP (Arrakis V2) Performance Fee (50%)

twTAP holders also receive voting power, which offers the ability to direct the flow of oTAP via control over the Option Gauges, as well as Governance rights over the entire Tapioca ecosystem.

Tapioca Foundation:

Pearl Labs is a privately held limited liability company located in the British Virgin Islands, which conceptualized and created the Tapioca protocol, and currently acts as its core contributor(s). Pearl Labs was founded by twMatt & 0xRektora in February 2022, and its sole shareholder is the Tapioca Foundation. Pearl Labs houses talented contributors from all over the world, with a current contributor count of 15 who dedicated the past two years of their lives to Tapioca, including:

twMatt - Founder

twCanuck - Co-Founder & Foundation Director

0xRektora - Co-Founder & Lead Backend Engineer

0xKosmog - Backend Engineer

0xShippoor - Lead Front End Engineer

Giulio - Front End Engineer

Mome - Lead Graphics Designer

Jon Crabb - Lead UI/UX Designer

GrayMatter - Business Developer

uBenjammin - Research & Development

Miro - Community Admin

PunkGod - Community

Jayrod - Operations

Sara Chekroun - Legal & Foundation Director

0xWeiss - Lead Security Engineer

Tapioca Foundation is a Cayman Islands Foundation Company, a non-for-profit registered under company number CR-400607 which represents the Tapioca DAO in the real world.

All legal filings and documentation related to the Tapioca Foundation may transparently be found publicly viewable in the Tapioca Foundation section of the documentation.

docs

website

x

boring (and binding) legal stuff

THIS IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO PURCHASE ANY TAP TOKEN OR ANY OTHER DIGITAL ASSET OR PRODUCT. THIS IS NOT AN OFFERING, ADVERTISEMENT, SOLICITATION, CONFIRMATION, STATEMENT OR ANY FINANCIAL PROMOTION THAT CAN BE CONSTRUED AS AN INVITATION OR INDUCEMENT TO ENGAGE IN ANY INVESTMENT ACTIVITY OR SIMILAR. YOU SHOULD NOT RELY ON THE CONTENT HEREIN FOR ADVICE OF ANY KIND, INCLUDING LEGAL, INVESTMENT, FINANCIAL, TAX OR OTHER PROFESSIONAL ADVICE, AND SUCH CONTENT IS NOT A SUBSTITUTE FOR ADVICE FROM A QUALIFIED PROFESSIONAL.

THIS DOCUMENT CONTAINS HYPOTHETICAL, FORWARD-LOOKING AND/OR PROJECTED FIGURES WHICH ARE NOT GUARANTEED AND ARE SUBJECT TO CHANGE; ACTUAL NUMBERS MAY VARY. TAPIOCA FOUNDATION AND ITS AFFILIATES MAKE NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE COMPLETENESS, RELIABILITY, VALIDITY, OR ACCURACY OF THIS INFORMATION OR DATA. THE CONTENT HEREIN IS NOT ERROR-FREE AND MAY CONTAIN INCORRECT INFORMATION OR DATA. YOU AGREE AND ACKNOWLEDGE THAT ANY INFORMATION CONTAINED HEREIN IS SUBJECT TO CHANGE WITHOUT NOTICE. NO ADVICE OR INFORMATION, WHETHER ORAL OR WRITTEN, OBTAINED FROM TAPIOCA FOUNDATION OR ITS AFFILIATES, WILL BE CONSTRUED TO CREATE ANY WARRANTY OR REPRESENTATION NOT EXPRESSLY MADE HEREIN. FOR ADDITIONAL INFORMATION, PLEASE REFER TO OUR TERMS OF SERVICE AND RISK DISCLOSURE.

History

Liquidity Mining’s humble beginnings can be traced back to October 1st, 2017, with IDEX. IDEX rewarded IDEX tokens to users who filled limit orders (provided liquidity). Shortly thereafter in 2018, the centralized exchange, FCoin, debuted “Transaction Fee Mining”, which awarded FT tokens to traders as an 80% reimbursement for its BTC/ETH trading fees, spiking it’s volume by 7000%- surpassing Binance, Huobi, and OKex combined in trading volume, until…

After failed beginnings, liquidity mining was formally brought to prominence with the 2019 stakingrewards.sol contract, created by Synthetix through a grant accepted by none other than Anton Bukov, now known as the founder of 1inch. The contract was used to incentivize Synthetix’s Uniswap V1 pool of sETH/ETH through inflating the supply of SNX to fund the rewards. From 2020-2021, Synthetix paid out half a billion dollars in free SNX rewards (source: tokenterminal). Many however place the true beginnings of Liquidity Mining to May of 2020, with Compound’s infamous COMP Liquidity Mining Program. The Liquidity Mining program skyrocketed Compound’s TVL by 600%, and is thought of as the spark which ignited 2020’s DeFi Summer. Both Compound and Synthetix have both since tried unsuccessfully to end their Liquidity Mining program(s).

Following Compound’s meteoric “success”, we saw the rise of many new derivatives of Liquidity Mining, such as pool1/pool2 staking, being rocketed into the mainstream of DeFi with the viral Yam Finance. “pool1 staking” is otherwise known as the practice of staking (depositing) governance tokens (or LP tokens in pool2) for more of said governance tokens, proliferating the term “useless governance token”. Yam captured $750m in TVL in August of 2020 with its yield farms mixed with a splash of Ampleforth rebase mechanics, used to acquire yCRV. SushiSwap then created the famous “MasterChef.sol” contract as a vampire attack against the top AMM, Uniswap, reaching $1.2 billion in TVL. The MasterChef contract became one of the most forked contracts in history, being used to distribute token rewards to liquidity providers. Finally, Olympus combined Yam’s borrowing of Ampleforth’s rebasing mechanics with its own bonding model, a constant sale of discounted OHM tokens for stablecoins & LP tokens, as the crescendo to the (totally not) negative sum yield farming extravaganza of DeFi Summer.

Problem

The basis of the DeFi protocol economic model since it’s emergence has been predicated on liquidity mining- giving away free tokens as rewards to incentivize liquidity providers to deposit their capital in order for the protocol to capture TVL.

Let’s look at two critical statistics.

“A whopping 42% of users that deposit capital into a liquidity pool with liquidity mining incentives on the day it launches, exit within 24 hours. 16% leave within 48 hours, and by the third day, 70% of users withdraw their funds from the contract.” - Nansen

As you can see from the graphic above, DeFi protocols which employ liquidity mining are deeply unprofitable when we look at a protocol as a business, its fees as its revenue, and incentives as expenses. Liquidity Providers (LP’s) know protocols employing liquidity mining are operating at monstrous losses, even when compared to the plight of a normal tech start-up, and therefore also know that the value available to be “farmed”- predicated on the value of the token emissions- is fleeting. This is the reason why LP’s are observed by Nansen in such high percentages following the same ultra short-term script of: deposit > farm & dump > withdraw to find the next liquidity mining geyser to continue the never ending negative sum harvest.

Liquidity Mining’s goal is to capture TVL. What is TVL, anyway? TVL, or “Total Value Locked”- a metric created by DeFiPulse in 2019, is the capital currently deposited into a protocol’s smart contracts. Two questions: Is this liquidity actually locked? No. If we all put $1 million dollars into a Cardboard Box temporarily, does that mean the Box has $1m in value? Not really, the $1m is really a liability, as it’s owed to us. Let’s also take for example- if I offered you a million dollars for any amount of time I please- could be 12 seconds (one Ethereum block) or 10 years, versus $100,000 for one year guaranteed, which would you select? Time is Money, and without considering capital custody time with incentive models, we’re also thereby not able to capture real and estimable value, which is how yield farmers are not only enabled but incentivized to obtain something for nothing.

To hammer home the point- let’s say we open a coffee shop next to Starbucks together, charge the same amount per cup of coffee ($10), but then attach gift cards (token incentives) to every cup, enabling customers to come back to claim $100 in free coffee (liquidity mining), what would happen? Shitcoin Coffee would be the most successful coffee shop in existence temporarily, and catastrophically fail in a longer time frame, sound familiar? What would the customers do? Buy the first cup of coffee purposefully (deposit liquidity) just to obtain the gift card (token incentives), so that they could redeem them and drink for free, or sell the gift cards to others (yield farm), and never come back (withdraw) once the Gift Card’s funds run out (analogous to the token reward becoming worthless).

Game Theory wise, yield farming is actually the strictly dominant strategy in liquidity mining, creating, and most importantly incentivizing, a negative feedback loop which paradoxically incentivizes the extremely deleterious and parasitic strategy (farm & dump) as the most beneficial & logical strategy to be employed. Once the token has lost enough value to users employing the dominant strategy, the protocol can no longer inflate forever to rent liquidity, as the protocol becomes economically disabled with a worthless reward token. Giving away something permanently for free (tokens), for nearly nothing temporarily (rented liquidity) doesn’t work, no matter what package the Sisyphean task is bundled in- vested emissions, celsius style membership rewards, shifting the onus of incentives around (bribing), etc.

Call Option Incentive =/ Solution

“To get value, you must give value”.

Even though many looked at Olympus as the peak of insanity in DeFi Summer, it had an extremely powerful innovation made possible by Olympus’s bonding mechanism: Protocol Owned Liquidity (POL). The problem with Liquidity Mining & TVL boils down to the following piece of data: While Compound’s TVL increased by 600% with its liquidity mining program, Compound only captured $45m in fees with its $400m in emissions (expenses) (source: tokenterminal) from 2020-2021- nearly $10 in expenditures (emissions) for every $1.00 in revenues (fees). TVL has nearly zero value as it’s liquidity rented (liabilities) from the mafia (yield farmers), while POL’s value is indisputable- Liquidity is King. The advent of POL was the dawn of what many called “DeFi 2.0” (cringe), with headliners such as TribeDAO (FEI), Tokemak, and Frax. Generally in “DeFi 2.0", instead of employing liquidity mining, liquidity providers would receive an incentive that allowed them to purchase market discounted governance tokens. If Compound’s nearly $400 million dollars in COMP emissions from 2020-2021 were instead COMP call options or bonds, bearing an average of a 50% discount to market price, Compound would have brought in $200 million dollars in POL- seeding the largest Treasury in DeFi by a factor of two. Olympus still stands as one of the largest Treasuries in DeFi today (source: defillama).

While that is obviously a marked improvement, it does not address the parasitic nature of yield farming, nor many other issues. Call Options & Bonds do have many intrinsic benefits, and a few of their own problems (namely UX), but most importantly alone do not solve the three largest problems needed to create a self perpetuating and sustainable economic model. Tapioca’s economic model is much more than “call option incentives”.

The three requisites we posited were required to create our desired economic model are:

1. Firstly, employing a sustainable incentive model which maximizes economic growth while minimizing the negative effects of the growth stimulus itself.

2. The protocol’s (business’s) economy needs to promote real value creation (Fees & POL) to enable self-perpetuation (true flywheel) which reduces dependence on external LPs, and maintain profitable unit economics, which I define as a protocol having less expenditures (token incentive expenses) than balance sheet inflows (POL capture) and revenue (fees)- which is the basis of the real yield movement pioneered by GMX.

3. Lastly, the model must employ game theory in a manner that incentivizes a well-defined positive feedback loop. DeFi is nothing more than an MMO Economic Wargame, and the protocol must target & reward what it deems to be the most beneficial strategies (generally longer term value provision), and deter the employment of the most deleterious strategies (generally mercenary liquidity provision, or parasitic yield farming).

   Let's not forget, DeFi = Yield, and DeFi has been in a functionless state for almost two years due to an incentive problem, or lack of attractive supply rates for LP’s to be incentivized to provide capital, especially where short term U.S. Treasury Bills yield multiplicatively over Aave or many other major protocols. Secondarily, decentralized CDP stablecoins have had an inability to scale and/or to enforce their price alignment to the U.S. Dollar, especially without becoming a “USDC Wrapper” (backing itself with USDC/USDT, losing censorship resistance), such as with Aave’s depegged GHO stablecoin, due to a dire supply side incentive misalignment. To address this, decentralized stablecoin issuers like Maker (DAI) have been chewing through protocol profits to incentivize DAI demand & supply side incentives via the Enhanced DAI Savings Rate (eDSR).

These equally dire problems that Tapioca’s success depends with it’s USDO stablecoin & lending markets both boil down to an incentive problem. Tapioca was designed from the ground up to meet the three aforementioned requirements of a self-perpetuating value capture focused economic model with DAO Share Options (DSO) ft. oTAP (call option incentive), Time Weighted Average Magnitude Lock (twAML), while being targeted on POL & “real TVL”, or truly locked value.

The Actual Solution

Game Theory is incredibly important to economics, as we can determine potential outcomes of economic models via backward induction through the perspective it affords. For example, Liquidity Mining creates a strictly dominant strategy that incentivizes all players (users) to adopt a parasitic yield farming strategy, while Olympus’s memetic “3,3” creates an infinitely repeating Prisoner’s Dilemma. Olympus through backward induction loses subgame perfect equilibrium, a theory created by John Nash that calls for no player having an incentive to change their strategy, which is why users became incentivized to -6 (Sell) instead of continuing to +6 (Stake). Tapioca’s economic model is based around Rubenstein’s Bargaining Model, in which players (users) make alternating offers of lock time of TAP or lent USDO to the protocol to receive rewards (twTAP output ratios & call option discount levels, respectively). If players stop negotiating (locking), the AML (Average Magnitude Lock), a user controlled measuring stick that quantifies the value of a proposed lock against the current consensus of economic activity (current locks) in the Tapioca protocol, begins decaying until users begin locking again. Thus, the higher the AML is, the more open locks there are, and the higher the lock time will be required to get larger rewards, and the lower the AML, less open lock positions, the lower the lock time will be required to get larger rewards. Only users with sufficient offers (at least 0.10%* of total platform liquidity) affects the AML measuring stick. The oTAP discount level to TAP market price goes from 0% to 50%, and the twTAP output for an input of TAP + Time Weight (lock duration) goes from 0% to 100%. twTAP abolishes Curve’s vote escrow (ve) fixed “loyalty tiers'' (100 CRV locked for 1 year = 25 veCRV, 100 CRV locked for 4 years = 100 veCRV) in favor of dynamic output ratios to constantly ensure the minimum reward needed to incentivize new locks is met. twTAP ensures the circulating TAP supply is constantly diminishing, being the only way for users to capture a pro-rata share of Tapioca’s ecosystem fees, paid in USDO. Curve’s gauge model was also employed for twTAP lockers to obtain the ability to direct the flow of oTAP incentives to their desired lending market(s).

Sustainability is aided via call option incentives, first employed by Andre Cronje with Keep3r Network, which I opine are the perfect incentive vehicle from a stimulus standpoint as they are a right to purchase an asset at a specific price (strike price), within a specific time frame (expiry). The lowest strike price = the price floor, and these options expire each weekly epoch. The oTAP options can go “OTM” (out of the money, or unprofitable to exercise) if the strike price of the users oTAP goes below the market price of TAP, and/or simply expire, capping the deleterious effects of the stimulus. Liquidity Mining on the other hand can be thought of as an infinite expiry, $0.00 strike price call option. The unredeemed TAP from each epoch rolls over to the next- extending the incentive program well past the six years it would take to emit the majority of the TAP available to DSO per it’s predefined design- therefore, the circulating TAP supply doesn’t inflate unless the option(s) are exercised, and the incentive program can constantly extend itself. The overall global number of oTAP shares available in each weekly epoch are implemented along an exponential decay curve, which means the potential inflation of TAP is in constant decline. Lastly, TAP has a fixed supply of 100,000,000, bringing an end to DeFi protocols infinite inflation, as Tapioca no longer needs to retain rented liquidity (TVL). twAML, however, is the key to sustainability, as it enables Tapioca to constantly ensure the monetary reward (twTAP output ratio & oTAP discount level) are always in line with the minimum requirement of the consensus of economic actors to continue economic growth (snowballing TAP locks and locked lending positions) at the lowest cost basis to the protocol. Lastly, codename “FL” is planned to establish on-demand liquidity at TAP’s price floor, further defending the floor, heightening POL capture, and enabling the Tapioca DAO to reclaim TAP from the market at a near positive cost basis. If a user doesn’t want to commit to a locked lending position or a locked TAP position, they will only receive real yields (or have no share of protocol revenue or governance in the case of twTAP lockers), as temporary liquidity (TVL) isn’t valued by the protocol.

Profitable Unit Economics are met by Tapioca’s economic model from the fact that the free market controls the value of time via the AML, reaching allocative efficiency of incentives- or incentives that are distributed in equilibrium with user requirements and retain the maximum benefit to the producer (protocol) and users. Tapioca’s focus on capturing “Real TVL” - actually locked value, targets the stimulus at creating a positive feedback loop of capturing real revenues (fees) & balance sheet inflows (POL) with expenditures (incentives). This is because the free market controls the AML, and thus the reward size is always in harmony with the minimum economic stimulus required to continue economic growth. Capturing locked capital which can be extracted for fees will create a calculable cost basis of revenue (fees) for the Tapioca ecosystem:

Revenue [Average Fees Per Lock] - (Expenditures [Average oTAP Per Lock] - Balance Sheet Inflow [Average POL Captured Per Lock]) = Cost Basis.

The most important component to Tapioca’s unit economics is the POL captured by every redeemed oTAP incentive. The need for external liquidity will linearly diminish, especially important in the case of USDO LP on AMM’s, giving the DAO enormous control over USDO’s programmatic alignment to the U.S. Dollar. Thereby this is why TAP inflation was also designed to linearly diminish, decreasing expenditures while revenues stay constant via POL replacing external liquidity. Tapioca’s POL will also begin to grow in value, and create more and more fees itself, which will increase revenue.

Death begets Salvation- Genesis 022424

-twMatt

tapioca.xyz

The Original Installments:

nft://10/0xc52c79D0064056AB467417419e1D06a586876183/?showBuying=true&showMeta=true

nft://10/0x5d61b8b59C4a5444CFaD458Bc39357576eDaad98/?showBuying=true&showMeta=true

$$October 1st, 2017 - October 19th, 2022$$ $$[Epilogue - October 19th, 2023]$$

LIMBO

By the supreme edict of your el jefe, the Obituary of the Death of Liquidity Mining was expertly forged by the flourish of my pearl inlaid quill, and swiftly dispatched upon the blockchain. My loyal Pearl Labs interns, laboring tirelessly under my scrutinous gaze without luxury of recompense, accomplished this feat precisely one year ago. The solemn and somber Obituary was subsequently graced by an exorbitant procession of countless mourners, whose numbers swelled as if summoned by the heavens themselves. Upon the grand stage of this accomplishment, I magnanimously accepted and prominently adorned many Nobel DeFi Prizes (not really) upon the exalted expanse of your jefe’s desk, all thanks to my pioneering solution to world hunger the DeFi incentive dilemma: the DAO Share Options (DSO) incentive program & the twAML (Time Weighted Average Magnitude Lock) whitepaper. Following the solemn pronouncement of the Obituary, tears fell in a synchronized cadence from the eyes of many yield farmers, their descent mirroring a solemn percussion upon the frigid concrete floors of their subterranean basement chambers, conducting a symphony of anguish, reminiscent of a cacophonous chorus one would find in a South Park episode of irate blue-collar American laborers united in a collective cry of resentment, bellowing as one, "That damn Tapioca, they took our four digit APY’s!"

However, many of its more discerning readers saw not only an alternate path to embark upon, but witnessed their inaugural glimpse of an entirely new world emerging within the Singularity. Dawn broke over the alien landscape, and the sails of curiosity and excitement unfurrowed, all to set sail into the newly charted waters of salvation. They didn’t merely peer through a new lens, rather, they donned the kaleidoscope itself, seeing the multifaceted intricacies of decentralized monetary policy once left abandoned, now finally reveal itself in a mesmerizing dance of refracting lights. These readers consisted of front-runners protocol contributors, liquidity providers, and power users. What very few realized, however, was how terminal our patented flywheel’s cancer was, the prognosis was truly dire. As the Obituary aged, the malignancy only continued to spread throughout the bodies of our beloved protocols, their alleged “flywheels” stopped turning one by one- the hamster’s we all knew and loved, once endlessly racing for unsustainable yields inside of them, were now too sick & sedentary from the Sisyphean triathlon they were programmed to compete in, to continue forging on the circular negative sum path(s).

As many did not foresee the passing of our dearly departed, eyes were thrust wide open to the looming harbinger of collapse; the single greatest dilemma faced in DeFi, even still today, is a lack of sustainable incentives. This is the very reason I forgoed the finer things afforded to the jefe to instead take up the mantle of devising a comprehensive solution to the very problem exactly one year ago (foresight, my frens). DeFi is but an ocean, Liquidity is its water, and Incentives are Rain. In the eerie silence of the bera’s desert, DeFi protocols stand as parched cacti. They await not salvation but rather the chilling yet sweet final embrace of the "Wind Down" Snapshot proposal’s euthanasia, for the spectral hand to lead them to the ethereal realm, where their existence will hopefully find peace & sustainability in the haunting depths of untracked tokens inside cryptographic coffins throughout the catacombs of shitcoinery.

Now that we’ve long since poured one out for the dead homie, and had our time to grieve- while time is supposed to heal all wounds, it surely hasn’t mended the grievous wounds inflicted upon DeFi. Hence, why an epilogue to the obituary was prepared, to finally reach the closure we have all yearned for, and to hammer the final nail into the coffin of liquidity mining, ensuring the forkers grave diggers relent on trying to resurrect what’s best left to rest. This epilogue will analyze the dysfunctional decentralized finance household post the sudden passing of its matriarch, Liquidity Mining, in October of 2022. In summary, Liquidity Mining, born to parents, IDEX, just five fateful years ago on Hollow’s Past, experienced its first teenage heartbreak when it and its date, FCoin, lost their bid for prom queen & king to Binance in 2018. After a makeover by Synthetix shortly thereafter, she then tied the knot after finally finding true love with her now widow- Compound. This set the stage for the “Summer of Negative-Sum Love” more commonly known as “DeFi Summer”. Except this Summer was not in 1967, but 2020- and instead of hippies we had yield farmers, instead of LSD we had Liquidity Mining, and instead of The Beach Boys we had SushiSwap. The yield farmers tolerance grew to ever rapidly increasing APY’s, and Liquidity Mining, due to the mounting peer pressure, spiraled into a deep addiction and tragically passed from a massive overdose- with Terra, Geist, Yams, among many others unsustainable & adulterated yields showing up in the Coroner’s final toxicology report.

Liquidity Mining was loved by farmers harvesting magic internet money from protocol owned beanstalks, and hated by hordes of holders of tokens that now bear the same value as Argentinian Pesos. Secondarily, this epilogue is needed to address the specter of Frankenstein looming in our resident gigabrain, 0xRektora’s laboratory, as one of the preeminent heirs to our dearly departed’s fake plastic crown in late 2022: our very own oTKN. Andre Cronje with Keep3r Network & Fixed Forex birthed the oTKN (oKP3R) in October 2020, where shortly there after it was then discovered to be left for dead and ultimately succumbed to chronic neglect as the red headed stepchild to Cronje’s newly born & favorite son- Solidly and ve3,3. The oTKN entered incentive purgatory by March of 2022, with Cronje’s departure from the space. After 0xRektora found and placed the young oTKN into the Shrine of Resurrection after some careful yet significant improvements: oTKN’s life was restored, more alive than ever before, handing out coupons like candy on Halloween (wait, coupons?). But above all else, the forest has been missed for the trees, and the need has arisen to dispel the notion that call options themselves are the sole solution to creating sustainable incentive models. Actual Call options, while we do assert are the best vehicle to tackle the incentive dilemma, the right driver and destination are far more important. Let’s be real, regardless if you’re in a Lamborghini Gallardo or a bicycle, you don’t want to end up driving shotgun with an armed & under-the-influence Bitboy manning the wheel, traveling through the dark forest without a map.

In limbo, our punishment is a denial of paradise.

LUST

Before continuing, let's jump in our DeLorean and hit 88 mph to back up a year- why was Liquidity Mining’s Obituary so impactful? The bear market. In up-only adderall fueled euphoria, showering free token emissions to mercenary liquidity providers works, well, actually, not really at all (e.g. FCoin is tots gonna dethrone Binance with its “trans fee mining”, just like Craig Wright will one day prove he’s Satoshi). But wait- what do you mean it doesn’t work?!

As one now imprisoned, adderall addicted, imperial Chinese harem involved, Bernie Madoff-lite explained (or admitted) about liquidity mining: “DeFi is like a cardboard box where you can put $1.00 in and get $2.00 in return”. (wait, wut). If you cut through all the buzzwords, the traditional DeFi token economy truly boils down to “spray worthless tokens without a driver considering the cost of growth nor controlling the amount needed to be distributed to mercenary liquidity providers in order to spur & maintain growth. Pray TVL number goes up regardless of the utilization or demand of liquidity in the system through the incentive vehicle of liquidity mining- distributing free tokens en masse without a care in the world. With a desired destination generally entailing obtaining the holy grail of obtaining the biggest meaningless TVL number of them all.” But wait, then what? Soon, my fren. Liquidity Mining did accomplish this pointless pursuit with several partners in crime many times over- albeit all with short time horizons. Once the incentive token was dumped enough times that the founders of the protocol said to themselves “at least they didn’t ghost us” (sorry- horrible halloween joke), the protocol becomes crippled economically- no longer able to hold onto its fleeting and near valueless acquisition of rented liquidity.

The Liquidity Mining model was completely fundamentally flawed, giving away more lasting value than it ever momentarily received. For a sustainable model, the basic premise has to entail real value capture (destination), and the economic stimulus having the largest impact possible while minimizing the deleterious impact as much as possible (driver), or it will fail, regardless of the vehicle. Many of you know my patented phrase “To get value, you must give value”. Which, the quote simply means obtaining allocative efficiency- incentives that are constantly aligned with consumer preferences (the free market), while the state of output of incentives has a price equal to or below the cost of the incentives themselves.

“Allocational efficiency, also known as allocative efficiency, is a characteristic of an efficient market where the optimal distribution of goods in an economy meets the needs and wants of society. This occurs when there is an optimal distribution of goods and services, taking into account consumer’s preferences. Virtually all resources are limited; therefore, it is essential to make the right decisions regarding where to distribute resources in order to maximize value.”

If an incentive program is allocatively efficient, you can near infinitely sustain growth stimulus- sustainable incentives.

However, we still have an unanswered question: What really was the endgame of liquidity mining, anyway? That’s the great part, there really isn’t one. If you read between the lines and look at the intention, however, it always boils down to “Inflate & Rent Liquidity Forever,” that’ll surely work.

Moving swiftly along, why is TVL meaningless, though? Isn’t that what every DeFi protocol pursues, and the metric we all appraise DeFi protocols value with? That’s (a big part of) the problem. We need to trace back to TVL’s origins first to understand what exactly it is that we’re discussing. The “Total Value Locked” or “TVL” metric was created by DeFiPulse, on February 23rd, 2019. Even during its humble beginnings, TVL was a meaningless metric: for example- counting both the deposit of collateral & borrowed amount in a loan on Compound as TVL - e.g. user posts 100 ETH as collateral, borrows 50 ETH, Compound thus has 150 ETH in TVL (no it doesn’t, it has 100 ETH in “TVL” in the most hand-wavy definition possible, more on that later). Or, counting all the liquidity deposited in pool1 & pool2 as TVL- e.g. “pool1” being the total dollar amount staked of self-issued worthless governance tokens, and “pool2” being the total dollar amount staked of self-issued worthless governance tokens in an LP pair as TVL (double no- self issued governance tokens certainly shouldn’t count towards TVL), etc.

Most importantly however, TVL, as we must have all forgotten, stands for “Total Value Locked”. Firstly, a basic question: do you know of any “TVL” that is actually locked, or even has much of any appreciable value? There may be some examples out there, but for the most part- let’s make up a simple scenario to illustrate- we have a protocol called “Cardboard Box”, with a smart contract that distributes “SHTCN” token incentives (great name, huh?) providing 100% annual interest against user deposits of USDC. Users witnessing this, rush to deposit their USDC to receive the huge and totally sustainable yields consisting of the prized SHTCN token incentives- the smart contract quickly amasses $1m in USDC- thus, $1m in TVL.

Is Cardbox Box’s “TVL” locked? - No, users can (and will) withdraw at any time.

Does Carboard Box’s “TVL” have any value? - No, while it does have $1,000,000 USDC deposited, and $1m USD is $1m USD, the problem is, $1m USDC currently lent to the Box is different from $1m in liquid USDC in your hardware wallet. Let’s think, if I made a smart contract that’d lend you $1,000,000 in USDC, but only for 12 seconds (one Ethereum block) before the USDC is burned, does that have any value to you? Probably not much. If in the same example, I make a smart contract that would lend you $10,000 USDC for a year before the USDC would be burned, you’d probably select the latter. Therefore, time actually is money, and the value of time is quantifiable.

“But el jefe, if the TVL metric is this stupid, why did it become so prominent? What was the logic behind the TVL metrics importance from the initial supporters of it?”, (ofc, outside of the prior top metric “DAU” (Daily Active Users) somehow being even dumber, and putting aside big TVL numba gibs higher social hierarchical status) I promise, you’re going to love this, here goes nothing: because the Cardboard Box Protocol has $1m USD in the box at the moment, the alleged “value” is predicated on the fact that others decided that there should be $1m in the box (as that is what is (currently) deposited), therefore, the rationale is that the box has $1m in “value”, because of the consensus of depositors who collectively decided to put the million smackers into it. You see how extremely circular and ridiculous this logic is? In reality, firstly, the $1m is actually a liability as depositors are lending the capital to the box, and even more importantly, the Box’s cost of renting the $1m USDC through paying out 100% annual interest to the depositors in SHTCN token incentives obviously outweighs the fees being captured, because there are none- therefore it is obviously unsustainable as it’s operating completely cash flow negative- the actual total value is negative 100%, worthless, because in plain terms: it paid out $2,000,000 in SHTCN permanently (100% APY) to rent $1,000,000 temporarily.

Say hello to 99% of DeFi.

In lust, unrelenting winds of unquenchable desire spiral around us as punishment for being led astray by our worthless desires.

GLUTTONY

This is why Uniswap and many others are able to keep their top spots without incentives, (besides having better tech), as the traditional incentive model is the problem, not the solution. Consider Compound's Liquidity Mining Program, which catapulted it to the world's #2 protocol by TVL, with over five times Aave's TVL at its peak, to now sit at less than half of Aave’s TVL. Or look at LooksRare’s meteoric rise with its LOOKS token reward program which ignited a fire to allow it to outpace OpenSea in volume for several months, to now not even being in the top ten NFT marketplaces by volume. Incentive models are pivotal in any sector where specific behaviors or outcomes are sought, but they can be even more harmful as they can be beneficial. Shout out to American Airlines AAirpass holders, the OG yield farmers. However, imagine for a second if Compound or LooksRare could have sustained their success? That’s precisely what makes this dilemma so important- the stakes could not be higher.

But let’s really stop for a moment and think, this is honestly shocking to yours truly, does nobody else see how flatly absurd this incentive model is, and why it constantly fails? Anyone could “succeed” with the TVL metric in any field, and here’s an example to prove it. Open the Cardboard Box coffee shop (coffee farm protocol) next to a Starbucks (incumbent protocol) and charge $5.00 for a cup of coffee (fee), half the price of a cup of coffee at Starbucks. Then, attach an IOU to every cup sold that allows the customer to come back and collect $5.00 back from your cash register, plus an additional $5.00 (analogous to token incentives) whenever they please. Customers will buy the coffee even if it tastes like the TikTok Pink Sauce mixed with sewer water and Hepatitis-C- some will even buy it just to collect the $5.00 profit (yield farmers). The profits from coffee sales (fees on a protocol) will surely outpace the IOU’s being collected on, right? Let’s really think - what would obviously happen?

Cardboard Box Coffee will have ten times the amount in their cash register by the end of the day (TVL) then Starbucks does, even probably in a month's time frame, even maybe more. Let's say Cardboard Box Coffee sells $100,000 in coffee the first day- speculators then emerge who opine that the company is worth $100,000 because, well, there’s $100,000 in the till, and invest in Cardboard Box equity (VC’s), and then maybe even Cardboard Box Coffee goes public on the ABCTX Exchange at a $1,000,000 USD valuation, and many more invest (retail investors). Dear reader, you probably have already deduced there’s a critical issue. The Cardboard Box Coffee customers can come collect that money from the register against their IOU’s at any time- and that they will do.

By the end of the month, as you’ve probably already deduced, Cardboard Box Coffee will be out of business. Most of the customers would similarly realize they need to get that $10.00 out as quickly as possible (yield farmers and a bank run). The VC’s of course have already sold their shares, but the retail investors now have the equivalent of 1923 German Marks, and the customers who didn’t redeem their IOU’s can’t collect $10.00 from the dust now lining the registers, ending up like LPs to Lehman Brothers in 2008 (or a web3 VC, or Anchor Protocol)- this must be starting to sound a lot like DeFi (and something far more insidious, too…).

A quick statistic from the original Obituary that’s very poignant to this exercise:  “A whopping 42% of yield farmers that enter a farm on the day it launches exit within 24 hours. By the third day, 70% of these users withdraw from the contract and never return.” (source: nansen)

But why would a large selection of customers redeem their IOUs as quickly as possible? Because like the yield farmers shown in the data point above, they know there is no chance that the shop can sustain the pay-outs long-term. The only customers who have any chance of profiting from the IOU’s are the ones who redeem their IOU’s as quickly as possible, and due to this knowledge, that they will do. This is called employing the pure strategy- the singular strategy that will yield the only positive outcome. Yield farmers aren’t acting maliciously, they’re literally being dealt a king and an ace in a game of Blackjack with protocols hoping for them to hit on their 21. The only logical strategy for users of protocols employing our dearly departed liquidity mining is to farm & dump, and that’s why the cryptographic cookie crumbles the same way every time.

Therefore, not only is the destination that DeFi protocols are predicated on, rented liquidity or “TVL”, an open lie- but as I’ve outlined in painstaking detail, the entire economic model DeFi protocols are based on, our one and only recently departed soul (liquidity mining), is utterly nonsensical with the protocols worthless governance token™ having a 0% chance of survival. Why I went into this level of detail however is to show that protocols employing liquidity mining are literally incentivizing users to act in the opposite way that they desire, all in a negative sum pursuit for a meaningless and valueless metric. In DeFi, protocols talk about “sticky liquidity” and throw a veTKN and some gauges on top of a liquidity mining program and call it a day- you’re literally forcing your LPs to farm & dump, this has failed over and over and will never succeed.

As we also now understand, liquidity deposited into a protocol is not valuable in of itself. The true value of a protocol besides its balance sheet (treasury) is its liquidity custody time, utilization, and demand. The more a system is able to capture dollars at a positive cost basis for larger periods of time, the ability for the system to put the dollars inside of it to work, and the more people are willing to pay for the dollars in the system- is actual value being created- this is called unit economics. Currently, protocols take none of these very important metrics into account when designing (forking) incentive programs. Even for example: if your protocol got a TRILLION DOLLARS in TVL: How long will your protocol have custody of the capital? Can your protocol even put that much capital to work? Does your protocol have enough demand for that much capital? And finally, what’s your protocol's cost / benefit in all of this? All unanswered in current DeFi monetary policy.  Gee, I still can’t figure out why most protocols have more contributors than users.

Unit Economics are a foundational measurement of the sustainability of a business. Using Unit Economics, we can shoe horn it to calculate DeFi protocols unit economics. Emissions & Operational Costs are Expenditures, Fees Collected by the Protocol & Token Holders are Revenues, and Treasury Inflows are Asset Inflows (or Outflows) to the Balance Sheet. The primary way to be sustainable, regardless of the incentive vehicle (call options, bonds, liquidity mining and its many incarnations, etc) is by the protocol having positive unit economics- protocol expenditures being less than revenues.

The following data disregards Balance Sheet (Treasury) inflows & outflows, but don’t worry dear reader, that will come shortly. These three metrics when weighted against one another can accurately determine the prognosis of a protocol’s sustainability, profitability, and ability to scale. Let’s look at a few protocols with these metrics in mind.

In Gluttony, a vile storm plagues us, symbolizing our programmatic lives of over-indulgence.

GREED

(Note: “Fees” are the share of protocol fees that have been captured by the protocol or its token holders for accessing its liquidity and/or services, and do not include fees paid out to liquidity providers. “Expenses” are the dollar amount in token incentives distributed by the protocol to rent liquidity and/or create a user base as well as operational costs. “Incentives” is the same metric, without operational costs, if not available or applicable. The percentage indicates if the protocol is capturing more in revenue then it’s losing in incentivizing usage & liquidity. All incentive data is sourced from TokenTerminal, fee data from DefiLlama, unless otherwise stated.)

AAVE: +72.95% (+$7.74m) - ($10.61m in fees - $2.87m in expenses)

GMX: +51.9% (+$16.23m) ($31.24m in fees - $15.01m in expenses)

Lido: +20.2% (+$8.78m) - ($43.52m in fees - $34.75m in expenses)

As you can see, these are three of the most entrenched protocols in their respective categories, who have also largely winded down their incentive programs:

AAVE: -97% [$125m in incentives (2022) to $3m in incentives (2023)]

Lido: -85% [$91m in incentives (2022) to $13 in incentives (2023)]

They represent outliers that withstood unsustainable liquidity mining programs from the sheer demand of their services, good timing, or a mix of both. The important thing to takeaway on why these protocols are so highly valued however simply comes down to their cash flow. For example, every $1.00 GMX spent on incentives, it essentially gained $2.00 in fees in return, which proves that GMX is held in high regard for good reason, and that even with the deceased liquidity mining incentive vehicle (esGMX), with positive cash flow you can sustain a protocol, however difficult it may be with a poor and unoptimized incentive model. GMX is extracting massive value from liquidity in their system, proves its ability to scale, while this nugget of information also perfectly explains what “real yield” really is- positive unit economics.

In comparison, let’s take a look at three newer protocols which have garnered significant market share utilizing liquidity mining “2.0” (not really, will explain shortly) model(s):

Lybra (Liquity Fork): -86.26% (-$8.41m) - ($1.34m in fees captured - $9.75m in incentives)

Note: data determined by using the current price of LBR at time of writing which is near an all time low, and minimum possible emissions notated in the Lybra docs, thus being best case.

Velodrome: -91.72% (-38.89m) - ($3.5m in fees - $42.29m in incentives)

Note: Incentive data sourced from TokenTerminal and fee data sourced from DefiLlama. Does not include 3M OP token incentives Velodrome received in November of 2022, which at current market prices is a further $4.92m in expenses, nor any further OP token grants received and distributed as incentives in 2023.

Radiant V2 (Aave V2 Fork): -23.75% (-$4.24m) - ($13.61m in fees - $17.85m in incentives)

Note: This data is not year to date (YTD), and instead represents March 2023 to today due to Radiant V2 launching in March, and is based on independent analysis of RDNT token emissions, averaging the price of RDNT to $0.2975 using DefiLlama’s RDNT token price data from March 2023 to today, then finally using Radiant V2 fees reported on DefiLlama from March 2023 to today. TokenTerminal reports a vastly different figure of $904.7k in RDNT emitted YTD. At the bottom of this article, the analysis used will be attached via a Dune Analytics link for review.

All three of these protocols are a little over a year old, and are operating on a scale of bad to worse on negative cash flow. In their defense, this isn’t atypical- startups generally do not turn a profit and have negative cash flow. However, this data serves to point out that “F2E” (fees to expenses) would be a far more optimal metric for evaluating a protocol's “value” than meaningless TVL. However, now that the stage has been set, you just activated my trap card. Let’s look at one last set of data:

Current DeFi Treasuries (minus self issued tokens):

1. OlympusDAO: $136 million

2. Lido: $65 million

3. MakerDAO: $50 million

4. Aave: $32 million

5. Synthetix: $17 million

Olympus, even today, has the largest Treasury in DeFi by 3x, and has more than 5X the Treasury size than the most profitable protocol we just analyzed- Aave. Take a moment to let this profound realization sink in. This data we just examined underscores the critical importance of analyzing and modeling the future of DeFi incentives. This vividly illustrates that, beyond any theoretical functionality, the lifeblood of a DeFi protocol's success lies within its incentive model.

Ultimately, Olympus had introduced a singular but critical innovation that revolutionized the lengths that DeFi monetary policy could take a protocol, shifting vehicles from our dearly departed liquidity mining, to bonds, and redefined the destination from TVL to POL (Protocol Owned Liquidity). Remarkably, even with Olympus being far past their infamous days of dominance, their Treasury still stands as a towering presence, outshining even the most profitable and firmly established protocol’s Treasuries in the realm of DeFi. I still regard Olympus as the first wave of “DeFi 2.0” (as fucking cringe as the numerical defi generation bullshit may be).

But why does a treasury matter? Liquidity is King. This is why “DeFi 2.0” was predicated on capturing POL with protocols such as Olympus & Fei. While these protocols shifted the destination from TVL to POL, they “failed” as they were still left driverless and in the wrong vehicle (bonds), generally were still employing liquidity mining, and had a model (3,3) predicated on Prisoner’s Dilemma game theory. As Compound, Synthetix, and many of Liquidity Mining’s spawn have found out, once you turn the money printer on (liquidity mining), you can’t turn it back off. When you turn on the liquidity mining spigot, the liquidity locusts come like maggots to a corpse, and they will soon control your plutocratic governance. It’s akin to a business paying the Mafia protection money- let’s think, is Lucky Luciano going to vote yes to decrease or stop their monthly payments? No.

But to the question posited, POL (protocol owned liquidity) is the truest value obtainable. When you wield control over the waters of liquidity within the vast ocean of DeFi, you reach a point where the need for external incentives- the rain to water the crops, will become completely obsolete. Thus why the TAP token has a fixed supply- infinite inflation is no longer necessary. Let’s also not forget- liquidity begets more liquidity- a self amplifying effect. This is why Maker has stood far and above any DeFi protocol to date without any incentives, as the system has so much liquidity that act as a magnet for obtaining even more liquidity, especially also proving that CDP stables are highly scalable without giving up price stability or censorship resistance with voodoo magic and delta gamma theta hedged liquid staking derivatives sitting on CEXs, it all comes back to incentives. The question now is, “Matt, I'm sold, we get billions in protocol owned liquidity, but that’s a lot of socks you’ll need to sell, how tf do we get there?”

Glad you asked, dear reader. Let's pause for a moment and contemplate what Aave's treasury would look like, had they only simply opted for bonds or call options as incentives instead of liquidity mining (R.I.P). We can actually answer that: in just two years, Aave would (conservatively) wield control of $350 million god damn dollars and have the largest treasury in DeFi by a factor of two (based on their $450m in token incentives paid out from 2020-2022, and applying a 30% market discount as the average incentive akin to our twAML/DSO, on top of their existing treasury, source: TokenTerminal). While your jaw is still on the floor, let me pose another intriguing question: What would happen if you merged the positive unit economics of a real yield pioneer like GMX, the destination of amassing massive amounts of POL like Olympus (plus truly locked liquidity), used call options as the incentive vehicle, and for the first time ever had a proper driver to reach allocative efficiency of the distribution of the incentives? If the "aha" moment has yet to strike, I’ve just described the first truly sustainable incentive flywheel with near infinite scaling properties, that I opine will propel us into the future.

Greed is the voracious beast that devours both wealth and souls, forever ensnaring its victims in a bottomless abyss of insatiable desire of what could be.

ANGER

As one Scoopy Trooples of Alchemix once proclaimed, “Liquidity Mining is an Addiction,” and I’ll add to that quote- an addiction without dopamine- no reward. I said previously in this piece, the bear market was the reason our dearly departed’s obituary was so well received, why the bear market? Simply put, no one cares about sustainability while ludicrous yields are hitting the yield farmers' veins, like Tyrone Biggums during his $450,000 crack party after selling his house.

And as many critics opined after the Obituary was released, “Liquidity Mining is sustainable during an up-only euphoric bull run”. They believe this because it’s partially true- no matter how much sell pressure the incentive model creates, there’s always enough buy pressure from the naive gamblers who appear during the mania of a bullrun to pull the proverbial slot machine handle of the next PooCoin shitcoin listing, which effectively subsidize those trillion percent APYs. However, the bull market is now long gone. Rob & Jenny are back, and that wasn’t actually Tyrone’s home that he sold. Not only is it not sustainable, as I’ve outlined, it’s a negative sum and highly paradoxical exercise- subsidies or not. In the current bera, right now, many of us can hop on over to our Fidelity accounts and snag a short-term Treasury Bill boasting a 5% APY. So, where are these individuals who are willing to shoulder massive risks to use liquid staking derivatives or lend to Aave for a measly 1-3% APY? Hello? Anyone still there?

Before (some of you) say it, the answer also isn’t “Don’t fret, Matt! I’ll open a liquidity pool, let user’s deposit USDC, and I’ll buy U.S. Treasury Bills from Uncle Sam and bring the yield back on-chain!” I know you thought you were a genius there for a second, and there absolutely is a place for tokenized securities- yours truly is actually pretty excited about certain implementations, however the regulatory risk, custodial risk, and the laws needed to be abided by (like, I don’t know…KYC?) aren't reeaallyy congruent with RWA’s being the solution to decentralized finance’s current problems. Additionally, let’s be real, who are these people who are going to buy Treasury Bills from 0xNotAScammer’s protocol over Fidelity or any tardfi institution? Regardless, even with enough hand waving and mental gymnastics on the centralization and risks of tokenized securities, it’s a short term solution for a long term problem, anyway- those treasury bills 5% APY aren't going to cut it when GTX hits the streets, the amphetamines are cheap & plentiful once again in the Bahamas, and yield farmers are laughing at pedestrian 100% APYs.

At its core, DeFi = Yield, universally accessible yield that doesn't care about your background or traits; in the dark forest, we're all just a bunch of 0x-somethings on a ledger, anyway (until account abstraction). But strip away that yield, and suddenly, this whole "DeFi thing" really loses its luster. This is why the current state of DeFi consists of airdrop farming and buying enough fake X followers to whip up enough task monkeys (❤️ Jor) to complete vapid Galxe & Zealy campaigns to “build” a “community” aka sybil worthless airdrops so that the veecees invest in seed rounds seeing the “hype” around the “protocol”. Let's not even get started on the plummeting value of blockspace due to the dire over production of it, all to feed the veecees insatiable appetite for losing a lot of people a lot of money, and these “novel”, “innovative”, “DeFi 3.0” protocols low effort forks that are certainly aiding in the demand for that blockspace. With your el jefe’s sudden emotional outburst out of the way, there must have been some attempt(s) to fix the state of DeFi in a year, right?

Oh yes, yes there were. As soon as the Obituary dropped in 2022, the attempts certainly began.

A list of announced or released “oTKN’s”:

1. Timeless/Bunni (oLIT - live)

2. Premia (Call Option Liquidity Mining - announced)

3. Yearn (oYFI - announced)

4. Bond Protocol (white labeled oTKN - announced)

5. Curvance (oCVE - announced)

6. Velocimeter (oFVM, oBVM - live)

7. Retro (oRETRO - live)

8. Dopex (OLP - live)

9. Vesta Finance (oVSTA - announced)

10. Blotr Protocol (oBLOTR - live)

11. Dolomite (oARB - proposed)

12. Umami (oARB - proposed)

13. Oath Foundation (oOATH - announced)

14. Rodeo Finance (oRDO - announced)

15. 0xTransmute (white labeled oTKN - announced)

16. PepperDEX (oPEP - announced)

17. Toupee Tech (oWIG - announced)

18. Protectorate (oPRTC - announced)

Naturally, the industrious interns of Pearl Labs embarked upon an unrelenting quest to extract every morsel of data from these enigmatic "oTKN's". Your sagacious jefe orchestrated their transformation from front-runoors into unknowing beta testoors with masterful foresight, until…something was realized.

Take oLIT for example- Houston, we have a problem. There’s no expiry, and no strike price. It’s a perpetual expiry incentive with a constant 50% discount to the market price…which isn’t an option, or even a bond, but a coupon. An example to exemplify the difference: “here’s a voucher to get this $10 shirt at 50% off forever” vs. “here’s a voucher to get this $10 shirt at $5.00 until next week”. If the shirt is marked down to $5, in the former example, the customer could purchase the shirt at $2.50 if it dropped in price to $5, and in the latter example, even if the shirt is now $5, they can still only purchase at $5. Secondarily, if the shirt is marked up to $25.00 in a month, the former can purchase it at $12.50, and the latter can’t purchase it because their voucher expired. You’re losing all of the benefits an oTKN brings, and even bonds. This continues on throughout all of the live oTKN’s…being…coupons, other than oKP3R, therefore, the only legitimate oTKN or call option incentive we can observe at this time remains Andre Cronje’s oKP3R.

This data admittedly shocked me. In one year, from September 2021 to September 2022, oKP3R had $8m in redemptions.

Interestingly, the KP3R token fell 53% over this time-frame, even with my contentions with oKP3R such as the long expiry of a month, and it’s flat discount. On top, KP3R is extremely illiquid, and Andre Cronje even had exited DeFi in March of 2022, which would all act as very large motivators for negative price performance. Shockingly, in comparison, an index of the top ten DeFi tokens by their protocols TVL fell 80% in the same time frame. ETH itself fell 59%. While it’s one anecdotal piece of evidence, it lends a lot of credence to my thesis that call options are the best incentive vehicle for DeFi.

Following the profound revelations ensconced in the Obituary, wherein the blueprint of call option incentives detailing the reanimation of the oTKN was unveiled, a frenzy shortly ensued across DeFi- it seemed that everyone and their loyal canine companions, inspired by the grandeur of our vision, fervently rushed to announce or release their own rendition of the oTKN with its new lease on life. While I had intentionally refrained from divulging the entire blueprint, for I as el jefe maintain a masterful grip of my cards close to my chest with an air of mystique, it is undeniable that a multitude of other valiant endeavors had also been set in motion, all aspiring to forge the same hallowed path towards a sustainable incentive paradigm.

Anger is the tempest that blinds reason and steers the ship of the soul into the treacherous waters of eternal turmoil.

HERESY

One such means was through vesting liquidity mining token incentives in one way or another. This practice was recently popularized by GMX’s esGMX, which has since been mostly winded down. But like everything- is far from new. Dodo, a decentralized exchange released in 2020, released their DODO Carnival incentive program. Dodo distributed DODO tokens through liquidity mining, but added a six month lockup to collect the rewards. The problem with vested token incentives are, while it may be quite obvious to some, let’s go back in time and return to the now bankrupt Cardboard Box Coffee for an example! We slightly modify the model- the IOU’s customers receive after paying for their $5.00 cup of coffee that once would enable them to collect $10 at any time, now only allow them to receive $2.50 per week for four weeks. What happens? Cardboard Box Coffee goes bankrupt in a year, maybe two years, instead of six months. The same problem still exists in that customers (LPs) are “getting something for nothing”. Vesting the emissions does mean the time frame till death is elongated- as the sell pressure is spread over longer time frames- but the survivability still remains very much finite, and the protocol still has nothing to show for it at the end of the near pointless & paradoxical exercise. The sell pressure will continue to mount until it overwhelms the system. No system can operate in near complete losses forever.

The next was the viral ve3,3 “flywheel” which was supposed to imbue the most positive properties of Olympus via it’s rebasing to curb inflation, and Curve’s vote escrowing into one “super” model, when in reality it was the worst of both. Most of the ve3,3 flywheels died quicker than they were born, such as Chronos.

In my opinion the reason we have seen so many Solidly forks is thanks to TVL evangelists attributing Velodrome’s rented liquidity success story to ve3,3 and not multi-million dollar OP subsidies and good timing. On paper, ve3,3 incentivizes users & protocols to hold/buy & lock their token to increase the global emissions and control the gauges, respectively. Users generally will not lock a hyper-inflationary token, regardless of yields, due to carry cost. Cronje, knowing this, decided to inflate the lock positions with the overall circulating supply to circumvent this. In reality, this made the situation worse, as we all know the solution to inflation is…more inflation. The secondary motivation of ve3,3 is to incentivize protocols to “bribe gauges” or purchase the Solidly forks token and lock it. With this investment into an illiquid lock position, the “briber” is now able to direct the forks incentives to their desired liquidity pool(s). Protocols gain “success” from this, just like they gain “success” from liquidity mining itself. The core problem of distributing free tokenized incentives en masse isn’t solved, just shifted around to another party.

The next model was the “loyalty tier” liquidity mining model. This is also not new, and was taken from everyone’s favorite CeFi ponzi scheme- Celsius. Celsius, upon seeing the success of Compound COMP reward program, of course needed their own reward program to maximally scam individuals by suckering them into depositing assets onto the Celcius lending markets with attractive “low risk” yields. As they realized the CEL token would be nothing more than a farm & dump token akin to COMP, they decided to create what effectively were “loyalty tiers”- not only suckering people into lending their assets, but buying their worthless token on top. If your CEL balance on your account was equal to 5%-10, to 25%-100% (yikes) of your total account balance, you’d receive boosted yields (in CEL), on top of the real yields, of 5% to 25% APY.

This model was brought back with a small twist on multiple protocols, requiring users to lock 5% of the protocol's governance token for one month to a year, relative to the size of their deposit, to earn the right to receive liquidity mining emissions. Longer the lock, higher the yield. However, if you go below 5%, no free tokens 4 u!

As Celcius proved, this will create buy pressure (subsidizing the yields). To add fire on the gasoline in the DeFi realm however, users are prompted to leverage up an asset when lending, to swap 5% of the borrowed amount into the TKN. This means, I deposit $10,000 in USDC, leverage it up 4x to $40,000, and $2000 of that $40,000 being lent is swapped into TKN, while also multiplying the TKN incentive yields I receive. This would imply a significant amount of TKN buy demand is through farmers applying leverage on lent assets, which is even more buy pressure subsidizing the yields. As with the Cardboard Coffee Shop example, no matter how many band-aids you put on a liquidity mining gunshot wound, the only thing you can change is the time it will take to bleed out.

Lastly, the “buy & burn model” re-emerged in a big way with Rollbit. My thoughts on Rollbit as a platform aside, token scarcity is important. Bitcoin’s entire model is predicated on scarcity (as we’ve all heard a gorillion times, there will only ever be 21 million BTC) and is also seen in Ethereum post EIP-1559*.* RLB has a fixed supply, and Rollbit uses their revenue to repurchase and burn RLB- this has an incredible psychological effect on the market, and is a simple but powerful implementation of reflexivity. To boil down what reflexivity is, most simply put it is a positive feedback loop in which economic expectations cause economic trends that substantially deviate prices from the actual fundamental reality. Essentially, our collective perspectives shape reality, even though reality should be fundamentally different. Wut? Huh? Take the Bitcoin halving event- we know that the per block reward will fall in half approximately every four years, and because of that, our expectations of how much the halving will impact the price of BTC become the reality- to the point that the price deviates massively to the up-side from the reality of how much the halving should actually fundamentally impact the price. Thus, Rollbit burning $1m in RLB this month will impact the price of RLB far more than the buy & burn dollar amont actually will, because of our collective perspectives on it. This is why we made TAP a fixed supply, when many liquidity minoors want a “get out of jail free” card to inflate forever. Reflexivity.

To boil this all down, simply put, no matter how you try to revive liquidity mining’s now oozing corpse- through vesting periods, the cha-cha slide, or even coupons- you’re giving away something for nothing. The practice of renting liquidity with free token emissions is completely paradoxical and counter-effective, no matter what package it’s in. Protocols are businesses, and while start-up’s often withstand operating losses in their early years to become profitable, there has to be a path to profitability. Repeat after me: TVL is meaningless, token emissions and operational costs are expenditures, fee generation is revenue, the treasury is the balance sheet.

Heresy is the fire that burns not only the flesh but also the very foundations of faith, where defiant souls stand as eternal testaments to the consequences of questioning divine truth.

VIOLENCE

We’ve thoroughly analyzed and proven the TVL destination of incentive models being fundamentally wrong, and opined that capturing Protocol Owned Liquidity (POL) is the obvious destination to be reached with incentives, it now has come time to talk about the vehicle, what many of us came to this Epilogue for- to discuss the oTKN or call option incentives.

First let's quickly recap- what the hell is a “call option”? To make it really simple, you have “calls” and “puts”- a “call” is a purchase, a “put” is a sale. “Option” is at the end of the phrase denoting it is “an option (and not an obligation) to buy (or sell) this asset”. The price that you can purchase the asset at is the strike price. Options also have expirations, and are generally short term in duration. So for example, let's say I give you a call option on ETH at $1000 with a one week expiry, that means I’m giving you the right to purchase ETH from me at precisely $1000, regardless of what the spot price (the market price) is, for one week. There also are European options, but for the purposes of this paper, we’re focusing on American options, which allow you to settle your option at any time up until the expiration date. Lastly, call options can be “in-the-money” (ITM), or “out-of-the-money” (OTM)- all this means is, “Is my call option’s strike price below the market price? Yes?” Then it is ITM or profitable to exercise, as you’re able to buy the asset below its market value, denoting profit. No? It’s OTM or unprofitable to exercise, your strike price is above the market price, and it wouldn’t make much sense to exercise the option, then.

Recap over. From the very moment we resurrected the oTKN, many rightfully pointed out when viewing our answer to the sustainable incentive dilemma through the lens of its predecessor, Options Liquidity Mining (OLM), OLM can somewhat be rightfully viewed as “liquidity mining with more steps” (liquidity mining being sort of in the name). While Keep3r Network’s oKP3R (KP3R Call Option Incentive) does have some tangible benefits in comparison to liquidity mining, it’s easiest to describe the comparison by putting it in these terms: liquidity mining is a call option incentive with a 100% discount and infinite expiry, while OLM provides a flat 50% discount, one month expiry version of liquidity mining (thus again, options liquidity mining). Lastly, all of the profits captured from oKP3R were distributed to vKP3R lockers, which drains all of the potential benefits by shifting the 50% cut pay-out to lockers instead of LP’s. The difference between giving two oKP3R call option incentives out, versus giving one KP3R liquidity mining incentive out, becomes basically identical with some small benefits to sustainability imbued in options.

The “More Steps” part of “OLM is Liquidity Mining with More Steps” is also correct because, options cause severe UX issues. An LP is now faced with needing to manually redeem options at regular intervals, before the expiration, and ensure their option(s) have remained ITM. Man, wouldn’t it be cool if you could automate the settlement of these call option incentives, maximize the profit with algorithmic purchase orders, and maybe even define strategies of how to use these profits, all with a click of a button? You’re in luck! twPro will be coming quite soon after Tapioca as the ecosystem's first sub-protocol, with a whole lot more functionality than that, maybe even including revolutionizing incentives for other protocols as a service? Remember, the jefe keeps his cards close to his chest.

But why options? Despite the UX issue, the answer lies in the fact that you enable the protocol to get the most granular control possible of any incentive vehicle, which is needed to minimize the impact of economic growth stimuli, and to create sustainability. You can of course control the amount of options and who gets them- which while important and often overlooked, is the same controls found with liquidity mining. However, you also can finely control the discount level, and enact an expiration- which further enables mitigation of the impact of the incentive cost. You also can create POL through the option being redeemed- being a non-zero cost to incentive recipients, which creating POL is the primary destination of Tapioca’s economic model.

Back to the future- because options are a market discounted sale of a token, they are also commonly compared to a bond, which was popularized by Olympus Pro. Bonds are essentially non-expiring options that don’t have a strike price, and could simply be described as an inverse Dutch auction of governance tokens as an incentive. So why are options better than bonds you may ask, dear reader? Well I’m glad you did- options create a natural price floor as the lowest strike price = the price floor. A bond is only a discount to the market price, no floor- no matter the market price, you get the same profit based on the discount. Secondarily, the option expiration is critical, as a call option on ETH @ $1000 strike price may not be a huge profit right now, but will be a massive profit in a year. Lastly, bonds carry no allocative efficiency, as regardless of the value you bring to the protocol, you will have the same access to the same bonding rates, which is why bonds generally incentivized front running bots over real users, and is why PoolTogether noted their bonds impacted their tokens price even more than liquidity mining.

However, allocative efficiency is of extreme importance- the final piece of the puzzle, as pertaining to DeFi economics, wherein the incentive distribution is autonomously and constantly perfectly aligned with user preference to perpetually remain in a growth state at the minimal cost possible. Therefore, while DeFi is in its 11th hour due to the grave wounds inflicted by our departed soul, the time has come to be introduced to thee guiding force, the very conductor of the incentive dilemma’s answer, the driver- twAML.

Violence is the raging storm that surges through the heart of Hell, where the souls of the merciless are caught in a perpetual tempest of their own creation, forever lashed by the very forces they unleashed upon the world.

TREACHERY

Never before have we been able to allow the free market to decide by consensus what the monetary incentive needs to be in order to continue economic growth until now. twAML, or Time Weighted Average Magnitude Lock, is a DeFi monetary policy agent which firstly acts as a democratically governed measuring stick. This measuring stick prices the incentive amount by controlling the discount level, the driver.

As laid out, the vehicle, call options / oTAP, has been explained in enough detail, but as briefly mentioned, Tapioca’s destination is two fold. The first is to amass escrowed lent liquidity in its lending markets, which incentivizes users to mint USDO, lend it, and lock it, and attracts borrowers to utilize that supplied liquidity- remember, liquidity begets liquidity. The second destination is capturing POL. Even though Tapioca is generating expenses on its incentives, it is simultaneously creating a substantial amount of fees that will magnify with more and more locks, while also snowballing POL that will grow and grow in value from asset appreciation and utilization- primarily as stablecoin AMM LP in the beginning. However, the use cases of the POL will grow rapidly, as once you control the water in the ocean, all ships must sail through our waters, a black hole of the only real value.

The driver, AML (not anti-money laundering god damnit), controls the discount level of the call option incentives via free market consensus of the Tapioca economy. Users propose locks with differing lock durations and amounts of capital, which are weighed against the average locks, at that time. The AML is dynamic- users steer it to ensure it constantly remains at the optimal point to continue sustaining growth. If locks decrease, the AML decays, enabling users to receive a higher discount for shorter lock durations. If locks are increasing, the AML increases, which requires longer lock durations for larger discount levels. This is how Tapioca reaches allocative efficiency, through the free market determining the value of time + liquidity.

The second component to this is unit economics. Let’s say there’s many user’s locking their lent liquidity for longer and longer periods of time to obtain the eligibility to receive oTAP incentives every epoch. The reward then needs to decrease to find the optimal yield for the market and economic state of the protocol to continue system growth (more liquidity, locked longer). This also means the protocol cost to continue growth is always in an optimal state, if you overpay in incentives- you’re directly negatively impacting token value and sustainability of continued economic growth.

There also is a situation where the system could be underpaying. Less and less user’s locking their lent liquidity for shorter and shorter periods of time. Thus, the reward needs to increase, again, to find the optimal yield for the market and the economic state of the protocol to promote system growth (again, more liquidity, locked longer). To truly make a sustainable incentive model, it must minimize the consequences of economic growth, and amplify the benefits.

Thus, this is also why the discount level of oTAP ranges from a 50% max to 0%. Not all escrow arrangements are valuable to Tapioca. If Gray proposes a one week lock of 100 USDO, when the average is a one year lock of 1000 USDO, why should Gray receive any reward at all, when Tapioca can extract more value from what the average user is willing to offer?

AML also purposefully introduces game theory. If a user speculates that in order to receive the max discount of 50% in the near future, that they would need to lock for several years, but currently they could receive the 50% discount by locking for a month, the user could decide to lock for six months instead, “locking in” that maximum discount every week for that six months, instead of locking for just the month to get the maximum discount and then needing to lock much much longer than six months to continue getting the maximum discount when the lock lapses. This is a variation of the Rubinstein Bargaining Model. User’s are bargaining with one another with complete information of all other users current moves, in a near infinite time horizon game through sequential and alternating offers to get the highest incentive output possible. The pure strategy of farming & dumping (yield farming) also no longer exists, as users who offer more loyalty to the system, measured in their escrow commitments, will receive far greater rewards. The liquidity locusts upon attempting to lock for the minimum time possible, will be greeted with near zero rewards. To get value, you must give value.

TAP as a token exists on an “exponential decay curve” whereby inflation is constantly decreasing, and any call options left unredeemed (from going OTM or just expiring) “roll over” to the following epoch (week), which continually extends the life span of the incentive supply well past it’s six year shelf life. Not to mention, time weighting TAP (locking) enables holders to receive a slice of the entire pie of fees from the Tapioca ecosystem, which also incentivize the float of the supply being reduced along with inflation reducing autonomously. TAP has a fixed supply, which once all TAP have been redeemed through call options, Tapioca will have captured enough POL that the liquidity itself becomes a magnet for even more liquidity. This all also serves to create reflexivity.

Having journeyed through the harrowing descent of all nine infernal realms, from the darkest abyss where Liquidity Mining met its somber end, alongside the deceivers who falsely prophesied the dawn of sound monetary policies, plunging us into our present desolation. We now stand on the precipice of an uncharted domain- here, once more, we gaze upon the celestial stars of divine wisdom, for the true flywheel of transformation has been set to motion.

**-twMatt **

tapioca.xyz

Editor’s Note: Yes, this is way too fucking long- it’s a years work, best I could do. I couldn’t have done this without Rod, the Capy’s, all of my amazing Tapioca family members, and a lot of caffeine and nicotine. This one felt special, I hope you enjoyed it.

$$P.S. Yes there’s a missing level, #soon.$$

After the depeg of Circle’s USDC over this past weekend, every ‘decentralized’ stablecoin depegged due to a single bank failure. All of their funerals were held the same day of this tragic event, in USDC wrapped coffins.

Is decentralized finance really decentralized finance if a few banks could destroy it all? Three questions:

-Why did virtually every major ‘decentralized’ stablecoin have a major (10% or more) depeg from the U.S dollar due to a single bank failure?

-How did we end up with a majority of the decentralized stablecoins becoming USDC wrappers (majority USDC backing)?

-How could there possibly be no harborage from the Jim Cramer approved clown show highly regulated and transparent banking institutions that you should totally trust ™, in DECENTRALIZED finance?

While obituaries can be melancholic, this one is not- imagine for a second a truly decentralized, unstoppable US dollar pegged over-collateralized capital efficient stablecoin built for a multichain world was coming into existence #soon?

Well dear reader, you’re in luck, as the Nobel CT Prize winning “Death of..” series continues in today’s newest installment- the death of ‘decentralized’ stablecoins. As with tradition, we must first take you back to where it all began- the very beginning of the ‘decentralized’ stablecoin..

a note from el jefe: please take note of the sarcastic quotations surrounding the word decentralized- true decentralized stablecoins are FAR from dead ;)

The Father of DeFi’s Decentralized Stablecoin

In early 2014, the utter fucking mess coolest, most daring, innovative, and -every superlative ever insert here- blockchain technology was released by someone who I personally attribute the creation of Decentralized Finance to- none other than Dan Larimer (you may know him as the founder of the “Ethereum Killer” EOS). But I’m not talking about that failed blockchain- the blockchain in question was BitShares*.*

The birth of BitShares brought us BitUSD- the first decentralized stablecoin!

But it didn’t end there, BitShares was like a clown car of a never ending stream of forex pairs- BitEUR, BitCNY, BitJPY, etc, called “SmartCoins” that all totally held their pegs and didn’t amount to glorified meme coins that yours truly definitely did not trade to feel like the super cool Forex trader bros on YouTube infomercials.

So, how did BitUSD work? BitUSD was not backed by cash reserves like Tether (supposed cash reserves amirite?), but instead was backed by BitShares native token, BTS (not the k-pop group, calm the hell down).

To create $1.00 in bitUSD, you needed to provide $2.00 in BTS as collateral, thus bitUSD was the first CDP or Collateralized Debt Position (fancy word for loan) “over-collateralized” stablecoin, with what amounted to a 200% Collateral Ratio (or a 50% Loan To Value Ratio, or LTV).

You could redeem the underlying BTS collateral by supplying back the bitUSD, or- if the collateral factor dropped to 150%, a rudimentary liquidation mechanism would occur whereby a “margin call” mechanism was employed to buy out the BTS associated with a bitUSD CDP and liquidate it- (reiterating for the last time, this was in TWENTY FOURTEEN).

This is all well and good, but how did bitUSD actually keep its price pegged to the US dollar? Well, uh..Dan forgot that part..

AN ACTUAL QUOTE from the BitShares Whitepaper: “So far we have shown how the price of BitUSD is highly correlated to actual USD; however, we have not provided any rational means for actually establishing the price.”

Essentially, the price of BitUSD was derived based on BitUSD’s weighting against BTS on Bitshares built-in DEX. There were no direct mechanisms enforcing the $1.00 price peg of bitUSD. Dan felt BitUSD should trade at a dollar well, because. And this worked, sort of..

If you want to truly understand how insane the beginnings of DeFi were, read the BitShares whitepaper here.

But who cares! While literally no SmartCoins stayed on peg, bitUSD basically held it’s dollar peg besides maybe uh..

But come on! In 2014 with bitUSD on the BitShares blockchain, you could Forex trade, purchase bitGOLD and other real world synthetic assets all on an early DEX, lend to earn a yield, borrow against any of these SmartCoins, go long or short on any of these assets, everything you could imagine in DeFi today, except, nothing really worked..

This all must sound pretty cool, and it was! But dear reader, by now you must be asking yourself, “I’ve never heard of BitShares, so this thing must have blown up,” and if you’re thinking that, you would actually be wrong.

No Boom?!

Nope, besides there being no oracles with actual price feeds, low trading volume on the BitShares Exchange which allowed for easy manipulation, and the peg stability mechanism amounting to “well, it’s supposed to be worth a dollar, why wouldn’t it be?” there was a more critical issue-

It may sound perfectly logical to think, “bitUSD was backed 200% by BTS, so at least there couldn’t be a death spiral” but what was BTS? A highly illiquid and volatile asset.

Is $1.00 in ETH worth the same as $1.00 in DogeElonSafeMars, or maybe FTT? Collateral assets aren’t created equally. The quality of the collateral asset is almost as important as the collateral ratio (as well as debt ceilings, liquidation systems, oracle quality, and many other factors).

Thus, all that needed to happen for bitUSD to lose its $1.00 peg was for BTS to sharply fall 50% or more quickly, and a liquidator wouldn’t liquidate the underlying BTS because it would no longer be profitable to do so.

But, probably to your surprise, there was no boom..more of a faint whimper.

BitUSD actually kept a somewhat respectable peg to the US dollar as seen above. But, BitShares as a network was literally unusable. There simply wasn’t enough value in the system for anything bad to happen. Is anyone going to spend time robbing a convenience store when they only have pocket lint in the cash register? Probably not.

With BitShares and BitUSD fading into obscurity and Dan heading to ‘kill Ethereum’ with EOS (also didn’t go so well), what would be the next chapter of decentralized stablecoins?

SAI HAI to DAI

R.I.P Nikolai Mushegian, a true innovator

** **Speedrunning through history to the next major stablecoin brings us to 2017’s “Single Collateral” DAI (or ‘SAI’), made by none other than the legendary MakerDAO and its leader, Rune. DAI was named after the originator of cryptocurrency, WeiDai (among other things). Rune ironically was a well known community member of BitShares, and actually originally Maker was meant to be deployed on BitShares! (the more you know).

DAI’s technical advances in comparison to bitUSD is like comparing a Campbell’s soup-can affixed with a string to an iPhone 14 Max. But let’s begin with the similarities:

SAI was over-collateralized at 150%, slightly lower than BitUSD which firstly offers higher capital efficiency (less dormant liquidity). SAI was backed by Ether, and Ether only, thus SAI- Single Collateral DAI- just like BitUSD was only backed by BTS.

SAI was also a CDP based stablecoin like bitUSD, but much more intricate. If a borrower accrued too much debt from Maker’s interest rates, an off-chain liquidator bot could purchase a portion of the users collateral for a profit, a much smoother and efficient system then BitShare’s “Margin Call” mechanism.

That’s where SAI and bitUSD’s few similarities end. SAI was deployed on the much more sophisticated Ethereum blockchain. Maker employed Oracle price feeds to ensure accurate values of Ether being used as collateral, interest rates to exert control over the supply of SAI like a true central bank, a way for users to always be able to redeem Ether with SAI, and lastly- an actual mechanism to enforce SAI’s price equivalence to the US dollar via arbitrage:

If the price of SAI was over $1.00, users could create new SAI at a discounted rate, and if SAI was under $1.00, users would purchase SAI to repay debt at a discounted amount.

Even though Ether fell 80% over the course of SAI’s first year, SAI adhered to its $1.00 US dollar price peg. wow mom, over collateralization with good liquidation systems works!

A Power Struggle

With the ultra successful actually decentralized SAI (Single Collateral DAI) stablecoin having almost $100m in liquidity, of course a power struggle had to begin, and begin it did in 2019.

Rune’s perspective had shifted- he believed the decentralization purism path was stunting DAI’s potential, and that Maker needed to integrate itself into the traditional finance system to truly spread its wings. Maker lost its CTO, Zandy, over this pivot. Zandy left Maker with a public memoir “Zandy’s Story,” dated April 3rd, 2019.

You’d never know if this was written in 2019 or 2023, Zandy certainly knew what was about to happen before it did:

With Zandy gone, Rune prevailed, hell bent on a warpath to world domination with SAI via melding the world of tradfi’s clown show highly sophisticated and heavily regulated financial system with DeFi’s trustless medium of exchange- SAI.

Rune offered the MakerDAO contributors two options- the red or blue pill:

Those who chose Red Pill were supposed to work on the initiatives focused on delivering government compliance and integrating Maker into the existing financial system.

Those who chose the Blue Pill would build Multi-Collateral DAI’s core contracts and then get BTFO’d from Maker (fired).

The core contributors unfortunately weren’t in the Matrix, and Rune wasn’t as convincing as Morpheus, and thus a number of the contributors chose to create the “Purple Pill” faction to dethrone Rune and take control of the now $200m USD that Maker controlled, and continue on the path of SAI being true decentralized money.

The Poison Apple

By 2020, Multi-Collateral DAI was born, supporting more collateral assets than just ETH to mint DAI. BAT or Basic Attention Token was the second asset ever allowed to collateralize DAI. The legendary Maker PSM or “Peg Stability Module,” which allowed DAI to be easily swapped with low slippage and fees to other assets through MIP29 was born.

On the fateful day of March 16th, 2020, Maker onboarded its third collateral for Multi-Collateral DAI- Circle’s USDC.

This was an extremely important event in DeFi, as centralization’s Trojan Horse was wheeled with glee through DeFi’s top decentralized & censorship resistant stablecoins fortress gates.

However at first, it actually was done in a very sharp way via isolation- USDC was given a cap of how much of it could back DAI, about 10% at the time which was the equivalent of $20m USD.

However, with the bite of the poison apple, DAI’s USDC backing quickly ballooned over time to being the majority backing of DAI.

RWA’s and other centralized stablecoins were kept isolated to some level, but USDC has since created 57% of all DAI in circulation, and currently makes up 40% of its backing.

This event started a ripple effect of attracting more and more ‘decentralized’ stablecoins to also take a bite of the poisoned apple of centralization- namely of the Circle variety- to gain meaningful adoption through the euphoric times of the 2021 bull run.

The allure of the mountains of capital Circle and other centralized entities had on offer was too great, making it easy to forget the very reason cryptocurrency was created- the 2008 Financial Crisis and the constant collapse of banking institutions due to endless greed and the reckless abandon employed to satiate this greed.

Here we are, 15 years later, in the same damn place..

Just to put in perspective the last several months in crypto:

Silicon Valley Bank: $1.8b in losses

Silvergate Bank: $1b in losses

FTX: $8b in losses

Celcius: $5b in losses

Three Arrows Capital: $3.5b in losses

Genesis (Digital Currency Group): $3.4b in losses

Total: $22,700,000,000

While the Lehman Brothers collapse of 2008 was over $600b, we can either keep deluding ourselves into believing centralized entities ‘are too big to fail,’ and that USDC wrappers are decentralized because they are governed in a decentralized fashion, even though Circle (or the government) could press one button and obliterate them from existence.

OR

We can accept that no centralized entity is too big to fail, and the need for trustless & censorship resistant money pegged to the US dollar- what SAI used to be, is one of the single most basic needs in true decentralized finance. How could you even begin to think a decentralized finance system could exist without a dollar denominated decentralized currency?

Wakeup Call

After the abhorrent arrest of Alexey Pertsev (creator of Tornado Cash) in August of 2022, Rune (seemingly) realized the severity of the situation DeFi was in, even saying we should seriously consider depegging a multi-billion dollar stablecoin (DAI) from the dollar.

Centralized entities now had a DAI kill switch for the supposed ‘decentralized’ stablecoin, and could flip the switch any time they wanted- along with most of ‘decentralized’ finance like a bug.

Shortly thereafter, Rune posted the now (in)famous Maker Endgame Proposal.

This radical shift would take the steps to jumpstart Maker’s chemotherapy of it’s centralized cancer- accumulating ETH into the Maker PSM, to inevitably yolo all of the remaining USDC into ETH, to become a censorship resistant..free floating non-stablecoin (wut).

Maker also posted an emergency proposal after the collapse of Silvergate Bank, Silicon Valley Bank, and the Circle USDC depeg to begin stamping out centralized assets from Maker’s PSM, as DAI was depegging.

But unfortunately, the cancer in my opinion is terminal.

Adding even deeper issues to Maker & DAI:

-Circular Financing: Backing DAI..with DAI (DAI/USDC LP - $375m)

-Moar Centralization: $300m Gemini USD (GUSD) backing DAI.

-Custodial Risk: $1.6b of the Maker PSM’s USDC lent to Coinbase Prime.

-Even Moar Centralization: Abusing Maker’s upgradeable automation contracts to seize user’s funds (Wormhole Hacker’s $202m) from a DAI vault for a British Court.

note on the wormhole hacker reverse exploit**:** While the Wormhole Hacker’s money was stolen and absolutely should have been returned to the rightful owners, true decentralized & trustless protocols do not get to decide that. Think of the implications? Courts can tell protocols to seize user’s money now? That’s DeFi?

DAI, in my humble opinion, is now so poisoned by centralized assets (and governance theatrics), it is no longer the censorship resistant decentralized stablecoin it once was, especially comparing it to its days as single collateral DAI.

note 2: I will openly state I have modeled Tapioca and myself after Maker and Rune in many many different ways. His doomer mentality on traditional finance, his openness to discuss radical ideas with the community at large, his perspectives on decentralization, etc, shaped my opinions. I by no means dislike Maker or Rune, and would not be here without them.

But, before we begin on what will emerge in the large empty place of our dearly departed, there is the blighted scroll we must pull deep from the annals of the history of decentralized stablecoins, written by the ‘master’ of the stablecoin, Rick.

The Basis for Rick & Morty in Decentralized Stablecoins

The first thing you’re probably saying is, “wait, Rick?”. Dear reader, sit tight.

Before the ‘master’ of the stablecoin went by his real name, he was Rick- clearly showing his sharp intellect- borrowing a pseudonym from the popular ‘Rick & Morty’ cartoon’s protagonists, along with an engineer from his company, being ‘Morty’.

So what did ‘Rick’ & ‘Morty’ build? Basis Cash, kind of- they really didn’t actually ‘build’ anything. Basis Cash actually existed long before Rick purported himself to be the ‘master’ of the stablecoin, and its roots were based in Basecoin / Basis. Basecoin was an unbacked algorithmic stablecoin that utilized a now common seigniorage model. Essentially, when Basecoin was below its peg, Base Bonds would be auctioned off to repeg it, and when Basecoin is above peg, it would issue shares.

Let’s step back for a minute- what’s an algorithmic stablecoin? Instead of backing a stablecoin directly, an algorithmic stablecoin relies on mathematical formulas and incentive mechanisms to hold price equivalence with the US dollar - aka, a sure fire way to lose a lot of people a lot of money.

The three main algorithmic ‘stablecoin’ models employed have been Rebases, Seigniorage, and the third and most recent, Fractionally Backed- a mix of collateralization and seigniorage.

Rebase- the stablecoin mints and burns its supply to keep its peg to the US dollar, an example of this was Ampleforth. Generally, rebase stables aren’t seen any more.

Seigniorage- These stablecoins generally have a multi-token economy to exist. The stable itself, and a second non-fixed price token to utilize to keep the stable well, stable. Generally incentives are employed to get market participants to buy or sell the secondary asset to keep the stablecoin on peg.

Fractionally Backed- Part Seigniorage, Part Collateralization, an example of this is Frax. With that being said, Frax has for some time been moving it’s collateralization ratio to 100%, although completely backed by USDC, Frax now has formally made clear it will become an over-collateralized stablecoin with FIP-188.

Anyway, Basecoin was never deployed, as its founder, Nader Al-Naji, stated regulatory constraints existed that forced Basecoin to shut its doors. Nader however felt there would be no regulatory concern cloning the Bitcoin blockchain, slapping an ultra cringe name of ‘BitClout’ on it, selling CLOUT tokens to VCs for $0.80, to turn around and sell them to retail investors for $180- getting the Vacuous Clowns and himself a quick 5000% gain. How in Nader’s mind Basecoin’s mechanisms were more illegal than him and a group of “tier one” veecees scamming retail investors for gigantic profits this el jefe will never know.

However, getting back on track with our master of stablecoins, ‘Rick’ didn’t care about Nader’s legal concerns, or more importantly the technologies sustainability, and issued a proclamation in his Telegram group, only comparable to the Sermon on the Mound, in the Summer of 2020:

“Yo degens, does anyone remember what Basis was? It was an early ‘DeFi’ algorithmic stablecoin with high ambitions, but was shut down due to SEC-related risks. Today we’re bringing Basis back from the grave.”

With this proclamation, ‘Rick’ began his quest of losing sixty fucking billion dollars and all trust in decentralized stablecoins building many no backing, no worries! seigniorage based algorithmic stablecoins, one in specific we all know of (don’t worry we’ll get there).

The Basis for Basis Cash

Basis Cash launched in the Summer of 2020, with Rick & Morty deploying Basis Cash (Stablecoin), Basis Bond, and Basis Share.

A quick history lesson that will prove valuable in explaining algorithmic stablecoins like Basis and currency itself- The U.S Treasury is the arm of the US Government that can print U.S dollars, that also issues Treasury Bonds & Bills. Therefore, algorithmic stablecoins like Basis Cash aren’t innovative at all but simply modeled after the actual fiat system that totally works perfectly.

Basis Cash = U.S Dollar, Basis Bond = Treasury Bond, Basis Share = Treasury Bill.

One note to add that adds even deeper issues to this model, is the U.S Government’s full faith and credit is certainly equal to ‘Rick and Morty’ amirite?

Basis Cash was an exercise of bad ideas and ponzi schemes, and ultimately captured $30m before falling to $0.30 by January 2021. But Rick & Morty kept themselves busy, the pair launched Empty Set Dollar (ESD), which hit $22m in market capitalization before falling to a penny within months, Dynamic Set Dollar (DSD) which was an instant failure, seeing a pattern?

But why did Basis Cash fail? Basis Cash was the highest performing of the trifecta, reaching $170m in market cap, and surprisingly, there wasn’t actually a catastrophic failure, it just never held a dollar peg.

The best way to summarize Rick & Morty adventures is from this quote:

“While DeFi degens are busy trapping retail in zero sum games like @emptysetsquad @dsdproject and @BasisCash, recall the only real stabilizing force in algo stablecoins is growing adoption and usage”

Who was this quote by? Rick of Rick & Morty, aka the guy who made ESD, DSD, and BAC.

Well that doesn’t make sense? Why would Rick call his own projects “zero sum games?”.

Because Rick wasn’t known by Rick anymore, he was now known by Do Kwon. Do Kwon was about to provide context to the phrase “failing upwards”. Having three failed stablecoins under his belt proved to sharpen his experience to make his fourth disaster his biggest yet.

That wasn’t the most ironic or interesting part of that statement, however. “The only stabilizing force in algo stablecoins is growing adoption and usage”. What does this mean? Do realized for an algo to keep peg, people needed to keep buying into the algorithmic stablecoin’s ecosystem to keep it stable. Hmm, what’s that called again? A Ponzi Scheme?

Rick realized the most important missing ingredient to his “no collateral, no worries” style of stablecoin with ESD, DSD, and Basis was there was no incentive for users to buy in and continue to buy in to keep them stable. So fail upwards we go!

Kwon I Blow Up DeFi?

Yes, yes you can- Enter Terra.

In 2019, Do Kwon and Terraform Labs, incorporated in Singapore, completed a seed round with LUNA tokens at 18 cents to create a Cosmos blockchain with every “top VC” (an oxymoron) in existence virtually participating.

Shortly thereafter in 2020, UST was publicly announced as a ‘decentralized’ ‘stablecoin’ on the Terra blockchain. There was a second critical piece to the story however, which was an engineer at Terraform Labs created Anchor Protocol, a money market on Terra to earn high consistent* *yields on UST, paid in UST. The Terraform Labs developers told Do they’d set Anchor’s yields for UST at 3.6%. A week before the launch of Anchor, Do told them, “3? Nah, let’s do 20%”.

UST, otherwise known as TerraUST, was a ‘decentralized’ ‘stablecoin’. Many anons mistakenly believe UST was backed by LUNA- it was not.

UST was backed by nothing, it was a pure seigniorage algorithmic unbacked ‘stablecoin’.

We’ve gone over the seigniorage model already, but to explain one more time: You could create 1 UST by burning $1 of LUNA, and vice versa.

If UST went above peg, you could convert $1 of LUNA into 1 UST which would be worth more than $1, and sell it for a profit.

If UST was below peg, you could always burn 1 UST for $1 of LUNA. (this is the important part)

In theory, this model probably may seem logical to some degree. But remember, “the only stabilizing force in algo stables is growing adoption and usage”.

Why would anyone take on the risk of holding or using UST versus USDC or DAI in the first place?

Well here’s the $60 billion dollar answer to that question, remember that Anchor Protocol? That was Terra’s Central Bank. Remember that 20% guaranteed yield part?

Essentially, you could deposit UST onto Anchor, and earn a consistent and stable 20% APY. That means for every UST you put into Anchor, in one year, you will get $1.20- guaranteed. How is this possible when real banks can barely offer a 1% yield? Well, we’ll get back to this. But through this ponzi-rific yield- Do had his “stabilizing force”- attract people to adopt and use UST with ludicrously high yields!

Also to foreshadow, Do Kwon tweeted In 2021 that a Black Wednesday George Soros style attack to destroy UST was “retarded”.

For context, what exactly is a “Black Wednesday Soros Attack”?

Black Wednesday

To explain this as efficiently as possible, Britain had joined the European Exchange Rate Mechanism in 1990. The ERM would essentially peg members' currencies against the European Currency Unit, which amounted to a basket of the members' currencies. This ECU would ensure all member currencies would trade in a ‘band’ against one another, minimizing fluctuations of European currencies trading rates, to ease into eventual adoption of one shared European currency. However, when members placed their currencies into a ‘band’ against one another, they were artificially changing the values of their currencies to create ease of exchange, and therefore could place them on fragile footing.

The Deutsche Mark (DM) was growing strongly in a unified Germany, so most of the ERM’s members tied their monetary decisions to Germany’s central bank. There was one problem with this, Germany’s economy was booming while Britain was feeling the woes of inflation in a stagnating economy.

Britain upon entrance to the ERM set their exchange rate at 2.95 DM’s being equivalent to 1 British Pound, vastly over valuing the Pound. Inflation continued to spiral out of control in Britain, which forced them to raise interest rates to 10%- further increasing the strain on their stagnating economy.

A billionaire by the name of George Soros, seeing that Britain entered the ERM at too high of an exchange rate against the DM, decided to enter into a $10b short through a 20:1 margin position on the Pound. Central Bankers thought Soros was over-levered like an adderall addicted Web3 VC, but Soros knew this was a house of cards that he could easily topple over and rake in endless amounts of cash doing so.

This put Britain in a game of chicken with Soros, they could either let the Pound continue to devalue and Soros to print money on his short, or find a way to squeeze Soros out of his short. Thus, Britain instituted a buyback on Pounds. Tuesday, September 15th 1992 began, and a run on the British central bank began. May have seemed bad, but in retrospect, Tuesday was nothing compared to Wednesday.

Wednesday, September 16th 1992 was the date of “Black Wednesday”. The Bank of England was buying back $2 billion in British Pounds an hour, before they finally called it quits being left with no other options but to officially leave the ERM- depegging the Pound completely from the DM. This further massively devalued the Pound, which allowed Soros to pay his loan back on his margin position and have $1b USD in profit left over, collapsing the British economy almost single handedly.

Thus, the British Pound’s artificial peg to the Deutsche Mark, buyback, and a bank run caused Black Wednesday- let’s keep that in mind while returning to Do Kwon-

Black Saturday

Shortly after @FreddieReynolds on Twitter outlined a Black Wednesday style attack to bring down Terra and UST, Do Kwon raised $1b from Three Arrows Capital and co (seeing a pattern with these clowns?) to create a “Luna Foundation Guard” of BTC to use to buy back LUNA/UST to protect the UST peg.

Unfortunately for Do Kwon, if you recall Black Wednesday- like Britain, Do Kwon was implementing a buy-back, while his central bank, Anchor, like Britain, was deep in the red. Now who would play Soros & Quantum Fund? Certainly not SBF and Alameda Research! I didn’t say that, you did.

There was now fourteen billion dollars of UST deposited into Anchor, which would cost over a billion dollars annually to maintain. More on how this wasn’t spotted as laughably unsustainable later.

Do Kwon not being able to see the flames surrounding him through his endless greed, bet GCR millions of dollars nothing bad would happen to Terra. He then infamously proclaimed DAI would DIE by his hand..(what a clever guy, huh? you’d totally give this dude a billion dollars too, right?) with a Curve 4Pool of FRAX/UST/USDT/USDC to starve off Curve’s 3Pool (DAI/USDC/USDT).

With mounting yields owed to Anchor Protocol depositors being pushed to critical mass via Abracadabra’s Degenbox (Bentobox) strategy offering 10X leverage on UST, which offered near 100% yields on a stablecoin* *(UST), piling on another near $3b of deposit mass fetching unsustainable laughably high leveraged yields from Anchor. This Degenbox strategy was the single most profitable yield strategy ever invented, all based on Terra’s absurd ponzi scheme.

Things reached critical mass, Anchor had a total yield reserve of $65.5M UST to sustain the 20% APY being paid to the depositors with billions of dollars in UST lent on Anchor.

So how did no one see that Anchor was hemorrhaging money? @FatManTerra discovered renowned clowns ‘tier-one’ VCs TFL & Hashed were manipulating Anchor’s borrowed capital to make it appear that things weren’t on fire- that there was actual organic borrowing that made the 20% APY sustainable on UST.

This account was borrowing $450m in UST earning no yield, thus forgoing $29m in yield and paying out $44m in interest on the loan. There were many more ‘whale’ accounts like this, just to make it appear that Anchor could sustain its 20% guaranteed APY on UST with fake loan interest.

Trying to fill an endless pit turned out to be an impossible task, 0xHamz, a Terra community member, plotted that at the rate of decline of the Anchor yield reserve as of Jan. 2022, there would only be 80 days until Anchor’s yield reserves were fully depleted. This yield reserve was supposed to build when Anchor was operating at a surplus (earning more capital than it needed to pay out), but because essentially all of the Terra liquidity and performance was fake, it was all smoke & mirrors.

With the flames starting to tickle Do’s face, Terraform Labs & Anchor realized they would need to spend $1.8M per day to continue paying depositors their 20% guaranteed yield.

Of course, Do Kwon realized that Anchor couldn’t sustain this yield, and therefore decided to lower the yield to a more reasonable 4% from 20%? Right? Right?! Nope, he said haters gonna hate, everything is perfectly fine. A few flames in the kitchen are never a big concern, even if they’re burning off your eyebrows..

Do, Do You Like Prison?

An attacker who was certainly not SBF OTC accumulated $1b in UST, and borrowed $3b in BTC to create a gigantic BTC short position.

Remember- Luna Foundation Guard (LFG) was accumulating BTC to protect the UST peg.

(just to note: it is disputed as to who or what put this attack to motion, and this is based on my interpretation of the facts, it was absolutely not Adderall addicted levered up morons in an “Imperial Chinese Harem” in the Bahamas who did this, I swear)

First, the attacker waited precisely for the migration of UST from Curve 3Pool to the DAI killing 4Pool so that it’d have low enough UST liquidity to enable him to easily drain it, with its remaining $350m in UST. Remember that Do proclaimed DAI would die by his hand with 4Pool? Do Kwon in actuality had prepared himself (and UST) to fall on his own sword with 4Pool. You can’t make this shit up, I swear.

Second, he began dumping UST on Binance after UST began its terminal descent into a depeg ($0.97). LFG then began selling BTC to buy back UST and fix the depeg. Remember, our attacker was shorting BTC, so by LFG protecting their peg by selling BTC, they’re causing the attacker to profit in BOTH directions (LUNA/UST down = profit, BTC down = profit), what made this trade pretty brilliant ngl.

With the Curve 3Pool now drained, the attacker began slamming Binance with the rest of his UST holdings to cause it to depeg worse, which in turn caused a bank run.

Binance then suspended trading of UST, and the UST peg was nuked, LFG ended up selling all of their BTC to try to restore the peg, and the attacker profited gigantically off the BTC sell off, being estimated to have raked in $850m in profit.

Without buy pressure on LUNA, the profitability of arbitraging the UST depeg, and LUNA now undergoing hyperinflation due to its seigniorage model with UST- remember, you could burn 1 UST for a $1 in LUNA always. If UST = $0.01, you still get $1 in LUNA.

Inevitably, $60 billion US dollars was lost on a horrendous ponzi scheme that any respectable business person would have laughed at. It’s not like this happened several more times directly after, either, or anything (Celcius, 3AC, FTX, etc).

The TerraUST Conclusion

While UST nuked consumer confidence in ‘decentralized’ stablecoins, it taught an important lesson. Algorithmic stablecoins simply will never work over a long time frame.

There is no way for trustless decentralized money to keep a peg to the US dollar, unless there is more money in, than out. What that means is, for every $1 in Decentralized USD, there needs to be more than $1 backing it. While fiat money is now unbacked, even fiat started with full backing in precious metals within the last century.

Governments, whether you love them or hate them, have exponentially more trust than 0xGenius building the BBQUSD algo stable- non-over collateralized stables almost inherently require trust to work. Whether that be by finding willing participants to purchase a secondary non-fixed price token, clever incentive structures, etc. Over-collateralized stables, while less capital efficient, need no trust, as all participants are aware there is verifiably more on-chain money backing each decentralized dollar than what is issued.

But, that also does not mean we must settle for USDC wrappers, or ‘decentralized’ stablecoins that utilize USDC (or USDT, USDP, BUSD, etc) as their main (and sometimes only) backing. We also do not need to settle for SAI style decentralized stablecoins like LUSD that strictly only support one collateral like ETH. We also mustn't give up all of our capital efficiency (liquidity productivity) with low maximum Collateral Ratios. Lastly, we shouldn’t need to rely on mercenary capital providers through incentive mechanisms such as veCRV and CVX to ensure the liquidity of an over collateralized decentralized stablecoin remains deep enough.

There’s a better way to do it all, balancing the “decentralized stablecoin trilemma” of price stability, censorship resistance, and capital efficiency.

Enter the Omnichain Dollar

The term decentralization has become a parody of itself- nothing more than an ideological gimmick to lure uninformed people into crypto. We at Pearl Labs reject this prospect, and believe it is time to return to truly trustless and decentralized money as cemented in the anarchist roots that started crypto and DeFi from the 2008 Financial Crisis. The events of November 8th, 2022 & March 11th, 2023 have proved this is the only path forward for DeFi to survive as intended. There must be a line drawn in the sand, and the only way to ensure true DeFi not only survives, but flourishes, is for there to be decentralized dollar denominated money on-chain once again.

With that said, TapiocaDAO presents anons worldwide, USDO- the Omnichain Dollar, built around a DAO governed decentralized central bank, Tapioca.

The five tenets that shape USDO:

Composability: We now live in a multichain world. There are 179 chains listed on DeFiLlama, and Ethereum currently only holds 60% of total TVL. From data of just Tapioca’s community, most members are utilizing at least 3 chains regularly.  We cannot issue stables on one chain, and store credits (that are often hacked) on another (USDC on Ethereum vs USDC.e on Avalanche for example).

Thus, USDO was built for a multichain world, being able to be minted & burned from chain to chain (teleported) with no bridges or intermediaries that are found with most major interoperability solutions outside of LayerZero. Competitors such as Axelar use an intermediary consensus chain, Wormhole, Multichain and Nomad were all previously hacked and use intermediaries, lesser known cross-chain solutions like Synapse & Abacus/Hyperlane use an intermediary and an unknown external validator set respectively.

Trustless: Some stablecoins like MIM for example require trust based on being minted from a 5/10 multisig with manual intervention required to fill its markets (cauldrons). USDC & USDT obviously require trust in that its off-chain liquidity is truly backing what’s issued on chain. Algo stables require some mechanism in which the stablecoin and its token economy have enough buy pressure to remain stable, which inherently relates to trust in the system. Some decentralized stablecoins contain upgradeable contracts which could modify critical systems.

USDO is trustlessly minted on demand when users supply collateral, and Tapioca’s contracts are fully immutable. There is no trust assumption in USDO’s ability to hold a peg, as there’s more on-chain high quality collateral backing USDO than what’s issued. There is also no trust in USDO’s central bank issuer, Tapioca, again being immutable code.

Stability: Not only is USDO over-collateralized at a minimum of 110%, but its liquidity is made up of Tapioca’s POL. With users redeeming oTAP call options, this creates POL, which is then supplied to USDO’s LP pairs cross chain (via Arrakis Vaults). This ensures the liquidity depth of USDO constantly grows without chance of a run on the bank and without needing to rely on external systems like Curve’s veCRV bribes to ensure sufficient liquidity is present and that the peg is held.

High LTV’s can seem dangerous, but liquidations are fast and efficient being settled off chain. USDO’s collateral backing is also not lent out (rehypothecated) as with DAI and some other smaller stablecoins which creates massive risk- especially when levering rehypothecated collateral, essentially making the stable no longer over collateralized. Lastly, Tapioca features “Collateral Debt Ratios” (CDR’s) in ‘Big Bang’ loans that mint USDO, which enables Tapioca’s Big Bang markets to accurately control collateral asset backing weightings and price in risk, as well as to control supply expansion and contraction.

Capital Efficiency: As USDO can be minted at a 90% LTV with ETH, wstETH, and 80% + LTV ratios with other assets in isolated CDP’s (loans), this ensures the dormant liquidity requirement is as small as possible. Other stablecoins such as LUSD suffer from needing large stability pools to cover liquidations- over 80% of all minted LUSD at the peak was deposited into the stability pool. This causes liquidity issues on secondary markets, and secondarily causes LUSD to trade above peg constantly (needing to pay a premium is just as bad as a depeg to the downside).

Censorship Resistance: USDO is only minted with network gas tokens such as ETH, AVAX, FTM, MATIC, and Liquid Staking Derivatives such as RETH, stMATIC, sAVAX, etc. USDO has no USDC or any centralized stable backing. USDO will also feature pairs against ETH to ensure even if USDC were to be obliterated, users could continue trading USDO as if nothing ever happened.

Of course, these are all important USP’s of USDO, but why would someone want to use USDO? Enter the Singularity.

Singularity is Tapioca’s Omnichain isolated Lending & Borrowing Engine based on Kashi that allows users to achieve high real yields on attractive yield bearing assets such as GMX’s GLP, Stargate ETH & USDC, Curve TriCrypto, among many others. As Aave and Compound (and their 9001 forks) have a shared pool of collateral, they cannot offer these riskier assets, or offer their users access to efficient leverage.

This allows users to attain leverage on the assets they want, while USDO holders get paid to lend them the liquidity- this is a second benefit of Singularity. With Aave or Compound, the interest rate minimum and maximum is manually set, whereas Singularity’s rates are set via utilization rates and have no min or max-

more demand = more real yield

This is a sustainable method to bootstrap adoption of USDO, offering attractive yields like Anchor, but sustainably without incentives or cash reserves, or like Abracadabra without creating undue risk on the USDO peg itself to support the high yields riskier assets can create with leverage making up any of USDO’s actual collateral backing.

Conclusion

USDO has been designed as the stablecoin to fill the large hole DAI has left for a decentralized immutable and trustless dollar as a base layer asset of DeFi. But also to importantly offer the highest capital efficiency possible for a CDP based over collateralized stablecoin without sacrificing sustainability and stability, and lastly to empower DeFi users on every chain to be able to traverse with their money once again- no more getting stopped at the toll on the unsecure bridges.

Your el jefe and 0xRektora believe we have designed the perfect decentralized stablecoin to scale to new heights without taking a bite of the poisonous apple of centralization- immutable code after all is law, and the unstoppable Omnichain Dollar will be coming from the Tapioca banking system to a swap near all anons, #soon

Pearl Club Member #0, twMatt, signing off.

Join the omnichain revolution @ tapioca.xyz

[last note: so anons can actually mint the Mirror NFT of this masterpiece instead of a bunch of bots grabbing all of them, there will be a price set on them. Pearl Labs will match all funds raised $1 for $1 and donate all of it to ProtocolGuild]

The twAML whitepaper:

For the twAML whitepaper, click here.

Introduction:

When Pearl Labs began the development of TapiocaDAO in early 2022, one of the largest goals was to conceptualize a new economic growth model in DeFi. Why? Employing virtually any current incentive system would do nothing more than propagate models that are bound for failure. Tapioca needed to be the agent of change.

To summarize, our primary issue with liquidity mining is “receiving something for nothing.” Liquidity Mining chases TVL, which is not locked as LPs can withdraw at any time, nor is there arguably any value. Liquidity Mining programs effectively “spray and pray” reward tokens, hoping as many LPs as possible will rent out as much liquidity as possible to the protocol. You cannot sustain giving something for nothing, and at some point that something (incentives) will mirror the value of what's received in return, nothing- worthless. This leaves the protocol economically disabled.

Liquidity Mining in short is unsustainable, unprofitable, and highly paradoxical. 

Users of today demand real yield. Forks of years-old codebases made relevant by laughably high emissions are increasingly short-lived in relevancy. For a more in-depth history of liquidity mining and our research of current DeFi economic models, read our Nobel Degen Prize-winning research article, Death of Liquidity Mining. 

With Liquidity Mining’s obituary in the annals of time, we embarked on creating what would become twAML. 

The first step was to decide upon the broad goals of this new economic model:

1. Sustainable Method to Stimulate Economic Growth: Incentives are typically dolled out with no mechanism of calculating the ROI (return on investment) of the incentive, or the impact on the token value of the inflation. Issuance happens haphazardly with no estimable price floor, as the tokens are dished out at the low price of free. Thus, all parties besides mercenary LPs quickly become diluted, creating a misalignment of interests. Incentive programs quickly become maintenance programs in attempts to retain the rented capital. Monetary death spirals generally occur from mercenary capital providers farming and dumping the incentives, leaving the system in a failure state- incapable of maintaining or recapturing its short lived glory. Lastly, these mechanisms have secondary effects of creating plutocratic governance systems.

2. Near Positive Cost/Benefit of Economic Stimulus: Observing emissions as capital expenditures, fee generation as revenue, and liquidity in the treasury as assets on a balance sheet, we quickly noted the majority of DeFi protocols expenditures (emissions) far outweighed their revenues (fees), on-hand assets (treasuries), and tangible user base increases. Many protocols after years of operation with Liquidity Mining programs have found out the hard way that no real value was being created. Thus, Tapioca’s incentives needed to generate and create tangible value in harmony with TAP’s issuance/inflation.

3. Promote & Reward Loyalty: Generally, participants who are loyal to the system get the short end of the stick, as mercenary capital providers reap all of the benefits. This is one tenet Vote Escrowing (ve) met by implementing loyalty tiers via CRV escrow durations. Lock for 4 years? Get one veCRV per CRV. Lock for 1 year? Get 0.25 veCRV per CRV, etc. The more loyal you are to Curve (via how long you’re willing to escrow for), the more you are rewarded.

4. Create Protocol Owned Liquidity (POL): Protocols become highly dependent on token value to stabilize their ecosystem, and thus are fragile- being easily affected by external factors like the market sentiment. Capturing POL would enable Tapioca to be stabilized by itself, resilient from these external factors.

Research:

With these goals in mind, we began the research stage. There were a number of existing systems that had properties that were crucial in conceptualizing Time Weighted Escrowing (tw) & Average Magnitude Lock (AML). Our central goal was answering the question: “What should be rewarded and how should it be rewarded?”

ve3,3’s lock position being represented as an NFT created a semi-liquid representation of an escrowed position. Quite literally an entire industry (liquid locking) was born out of this misstep of ve. This practice is highly beneficial as it keeps value within the system instead of with 3rd party liquid lock providers (such as Aura & Convex). Additionally, it allows the system to force the tokens to remain illiquid during the escrow (no early exits, which is self-defeating anyway), but allows for the creation of secondary markets to trade lock positions. Another interesting property of ve3,3 was the dynamic modulation of emissions- however, this mechanism being tied against veTKN lockup did not seem optimal to us.

OHM had many attributes that were crucial in the ideation phase of twAML. While the focus of Tapioca’s model is completely different from OlympusDAO, many OHM concepts remain novel and were important in the ideation for a new model- credit where credit’s due. Firstly, its incentives (bonds) being employed to create POL was and still is a groundbreaking concept, an incentive that is traded for real value- permanent liquidity. This would give the Tapioca DAO the ability to be its own capital provider and remove the need of renting liquidity altogether. This secondarily stops external factors from affecting system stability. Secondarily, OHM’s measurable price floor with RFV (Risk-Free Value) was yet another concept of great importance. Lastly, Olympus’s use of game theory was a second foundational concept- the ability to scientifically optimize a system is how real flywheels are made.

GMX, among the many other real yieldoors had many formative concepts, even though real yield shouldn’t be a feature but the norm. Through the real yield meme movement, we realized our lockers receiving ETH was much more effective than paying out lockers in TAP token(s)- there always must be a point that profit exits the system, just with as minimal negative impact as possible. It also creates an additional extrinsic motivation to lock, as ETH is undoubtedly the most attractive asset in DeFi. “Reflected Buybacks” may seem like a great idea to create consistent buy pressure on the incentive token in theory, however when distributed, these rewards are typically sold, and the system ends up in a net loss.

Vote Escrowing (ve) as aforementioned implemented a loyalty mechanism which was one of the few significant improvements in economic design in DeFi in the last several years. However, we didn’t like the fact that ve is static- in that, a one-year lock with an input of 1.00 CRV would always = 0.25 veCRV, two years = 0.5, four years = 1.0, etc. We wanted a system that was dynamic in that the free market would decide the value of time.

Convex & Aura’s offerings of staking Curve & Balancer LP sprouted a grander idea in answering the question of “what should be rewarded?”. We formulated the idea of adapting the escrow model to liquidity provision (think “veLP”). Being a money market, Tapioca needs sufficient liquidity reserves for borrowers to maximize the utilization of the system. Thus, the goal of our incentive program was incentivizing capital to not only be provided but locked as well (like if TVL was actually locked value- imagine that).

Through this research, the eight core tenets of our system were now in place:

1. Generate POL

2. Incentivize Capital Escrowing

3. Provide Real Yield

4. Semi-Liquid (NFT) Represented Escrow Position(s)

5. Dynamic Response to Economic Activity

6. Minimize Negative Impact of Stimulating Growth

7. Sustainable Inflation

8. Employ Game Theory

Design:

First, we needed to design the base token economy. We decided on a hard-capped / fixed total token supply. It’s easy to put a “soft cap” on a token supply and pretend the supply is capped until the incentive program ends to only continue infinite inflation, but you cannot turn this spigot off once it’s been turned on. This was observed with Compound’s COMP Rewards Adjustment Step Two Proposal- since mercenary capital providers controlled Compound’s governance, they cannot end the emissions as that would be against the self-interests of capital providers. 

The real reason however why most token economies require infinite inflation is that there’s no real value being captured. Once the emissions dry up in one way or another, the* *users and liquidity follow suit. We felt inflation must end at some point. We made the hard decision that if the inflation did not stimulate enough economic growth and value in the system (POL) by the time the incentives had run out, the system failed- no safety nets. Additionally, research has found fixed supplies scarcity is more attractive than non-fixed supplies to market participants, makes sense.

The next step was to design the issuance of TAP. Protocols like Convex have run into the problem of runaway inflation, in that CVX will hit its max supply cap earlier than expected…than what? We set a pre-calculated inflation schedule so that TAP could not be issued faster than what was predetermined. The inflation schedule would in actuality act as the maximum inflation schedule. We wanted to ensure issuance was done in a trade of intrinsic value, which would occur through the incentives themselves creating POL. If POL was not captured, TAP would not be issued.

We then sought to employ a “veLP” like system as to what the incentives would be issued for, so that Tapioca as a money market would always have deep capital reserves that could not be destabilized by external factors. Users would lend capital and receive a tOLP LayerZero ONFT reciept (Tapioca Omnichain Liquidity Provider Receipt). Users would then lock the tOLP, and receive incentives for each epoch their tOLP was locked. This serves to maximize the on-hand inventory for borrowers to utilize in the creation of loans, which in turn creates fees through debt repayments, borrowing fees, and yield performance fees. More liquidity = more revenue and more users.

On designing the incentive itself, we toyed with employing bonding as the incentive design for users escrowing capital, with bonding being the most well-known mechanism for creating POL. However, we quickly realized bonding was an inefficient solution. Bonds set no predictable price floor for the incentive, or an estimable trade of the capital provided for the expenditure of the incentives, as it’s a constant discount against the incentives’ market price. PoolTogether actually noted they had more sell pressure using bonding than regular liquidity mining. Bots were programmed to buy $POOL/ETH LP to obtain the discounted $POOL to be sold for a profit- it encouraged mercenary capital providers’ behavior even further. As PoolTogether notes, it would have been more efficient to OTC sell their tokens, or even to simply sell $POOL tokens on an AMM to generate POL.

The end goal of our issuance was to create enough POL that issuance was no longer necessary- Tapioca would thus become its own capital provider to its own LP pairs (using Arrakis vaults to manage the LP) as well as to Tapioca’s lending/borrowing markets. Lockers would share in fees generated from the platform, receiving Omnichain ETH (tETH) as the unit of reward. The DAO would always act in the best interest of itself, unlike mercenary capital providers. This stabilizes the Tapioca ecosystem from external factors. 

One question remained: how do we issue TAP to create POL if not with bonding?

A New Option:

On a chance evening, we stumbled upon Andre Cronje’s Keep3r Network’s Option Liquidity Mining (OLM), and the reward token mechanism was quickly cemented - call options. Call options are the right, but not the obligation, to purchase the underlying asset at a specified price (strike price = market price - discount) within a specified duration (one week in our case). If the market price of TAP were to fall from sufficient sell pressure, the call options would become OTM or out of the money (unprofitable) and would be left to expire. This minimizes the negative impacts of incentivization of economic growth. Call options also create intrinsic value when exercised. 

This also allowed us to reuse this system to create the first sustainable airdrop, in Tapioca’s “Call Option Airdrop”. Airdropping call options offer loyal community members an appreciable and estimable reward, and airdrop hunters' negative impacts are minimized.

This is when the name for our incentive program was created; DSO, or DAO Share Options, which was named after ESO, or Employee Stock Options. With ESO, rather than a company granting shares of their stock directly, the company gives derivative options on the stock instead. This is identical to DSO, except with lenders instead of employees, and tokens instead of stocks. 

In contrast, Liquidity Mining can be looked at as a call option with a 100% discount, and an infinite expiry. With call options, they set an estimable price floor, as TAP Price Floor = TWAP - Average Discount % per Epoch.

Due to non-circulating TAP only being injected into the supply through exercised call options, the preset inflation schedule becomes the max amount of TAP that can be redeemed each week instead of the actual amount of inflation that will occur. With the nature of call options going out of the money (unprofitable to execute) and having an expiration, this ensures we can issue incentives over a long time horizon due to TAP that is not redeemed through call options each week being held in the multisig to remain uncirculated.

While stumbling onto OLM was a eureka moment, there remained two distinct problems the OLM model did not solve: 

1. Keep3r’s oK3PR’s redemptions were redistributed to lockers- meaning most of the liquidity captured from redemptions of call options went right back out of the system

2. The discount and expiry were fixed- while the expiry we felt should be fixed, the discount being fixed we felt was inefficient- no dynamic modulation of the system during economic decline, growth, or stagnation.

The plan was set. We could easily reconfigure these call options, now known as oTAP* *to capture POL through a redirection of the redemptions to the DAO Treasury (to then be deployed into Arrakis Vaults). The Arrakis Vaults act as a decentralized market maker, and the DAO Treasury earns fees from the trading of its own tokens. If that’s not a flywheel, I don’t know what is.

Users would receive oTAP for each epoch their tOLP was locked. When a user would receive the call option (oTAP), they would redeem it OTC (over the counter) from the DAO- thus creating POL. The user then could choose to sell this discounted TAP on an AMM for a guaranteed profit, or escrow it to receive shares of protocol revenue (and governance). As ITM (in the money) call options, they could be viewed as a more attractive incentive than what liquidity mining offers, as the value of liquidity mining incentives can, and usually does rapidly fall, thus lowering the profit amount. With oTAP call options, users are receiving the ability to purchase TAP below its current market value- thus how it is a guaranteed and predetermined profit. 

The larger issue remained, the fixed discount of oKP3R. We wanted to create a system that dynamically modulated the discount to economic activity within it, and thus- the creation of the Average Magnitude Lock.

AML:

(no FBI, not money laundering)

As aforementioned, varying the call options discount was our motivation behind the creation of Average Magnitude Lock (AML). We first set two boundaries, a minimum discount of 5%, and a maximum discount of 50%. The expiry was left fixed at one-week epochs, as we felt weekly distributions were typical. When users lock their tOLP for any period of time they wish, the escrow duration and capital amount are measured by AML, which offers the appropriate discount level. This discount level is then locked in for the entire duration of the user's escrow period.

When the system is stagnating or declining (users stop escrowing liquidity), AML will offer higher discounts for lower time commitments to trigger growth. Conversely, when the system is experiencing economic growth (many users are escrowing capital), AML will lower the discount for the average escrow duration. Even during times when it may be a small time commitment to receive a large discount, a user would still be incentivized to lock longer than necessary to lock in the maximum discount for longer periods of time.

Thus, the modulation of the discount allowed us to modulate the reward size for any duration of lock time and capital amount used as an input. Users locking capital, or not locking capital, would “steer” the system's time reward ratio- serving to always offer an optimal reward level. AML was created to be easier to push higher than back down, to prevent manipulation from bad actors.

When many users are locking capital, the system will give smaller and smaller rewards to each subsequent user for the average time commitment. When few users are locking capital, the system will receive less in capital lock time, but give out larger and larger incentives (decaying) until it triggers users to begin locking new capital. Thus, the Tapioca protocol and its users are always in perfect harmony with one another's desires, and allocative efficiency is reached.

AML also implements an extrinsic motivation based on the human psychology of competition. Competition occurs from users competing over discount levels offered by the current average magnitude lock (AML). One study of competition found that nearly half of the people surveyed would rather make $50,000 in a world where the average salary is $25,000 than make $100,000 in a world where the average is $200,000; that is, they prioritize making more relative to other people rather than having a higher overall income. 

As this example outlines, humans are incredibly competitive. The ability for one user to receive a better reward than the subsequent user acts as a strong motivator in of itself.

For example, If Bob locks 100 usd0 for one year and receives a 30% discount, and Sally then goes to lock the same amount for the same duration and sees she’ll only receive a 15% discount, half of Bob’s, she is incentivized intrinsically and extrinsically (profit & competitiveness) to double her lock time to get the same discount as Bob.

This means, unlike most systems (like Liquidity Mining) where it is “Player vs. System,” AML creates a “Player vs. Player” environment that leads to higher efficiency through competition. This led us down a path Olympus once trotted, the path of game theory, and how best to optimize our mechanism in a scientific fashion.   

Game Theory 101:

To start, we first analyzed liquidity mining through the lens of game theory to scientifically determine where the core issue lies in Liquidity Mining, as Game Theory provides a mathematical way to compare the benefits of self-interest and cooperation. The goal of Game Theory is to study the behavior of decision-makers, called players, whose decisions affect each other. 

We quickly noticed that the dire issue with liquidity mining was it incentivizes all participants to employ a strategy of yield farming- a “pure strategy”. This pure strategy in Liquidity Mining is precisely what we observe in mercenary capital provider’s behavior. Supply Capital > Receive Rewards > Withdraw Capital & Sell Rewards. 

In a pure strategy, players adopt a strategy that provides the best payoffs. In other words, a pure strategy is one that provides the maximum profit or the best outcome to players. Therefore, it is regarded as the best strategy for every player in the game.

Unfortunately, this strategy is the worst outcome for the system itself.

OlympusDAO is well known for its effective employment of game theory with its memetic 3,3 mechanic, and thus we sought to analyze it as well. 

In Olympus, each “player” had three options: stake, bond, or sell:

If Ohmie One and Ohmie Two stake, +6 (+3,+3).

If Ohmie One and Ohmie Two sell, -6 (-3,-3)

If Ohmie One sells, and Ohmie Two stakes, 0 (-1, +1)

Under the microscope of game theory, we wanted to determine how Olympus accomplished its meteoric rise, and what caused its subsequent downfall. We quickly saw Olympus created a cooperative variant of the “Prisoner’s Dilemma,” featuring Nash Equilibrium. 

In economic theory, the Nash equilibrium is used to illustrate that decision-making is a system of strategic interactions based on the actions of other players. When players do not need to change their strategies, you have found the Nash Equilibrium. The Nash equilibrium is a part of game theory, and models economic behaviors that maximize outcomes for each participant.

The Prisoner’s Dilemma applied to economics is a scenario in which the gains from cooperation are larger than the rewards from pursuing self-interest. Thus, via cooperation between Ohmies, rewards are maximized and economic alignment is found. 

But what actually is the Prisoner’s Dilemma?

Prisoner’s Dilemma:

Let’s imagine that the police lack sufficient evidence to convict two prisoners. The police then simultaneously offer each prisoner a bargain: either testify against your accomplice and stay free, or stay silent and run the risk of betrayal and going to prison.

The possible outcomes in this scenario are:

Both Sam and Caroline snitch- 2,2 (both receive 2 years in prison with no vegan food)

Caroline betrays Sam, and Sam stays silent- 0,3 (Caroline receives 0 years in prison, Sam receives 3 years in prison and is called a simp)

Sam and Caroline stay silent- 1,1 (both receive 1 year in prison and lose their Adderall prescriptions). 

Unlike the prisoners in our hypothetical game, OHM stakers can communicate- meaning they can theoretically reach a consensus and continue cooperating (staking) because that is the most optimal action for everyone to take. By staying staked (3,3), OHM holders are essentially cooperating to withhold OHM supply from the market, therefore raising the OHM price and increasing OHM’s market capitalization.

Therefore, the premise of 3,3 is if all users cooperate and stake, and no users sell- everyone will definitely become rich.

So, why didn’t they? 

“Ohmies Dilemma”:

The Prisoner's Dilemma is a counterintuitive decision-making paradox. The rational decision is to blame the other prisoner in an act of self-interest, while the optimal decision is for the prisoners to cooperate and remain silent in an act of collective interest. However, individuals will almost always act in self-interest, and will rarely choose the optimal strategy.

Applying this to 3,3- during the beginning of the game, profit motivation to sell was small, thus participants' self-interest would be meaningfully aligned with the system to cooperate and drive the value of OHM up through staking (3 + 3 = 6).

However, as participants continued choosing the optimal choice of staking, the potential profit grew and grew. Thus, it became more and more profitable for players to deviate strategies, and act in self-interest to sell. (-3 + -3 = -6).

“But I thought the Prisoner’s Dilemma and 3,3 found Nash Equilibrium and Nash Equilibrium would be lost if it became better to deviate strategies?”

Correct, thus a second Game Theory concept, Subgame Perfect Nash Equilibrium (SPNE). A Nash equilibrium is said to be subgame perfect only if it has Nash equilibrium in every subgame of the game. While Olympus, like an infinitely repeated Prisoner’s Dilemma, achieves Nash Equilibrium, Olympus fails to achieve SPNE like the Prisoner’s Dilemma, in that, as the game goes on into many sub-games, it becomes better to deviate strategies- acting against the interest of the collective and OHM itself, and to act in self-interest (sell, or -6).

Pareto Optimal:

When applying game theory to situations, like the Prisoner's Dilemma, sometimes Game Theory yields outcomes that are not optimal, thus why it is a dilemma- there can be better outcomes that theoretically provide better payoffs to both players. There are several ways to observe that the Nash Equilibrium in OlympusDAO (and the Prisoner’s Dilemma) are strictly Pareto Inefficient. 

An outcome is Pareto Optimum if you cannot find another outcome that simultaneously improves the payoffs of both players. As already pointed out, the solution of cooperative staking (+6), (which also corresponds to Nash Equilibrium), does not constitute a Pareto Optimum insofar as the two Ohmies would achieve a better result if they were to betray the collective and sell (**-6*) during later stages of the game*, just like both prisoners would have a better outcome individually by snitching, which is what was observed in the “real life game of OHM”.

Thus, the ultimate goal behind twAML was for it to focus on achieving a level of Pareto Efficiency to maximally align players and the system itself, ensuring all participants receive outcomes that improve the payoffs of all actors (and the system itself).  

Pareto efficiency implies that resources (in our case, incentives) are allocated in the most economically efficient manner, but does not imply fairness. An outcome is Pareto efficient if there is no other outcome that increases at least one player's payoff without decreasing anyone else's.

Thus, with twAML, when one player chooses to escrow their capital for the duration required to maximize their incentives (oTAP) discount level, the next player applying the same escrow arrangement will receive half the reward as the player before, and this is observed again and again in sub-games. This is a variant of Rubinstein’s Bargaining Model.

Both the optimal (collective outcome strategy) and rational (self-interested strategy) is to lock enough capital for the amount of time necessary to receive an equitable reward. Therefore, twAML also reaches subgame perfect Nash Equilibrium.

When the lock time becomes perceived as too long to receive a reward level that is perceived as equitable, or in more scientific terms when the system is no longer allocatively efficient, the system will “decay” or decrease the lock time required to receive an equitable reward until allocative efficiency is once again reached. What users view as an equitable reward individually does not matter, the collective always decides what is in the best interest of themselves and the system itself.

As Game Theory is incredibly complex and would require an extremely verbose explanation to fully explain twAML’s basis in it, check out:

Perfect Equilibrium in a Bargaining Model by Ariel Rubinstein.

Time for Time Weighted Escrowing:

twTAP, or time-weighted escrowed TAP, also employs AML (our Average Magnitude Lock) like oTAP, with one difference. The boundaries are not 0.05 to 0.50, as in the maximum and minimum discounts seen in oTAP, but 0.10 and 1.0. This is the ratio of twTAP received for an input. twTAP Output = AML (TAP Amount + Time Duration).

In Curve’s Vote Escrowing (ve), if a user locks CRV for 4 years, they’ll receive 1 veCRV for each CRV locked. If the user instead locks for 1 year, they’ll instead receive 0.25 veCRV for each CRV input. The user’s veCRV balance decays linearly until the completion of the lock, at which point they will have zero veCRV. Curve’s veCRV allows users to receive shares of fees, and participate in multiple forms of governance, such as Gauge voting and Snapshot voting.

We felt applying AML instead of fixed values would offer much higher efficiency for twTAP. Thus, If Tapioca’s protocol revenue was high, users would be incentivized to lock TAP, in turn steering AML to the lower boundary of 0.10 twTAP per TAP locked. If protocol revenue was low, users would be incentivized to lock as AML would be steered to the maximum boundary of 1.0 twTAP per TAP. 

Imagine if, during the height of the Curve Wars, you had to lock longer than four years to get the best outcome. Then during periods of stagnation, like the current bear market, you could lock shorter amounts of time to get the best outcome. That’s the point of twTAP.

In short, what if users were willing to lock longer because there was so much value in the system? Or, what if there was so little value in the system that these fixed values were unattractive? This elasticity would beget higher economic efficiency.

twTAP would also be transferable and represented by a LayerZero ONFT-721 (like oTAP). This allows for the creation of secondary markets to trade lock positions but forces the underlying TAP to remain illiquid for its escrow duration. This system additionally offers voting power for loyalty, the more loyal you are to Tapioca (in lock time), the more voting power you receive.

twTAP also offers a constant balance, in that a user’s twTAP share will not diminish over time like ve, or increase like ve3,3. At the end of the lock, the NFT will burn, and the user will receive the original TAP balance back.

Conclusion:

After a year of development into Time Weighted Average Magnitude Lock (twAML) and DSO (DAO Share Options), 0xRektora and I feel we have conceptualized and developed a full-scale revamp of the economic modeling in DeFi. twAML meets the goals of offering a sustainable and cost-effective approach to economic growth stimulation that retains economic alignment of all participants, plus a democratic and loyalty-based governance system, and the first airdrop mechanism that frankly doesn’t suck.

I hope the time you waited was worth it! (sorry, I had to)

Pearl Labs Member #0, twMatt, signing off.

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??? - November 7th, 2022

Yet another untimely death has come for us at TapiocaDAO to sadly announce the sudden passing of bridging. The following obituary provides context to what went wrong in bridging’s short but “eventful” life. Join us in remembrance and seeing what the future holds.

Dude, where’s my scaling?

In July 2015, the genesis block of the Ethereum network occurred. DeFi’s “Big Bang” event if you will. Rune Christensen launched eDollar onto the Ethereum testnet in 2015 (later becoming MakerDAO), Stani Kulechov launched ETHLend (later known as AAVE) in 2017, and Robert Leshner launched Compound in 2019. At the beginning of 2020, DeFi’s TVL was $700m, a paltry sum compared to what it would soon capture. After Compound’s Liquidity Mining (RIP) program began, “DeFi Summer” of 2020 caught on, and the bull run began.

Money poured into DeFi markets from June to October 2020 as DeFi TVL exploded from $1 billion to $15 billion. From this rapid influx of users and liquidity, many new decentralized applications were launched on Ethereum. DeFi users were elated and blinded by the incredible wealth generation possible during the warm days of the DeFi summer. With massive amounts of users, developers, applications, and liquidity, what could go wrong?

(Retail) Not Gonna Take it!

Ethereum gas fees started to sharply increase significantly due to the stress the network was being put under. Slow transaction finality was also ever-present, taking several minutes to complete a single transaction (imagine a Google search taking 10 minutes). This was not just a minor nuisance- gas costs became so high it was prohibitively expensive for retail users to, well, use the network and the apps on them. The fee to complete a single swap on Uniswap for example cost nearly $200 USD. (A decent chunk of most middle-class paychecks to swap ETH for your favorite Safe-Baby-Doge-Inu token sound good?).

These soaring gas costs effectively blocked the entire retail market from interacting with DeFi. Whales were still quite content to continue utilizing DeFi apps to gain enormous profits during the legendary 2020 bull run.

Since gas fees were not calculated based on the size of the transaction, but rather a base cost to interact with the smart contract(s), whales were less affected by the rising transaction costs, and thus the retail market was made homeless in decentralized finance and begging for a place to sleep at night. Ethereum’s market share fell 30% in 2021 as a result. But to who?

There were many proposed solutions; Rollups, sidechains, flux capacitors breaking the time flux continuum, etc. One lone solution reigned supreme to save DeFi for retail: Binance Smart Chain.

Binance had already launched its own blockchain, Binance Chain. But their aim for Binance Chain was to create a high-speed blockchain that could support a large number of transactions. To achieve this, Binance Chain did not support 3rd party apps. Through seeing potential market share they could grab from Ethereum being on its back for the first time like Holyfield vs. Tyson (no ears were harmed in the creation of BSC), Binance decided to fork Ethereum with (essentially) a centralized set of validators- offering unparalleled speed and most importantly- near free gas costs.

Foodcoins for thought, shall we go Multichain?

BSC quickly not only overtook Ethereum in daily transaction counts but doubled it.

In a food-coin-fueled craze, retail users and developers set their sights on Binance Smart Chain (BSC). Due to BSC being a fork of Ethereum, it was easy for developers to move from developing on Ethereum to BSC, and thus they made the move. “They” in this case were several hundred thousand retail users.

BSC was quickly filled with copypasta (forks) of Ethereum applications. PancakeSwap, a fork of Uniswap, was a runaway train, dominating on-chain swaps of every shitcoin imaginable.

Strangely, forking Ethereum codebases and launching them without any care in the world like BSC developers were all in a carnival money booth trying to quickly nab every dollar didn’t work out so well.

PancakeBunny, Cream Finance, bEarn, Belt Finance, Bogged Finance, Uranium Finance, Meerkat Finance, Spartan Protocol, and BurgerSwap is just a small list of BSC forks that got rekt. These hacks weren’t small, there were billions of dollars lost due to low-effort forks filling the BSC ecosystem before the Ethereum dApps could scale to BSC to meet this burgeoning demand.

For example, dForce forked the Compound codebase and launched on BSC where it gained dozens of millions of dollars in liquidity before crashing and burning in a hack that lost $25,000,000 USD (oops). This was due to adding risky assets into the delicate Compound codebase which featured a unified liquidity pool. (who knew security and risk management were important!?)

Not only did users lose their funds through constant hacks and their (somewhat) seamless user experience on Ethereum, but Ethereum dApps also lost out on gaining deep liquidity and new users on the rapidly growing yellow chain. Liquidity also became fragmented between ETH and BSC. Mark Cuban even was rugged from a fork.

Woes of a Multichain World

As retail quickly flocked to the Smart Chain, only comparable to James Marshall finding gold in California in 1848, another problem emerged- how do we get our funds onto BSC to buy rugs highly profitable and well-crafted meme coins?

Even with BSC’s highly centralized network, and the infrastructure of the Binance CEX behind it, users leaving Ethereum’s gas-guzzling and slow infrastructure for brighter, food-coin-filled pastures quickly saw for themselves early on the need for cross-chain communication- being able to easily transport funds from one DeFi network to the other.

Even Binance wasn’t able to produce a secure way to transport funds, losing over half a billion USD in a hack of its “BSC Token Hub” in 2022. Bridge exploits account for ~50% of all DeFi exploits, totaling ~$2.5B in lost assets.

Here’s a short list of the happiness bridges gave us in their short lifespan(s):

• BSC Bridge Hack: $568m - Bug in the way that the Binance Bridge verified proofs which allowed attackers to forge messages. Resulted in a hard fork of the chain.

• Nomad Hack: $200m - Attackers bypassed the message verification process and drained the tokens from the bridge contract.

• Harmony Bridge hack: $100m - Compromised private keys. (not your keys, not your crypto)

• Ronin Bridge Hack: $650m - Compromised private keys.

• Wormhole Bridge Hack: $325m - The attacker bypassed the “verify signature” with a malicious sysvar account that forged the message to mint the wETH on Solana. Therefore, the bridge minted wETH without an equivalent deposit on the Ethereum network.

• Multichain (Anyswap) Bridge hack: $1.4m - A vulnerability in the code for the $ANY intermediary token’s contracts allowed an attacker to steal funds from users who had previously created approvals for them.

• QBridge Hack: $80m - Bypassed the verification process by evading the bridge’s smart contract.

• Polynetwork Bridge Hack: $600m -  The hacker exploited a vulnerability in the way the bridge verified smart contracts. By changing a list of public keys to match their private keys, the hacker could reroute the funds to personal wallets.

• THORChain Bridge Hack: $7.6m - Exploited a bug in Bifrost, THORChain’s Ethereum bridge via abusing an override loop (designed only to be used in a vault transfer incident).

  Security was not the deceased’s only issue- bridging finality was also extremely poor, observable for example in Arbitrum and Optimism’s L1<>L2 bridge having a one-week withdrawal time when coming back to the Ethereum mainnet. Polygon’s bridge takes 30m to 3 hours to move funds between ETH and MATIC. Anyswap takes from 10 to 30 minutes.

  While retail users saw the beginnings of the bridging trilemma when attempting to transport funds between ETH and BSC, the issue has remained a centerpiece of DeFi’s barriers to attaining mass adoption. The bridging trilemma involves finality, security, and composability.

  Now that our multichain world has expanded far beyond just ETH and BSC- we now have 152 chains, and each chain is isolated, all the same, forcing users to operate within more and more walled ecosystems.

  With VC’s patented “L1 Rotation Trade” only ensuring this fragmentation of user flow and liquidity will only become worse, what options do we have?

  Ethereum>BSC>Polygon>Fantom>Avalanche>Solana>Aptos>To infinity, and beyond! (pls stop)

the wrap game

In order to understand the risks of wrapped tokens, first we need to understand what a wrapped asset is. A wrapped asset is a token that generally represents a crypto asset, and is (supposed to be) backed by the represented asset or assets of equal value. The backing asset is put in a vault called a “wrapper” (hence wrapped asset).

Many of us have interacted with Wrapped Bitcoin (wBTC) which was launched in June 2019, or wETH (Wrapped Ethereum) when using DeFi dApps. Many of us have used “USDC.e'' on Avalanche by using Avalanche’s bridge as just a few examples of wrapped assets.

The central problem with asset wrappers, taking USDC.e for example is this; imagine the smart contract controlling the assets on ETH is hacked and the funds are stolen. Now the wrapped assets on AVAX (USDC.e) have no value. You’ve just lost your funds to custody risk.

wen true interoperability ser?

Connecting disparate chains adds many new layers of complexity. Every new network creates a new set of idiosyncrasies, mechanisms, and other nuances that developers need to contend with. Security concerns remain ever present, and dealing with additional smart contract deployments adds a mounting risk of getting rekt. This adds additional time and consideration even when taking an Ethereum application multichain to Binance Smart Chain, even with its basis being the Ethereum codebase. When you start thinking of even more disparate networks like Cosmos, Solana, and Aptos, things get even hairier. (Wouldn’t it be nice if we had a generalized messaging base layer to fix that…).

For example, SushiSwap exists on seventeen different networks with each deployment running in a walled garden. If Sushi wanted to sync states between their Ethereum smart contracts and all of their altchain deployments, they’d have to write code for every separate bridge that exists on each of these chains to interconnect them. The end result is dozens of separate sets of code (more risk), with unique interfaces and nuanced security properties. Since the ecosystem of bridges and new L1/L2s is constantly growing, this becomes an untenable proposition.

This is why (in my opinion) Sushi chose, like us, to utilize LayerZero. Which LayerZero you ask? Uh…

Will the real LayerZero please stand up?

Firstly, what is LayerZero? Cosmos? Polkadot? Chainlink CCIP? Synapse? Hop? Router Protocol? Multichain.xyz? Hyperlane? A flying spaghetti monster?

While ‘layerzero’ can be interpreted in many different ways, a universal definition is: ‘A communication protocol, enabling smart contract execution across multiple chains, with one transaction from any one source chain enabling cross-chain functionality for dApps and (native) token bridging’.

• Cosmos/Axelar: A “layer-zero,” sometimes referred to as the “internet of blockchains”. Cosmos is a cross-chain network that connects blockchains, utilizing IBC (Inter Blockchain Communication) built on Tendermint BFT to facilitate interoperability between networks. The major issue with Cosmos is it introduces an intermediary (think a middleman). Secondarily, IBC alone does not interconnect blockchains. They must first meet certain specifications surrounding their module system, consensus state introspection, etc.

• Polkadot: A “layer-zero,” that utilizes two types of blockchains. The main network is called the relay chain, where transactions are permanent, and user-created networks are called parachains. Instead of IBC, Polkadot uses XCM, or “Cross-Consensus Messages,” that are executed in the XCVM, or the Cross-Consensus Virtual Machine. Polkadot again introduces a middle-man via the relay chain that also does not natively support the EVM or Ethereum Virtual Machine.

• Multichain (Anyswap): Born Anyswap, Multichain is a cross-chain bridge enabling bi-directional token transfers. AnySwap relies on an intermediate token, ANY, based on Fusion distributed control rights management. Introducing an intermediate token introduces higher cost, slower finality, and security risk. Multichain was hacked for $3m.

• Chainlink CCIP: Chainlink’s Cross-Chain Interoperability Protocol. Still unreleased, CCIP is admittedly very similar in nature to LayerZero. However, it does not feature the customizability or modularity of LayerZero. The security is monolithic to Chainlink- not allowing us to spin up custom relayers, or use outside oracles to Chainlink. Our vision is to continue Sushiswap Kashi’s multiple oracle vision. (Boring built this for a reason).

  (note: these descriptions contain opinions that some may disagree with. please research these yourself.)

While there are even more “LayerZero’s” only one is live on mainnet that offers a truly lightweight, agnostic modular infrastructure, trustless generalized messaging layer (that’s what we want).

While some “omnichain” protocols have chosen to take the impractical path of trying to support all “LayerZero’s”, Tapioca has made a very calculated decision to only develop and support thee LayerZero.

What’s under the hood?

Let’s first go over what this architecture entails:

LayerZero Endpoints exist on each (supported) chain. Any chain with a LayerZero endpoint can conduct cross-chain transactions involving any other chain with a LayerZero Endpoint. With a small amount of code, any chain can be supported.

ULN or Ultra Light Nodes allows lightweight cross-chain messaging with configurable trustlessness on the specification of Oracle and Relayer, the two roles that are relaying block information and transaction proof across chains. These on-chain assurances are facilitated by off-chain entities.

Relayer, or in our case, the Pearlayer will allow TAP to be staked in a DPoS (Delegated Proof-of-Stake) system allowing for token holders to delegate to validators who secure our cross-chain messaging system. If a validator tries to commit any harmful behavior, slashing will occur. Any Oracle can be used, but our configuration utilizes Chainlink. However, we do cross-check Chainlink with other data providers in a sanity check. Some controversy was created from LayerZero utilizing a DON (decentralized oracle network) “Industry TSS” of Polygon, Sequoia, and FTX. However, this is all meaningless to Tapioca due to the fortunately highly customizable nature of LayerZero.

Speaking of that customization, LayerZero even lets Tapioca decide on the rules and consensus required to approve cross-chain transactions, giving full control over our own security profile and level of decentralization. This gives us the ability to create our own relayer, with the aforementioned aptly badass name of Pearlayer (the Pearl Relayer).

To support a new chain, Tapioca does not need to deploy its core smart contracts to each chain. Instead, Tapioca only needs to deploy a proxy contract which is a lightweight contract used to send and receive messages from the newly supported chain to our host chain, which is an optimistic Ethereum roll-up**. This allows Tapioca to reunify liquidity, user flows, and greatly reduce infrastructure risk.**

To ensure valid delivery, the only requirement is that for any given message sent using the LayerZero protocol, the Oracle and Relayer must be independent of each other.

Pearlayers, Chainlinks, and what next, Warp Drives? How does this actually work?

Let’s take for example a user who has requested to deposit MATIC on Polygon, to borrow usd0 on Arbitrum.

1. The user deposits $MATIC from Polygon, which is then passed to the Polygon LayerZero endpoint.

2. The endpoint sends information to the Pearlayer (Relayer) and Oracle (Chainlink) - both separate off-chain entities with almost no way for collusion to occur.

3. Chainlink confirms the block header.

4. Pearlayer confirms the transaction on Polygon.

5. Assuming everything is valid, the requested action (borrow usd0 on Arbitrum) is committed.

   If there is any contention to the validity of the message between Pearlayer or Chainlink, the smart contract is paused and not committed on Arbitrum.

   (Note: There are other security variables we have enacted, but this is a high-level overview).

   You may say, “But there’s potential for collusion between Oracles and the Relayers!” Let’s take a look at an extreme case of Chainlink’s consensus being corrupted and Pearlayer colluding, and how other edgecases will get stopped in their tracks.

Pre-Crime

Precrime allows Tapioca to stop an exploit before it matters.

Due to LayerZero’s “Pre-Crime,” solution, Tapioca can run a defined set of assertions on a locally forked blockchain to verify that every cross-chain message being delivered will never result in a compromised state. If these assertions ever fail, Pearlayer will not deliver the message, preventing the attack and saving Tapioca from almost certain disaster.

Tapioca also uses Forta locally on our host network for real-time threat detection. Forta is also used by Lido, Balancer, Maker, and other top protocols. This chosen security architecture also results in negligible increases in finality time and fees to the end user. This security-first architecture makes Tapioca one of the most secure decentralized money markets ever created.

Omnichain Fungible Tokens

At Pearl Labs, we always thought one of the key innovation points of LayerZero was the neglected OFT or “Omnichain Fungible Token” super standard. Instead of creating bridges with liquidity on both sides that creates enormous and well-evidenced smart contract risk, finality, liquidity fragmentation woes, or wrapped tokens with large custody risk, our tokens (TAP & usd0) can bridge chain to chain at a token level, just like when you transfer an ERC20 token using transfer().

Stargate’s $STG is an OFT, and Circle among other centralized stablecoin issuers are testing OFT wrappers for their stablecoins. The obvious endgame goal of the OFT standard was to create a native OFT decentralized stablecoin that can bridge at a token level, and that’s what our usd0 is- the most composable stablecoin ever created, purpose-built for the omnichain future.

Not only is the OFT a shared token super standard across all supported chains (12 at the moment) offering unparalleled liquidity reunification and composability, but also can be seamlessly bridged across these chains with exactly 0 fee- just gas!

With LayerZero’s guarantee of valid delivery, the token is burned on the source chain and minted on the destination chain directly through the token contract. OFTs token supply is actually elastic between all supported chains.

(don’t worry, there’s more on usd0 to come soon 😉).

Unparalleled Security, Composability, and Capital Efficiency:

The Omnichain Future is Now

In our world, with over 150 blockchains for users to choose from (no longer just BSC and ETH) navigating through the array of options can feel overwhelmingly complicated. Moreover, the lack of unity between chains has led to the fragmentation of liquidity, difficulty creating money legos with a lack of compatibility, and security woes due to more and more unique blockchains with nuanced approaches to smart contracts.

In a space where attention often centers on unsustainable and risky offerings, it is time to return to the fundamentals: developing safe, secure, and user-friendly infrastructure through seamless interoperability that facilitates real yield and the continued innovation and adoption of decentralized finance. The rallying cry of the Omnichain Future TapiocaDAO.**

Currently, rather than the fluid experience that one would encounter when using modern websites and apps like Google and Netflix, the current blockchain experience is defined by all of its disjointed parts. While the multichain reality is upon us, it created more problems than it solved. For users, money is money. Bridges (RIP) offered unconnected money which was nothing more than store credits. usd0 is the first truly interconnected decentralized money.

Even with L1s increasing throughput and innovating other nuances, it’s all for naught without seamless interoperability. Do you know anyone who cares about the specs of Facebook’s servers? No- they only care that they can talk to friends across borders. In the blockchain world, you couldn’t talk to blockchains across other blockchains borders until now, through TapiocaDAO leveraging LayerZero.

Through offering truly seamless interoperability, more and more users will be able to benefit from higher capital efficiency through defragmented liquidity, and streamlined user experiences. Mass adoption can come, to the only secure, real sustainable yield-providing, seamlessly interconnected money market to rule them all.

R.I.P. Bridges, may you rest in peace. The omnichain future is here.

- veMatt, TapiocaDAO Pearl Club Member #0

Join us, anon @ tapioca.loan

Sources :

https://messyproblems.substack.com/p/the-three-debates-of-the-layer-zero

https://medium.com/layerzero-official/layerzero-an-omnichain-interoperability-protocol-b43d2ae975b6

https://layerzero.network/pdf/LayerZero_Whitepaper_Release.pdf

https://antiape.substack.com/p/whats-wrong-with-bridges-and-whats?

https://medium.com/stargate-official/the-bridging-trilemma-d80788cce4ef

https://a16z.com/2022/03/30/investing-in-layerzero/

June 16th, 2020 - October 19th, 2022

Liquidity mining is the mechanism used to incentivize users to lend liquidity with a reward token. TapiocaDAO today officially announces the death of Liquidity Mining. We offer a novel and brand new monetary policy to DeFi featuring sustainability, permanent value capture, and financial alignment of invested participants. We consider this to be the liquidity incentive trilemma that TapiocaDAO has solved with DSO, or DAO Share Options. We invite you to read Liquidity Mining’s obituary below, and the details surrounding this paradigm shifting mechanic.

Liquidity Mining unofficially began on June 16th, 2020 with the decentralized lending and borrowing protocol, Compound. Participants who either borrowed or lent to the Compound protocol were rewarded with COMP tokens. These tokens were used to increase returns for lenders and subsidize interest rates for borrowers.

Compound’s “TVL,” or total value locked, instantly rose 600% with the launch of its liquidity mining program. However, there was an unintended deleterious effect on Compound's meteoric rise. Very few of these “miners” actually ended up holding their emitted COMP tokens. According to the report, only 19% of the accounts kept more than 1% of the COMP they claimed, dumping 99% of their liquidity incentives on the market. Did these recipients retain any economic interest in Compound? No.

Secondarily, Compound’s cost of renting liquidity in the form of minting and circulating new tokens, versus the revenue that the rented liquidity generates generally results in large operating losses. Operating Loss in this case refers to the protocol’s operating expenses (in emitting reward tokens) vs revenues (fees). This is the primary harmful effect besides the harsh dilution COMP token holders face from these emissions.

As evidenced in the graphic above, almost all of DeFi is extremely unprofitable. This isn’t because there isn’t sufficient revenue generation. DeFi protocols generate relatively large revenue(s). For example, AAVE generated $101.4m in revenue annualized. The problem may appear to start with 90% of its revenue being distributed to lenders, leaving the protocol margin at around 10% or $10.92m, but this isn’t the core issue. There are still millions of dollars in revenue for the protocol itself. The problem lies squarely in liquidity mining’s hands. AAVE paid out $74m in incentives to rent liquidity, creating a net loss of $63.96m for one of the largest protocols in DeFi. Did AAVE need to give out AAVE tokens to LPs for $0? No, but here we are.

However, glaringly standing alone in profitability is Maker. Generating $28.61M in total revenue, which was all accrued to the DAO. This is due to there being no reward token with dividend payouts. This proves not every protocol needs a token. Many DeFi aficionados’ palettes are so accustomed to protocols treating emissions like Jerome Powell with a magical money printer that they prefer when protocols instead don’t even offer a token. No reward token, no operating loss, no dilution. But it is undeniable that a carefully gamified and well-balanced token economy can create lightning in a bottle.

Some of our dear readers may say, “these incentive programs attract liquidity, so why’s it bad?” “Liquidity is King”. What is actually being attracted is not liquidity but liquidity locusts; non-loyal “farmers” who take their rewards and leave for the next geyser of tokens or when the current one runs dry. Compound now cannot even close the liquidity mining spigot due to liquidity locusts using the single utility many liquidity mining token rewards offer- governance. This creates a deep misalignment of financially invested participants inside a token economy of loyal token holders who actually contribute to the growth of the protocol vs. yield farmers who want the max return at any cost from whoever will provide it. They will vote to continue reaping the maximum amount of benefit, and it’s all our fault.

Compound did not originate the Liquidity Mining idea (or even liquidity mining in smart contracts, that honor goes to Synthetix for its “StakingRewards” contract that was co-authored by Anton of 1inch). Liquidity mining, like many things, was an old idea with a new name. The concept of liquidity mining in cryptocurrency traces back to FCoin, best known for crippling the Ethereum network in 2018. FCoin was actually the first cryptocurrency product to offer something akin to the concept of liquidity mining that we’ve all come to know, in what FCoin called “Trans Fee Mining”. (bad name, huh?)

The founder of FCoin was none other than Jian Zhang, ex-CTO of Huobi. FCoin offered large token incentives to its traders, hoping that the liquidity this created would attract organic growth in user count. FCoin essentially was making a bet that users would stay on the exchange after the liquidity incentive program ended. Hint: They didn’t.

Once a token model has an acceptable liquidity incentive design, it also requires a sound monetary policy; addressing token supply (dilution), token demand, token circulation, etc. This is critical because it will affect the token price and the token price will impact the effectiveness of an incentive program, and the incentive program affects how much liquidity the protocol can draw into its grasp.

What is the current goal of liquidity mining? To rent liquidity. Let’s pose a question: Would you rather receive $1,000,000 USD or $100,000 USD? If you answered “The $1,000,000, of course,” you, like virtually every DeFi protocol in existence, did not properly assess this question. How long do you get custody of that $1,000,000? Inquiring further with time in mind exposes details critical to correctly assessing the true value being offered; if the question now changes to “Would you rather receive $1,000,000 USD for one second, versus $100,000 USD for a year,” your answer would now most likely be different to the option you previously selected. You can do very little with a million dollars in a second, but you can do a lot with $100k in a year; this is no different for a protocol.

These “liquidity rental incentive programs,” which attract liquidity locusts, are completely unsustainable and completely ineffective in their core goal. In a study by Nansen; “A whopping 42% of yield farmers that enter a farm on the day it launches exit within 24 hours. By the third day, 70% of these users had withdrawn from the contract and never returned.”

Based on this data, liquidity locusts are entering positions only to maximize their returns, and no true long-term value is created for the protocol besides fee revenue that is microscopic when compared to the cost of incentivizing liquidity in the first place. To motivate these actors in liquidity mining programs, protocols generally allocate large percentages of their token supplies toward keeping payments going to liquidity providers (see, the mafia), as they have no loyalty to the protocol itself, and only are there to extract value. That is, these token rewards are nothing more than mafia protection payments, “as long as you keep paying me, you’ll keep your big number on DefiLlama, capiche?.” At the end of the day, what does the protocol actually own from liquidity mining? Absolutely nothing. As soon as the protocol stops paying out, the liquidity is as good as gone.

Whoever controls liquidity controls DeFi

Enter Olympus

Olympus looked at this broken model, and rather than try to create a model that could perpetually pay for rented liquidity (see, impossible), Olympus, (correctly) seeing that a protocol should create permenant value for itself and grow its balance sheet, drew on the demand for their OHM token to create POL or “Protocol Owned Liquidity”. They were the first to realize you don’t need to negotiate with the liquidity provider mafia. You can instead beat them at their own game and create permanent value for the DAO’s balance sheet through gamification; trick the mafia into thinking it’s winning.

While some may say Olympus was a failed experiment, Olympus was the first to exit the hostage negotiation of continually paying for rented liquidity. POL became a fixture of the “DeFi 2.0” landscape. So why did Olympus “fail” if it was successful in at least identifying the critical monetary policy oversight in DeFi, the lack of real value creation? The 3,3 mechanism like all other liquidity mining programs inflated the OHM bubble with illogically high yields (remember: if you don’t know where the yield is coming from, you are the yield). 

Eventually, the financial misalignment of participants reached critical mass, yield farmers who controlled the majority of the OHM supply felt they had extracted as much value as they could, exited, and the price of OHM entered a death spiral. Olympus panicked and offered inverse bonding. Inverse bonding allowed users to sell their OHM tokens back for the POL assets. This lost OHM’s POL (the only real value it created), undiversified the treasury, and lowered investor confidence. Redacted was the only winning participant of Olympus, as it pivoted once the dilution got too high, keeping the POL.

Even if you dear reader opines that Olympus “failed,” the baby should not be thrown out with the bathwater regarding Olympus and POL. 

Enter ve

ve, or “vote escrowing” was pioneered by Curve with veCRV. Curve paid close attention to protocol loyalty, and required lockup of their liquidity rewards in order for prospective liquidity providers to maximize their returns from their liquidity incentive program. Curve essentially created a tiered incentive structure; the more loyal you are to Curve, the more rewards you will receive. 

While the inclusion of loyalty into the equation (now liquidity lent + time) greatly heightens Curve’s ability to keep financial participants aligned and to create more loyal protocol users. The problem still remains that Curve owns no liquidity; investors still are diluted by emissions, and liquidity locusts are still able to get something valuable (CRV) for next to nothing (supplying liquidity that can be pulled at any time). Imagine the amount of POL Curve would create if it wanted to, value all left on the table, that’s value Tapioca can instead capture as it’s been left ripe for the snatching.

When the value of CRV goes down, CRV incentives are less valuable, and therefore the direction of these emissions becomes much less valuable. Protocols war over veCRV in the Curve Wars, which created “incentive-ception”; Protocol X mints and circulates their tokens in an incentive program to own veCRV and thereby direct the CRV incentives. This is a great mechanism, but as a protocol you have done little more than diluting your shareholders via minting new tokens to capture the veCRV, an illiquid asset. Add in Redacted and Convex, you have an inception of an inception. These features should've been built into Curve natively from the start. ve inefficiency has quite literally spawned an entire industry. You may capture more liquidity with veCRV incentives than by incentivizing liquidity with your own token, why not increase the value of your own incentives instead?

Not to pile on Curve, as ve is quite obviously the best staking methodology ever created due to the financial participant alignment, but the Curve War at a protocol level is somewhat of an illusion. As a protocol, why give up your valuable assets to acquire an illiquid asset that may or may not have valuable incentives at any given time? Like Yearn, Badger, and StakeDAO, offering services to rent veCRV is far more attractive- exploit its inherent value while the value exists. Attract liquidity with the “rented” veCRV, and permanently trap in as much of the liquidity that veCRV incentivizes to the protocol as possible.

Lastly, with Curve, the one way it’s created permanent liquidity is through becoming a part of the mafia. Protocols need Curve to stabilize their stablecoins, not to earn fees. What if instead of trying to rent more liquidity, you used the fee generation from Curve pools to simply own more liquidity? This is precisely what Tapioca is doing. We have exited the matrix, accepted the red pill, and seek to own the only thing that’s real in DeFi- liquidity. Or you can take the blue pill and pretend by gamifying these mechanisms “just a bit more” that you can inflate perpetually to incentivize liquidity. I will show you how deep the rabbit hole goes, Neo.

Enter Andre Cronje

Before Andre created Solidly Exchange and ve3,3, which tried to remove dilution from the list of problems ever present in ve liquidity mining. Andre created OLM, Options Liquidity Mining, for the experimental automation network, Keep3r Network.

Andre (in usual Andre fashion) had the start of something that would later revolutionize DeFi. If you provide liquidity to Curve, and you claim CRV as your liquidity mining reward, what actually just occurred? The liquidity provider exercised a CRV call option with a strike price of $0, and no expiry. When you start thinking of emissions in liquidity mining programs in terms of American style call options, all of a sudden protocols have the power they didn’t have before.

The problem with Andre’s OLM was that the protocol still created no POL. The redemption of the options is the key to DSO. oKP3R distributed the option redemptions to vKP3R lockers- a nobel and simplistic way to incentivize lockup. But again we come back to the central question, “why are we incentivizing liquidity to our protocols in the first place?” To generate sufficient liquidity depth to sustain the protocol’s core functions, but the point of these services is to generate revenue to sustain the organization as a whole. By owning your own liquidity, you don’t need to incentivize it anymore. You take the red optionalized red pill, and exit the liquidity mining Matrix.

Turn off the money printer

SIP-276, a Synthetix Improvement Proposal authored by Kain Warwick addressed the insanity of the heavy inflation occurring in the DeFi Summer protocols that have made it from the bear to the bull and back to the bear. These protocols had heavily incentivized (rented) liquidity, and Synthetix wanted to (again as usual) be first in putting its foot down to inflating the supply further. Synthetix felt it had successfully bootstrapped its ecosystem, which is hard to argue with when its revenue generation at times surpasses Ethereum.

As Compound saw, turning these rewards off can be very difficult as mercenary liquidity providers generally control governance. If it were to pass, being rented liquidity, the liquidity could (and probably would) immediately leave the protocol, fees would go down due to less liquidity depth, and it would be difficult to sustain the ecosystem moving forward. While Tapioca will move on a similar path, Tapioca will seek to instead acquire as much POL as possible during carefully pre-calculated inflation. Once the supply has hit its predefined apex, the protocol would instead be sustained off its own POL. The fees and yield on this POL would flywheel itself (Obtain POL > Create Yield on POL > Acquire More POL > Rinse & Repeat). Tapioca would be able to carefully inflate the supply of TAP to a predefined level using American options that in themselves create permanent value.

POL + Options = DSO

With Tapioca, there’s no free lunch. Lenders will receive an option to buy at a discount- a DAO Share Option (doesn’t that make so much sense?). To get value, you have to give value, and the protocol now can now properly quantify that value. Taking the core concept from Olympus; a successful model must trap value as long as possible, not just get big TVL numbers on DefiLlama. Therein, TIME is the missing quantity in sound DeFi protocol monetary policy in regard to incentivizing liquidity. (don’t worry, not the Wonderland sort of time). The longer the liquidity is locked, the more total yield will be generated, thus the more revenue is generated for the protocol, the more POL is created, the better the DAO’s balance sheet looks.

Firstly, the option being exercised would purchase TAP from the Tapioca DAO at a discount. The discount is based on the time investment of the lender. This redemption generates liquidity, the lender can still sell the TAP for a guaranteed profit. However, the protocol now wins, investors win, and the liquidity provider wins- we now have a harmonious “throuple” relationship even Charlie Sheen would approve of.

1. The lender can lock in a guaranteed profit on TAP, that profit is correlated to the amount of quantifiable value the DAO receives from the lender (liquidity amount + time investment = value proposition the lender is offering).

2. Investors win because there’s a price floor set via options expiries (lender(s) can’t hold these options forever, they expire. veTAP Lockers get more protocol revenue due to the options being redeemed.

3. The protocol creates POL from option redemptions- no rentals but permanently owned liquidity. Lenders have to lock liquidity longer to get deeper discounts, creating more fees (thus also PCV) with semi-forced loyalty to the protocol a la Curve. This also stabilizes the protocol ecosystem as liquidity cannot be pulled at any moment.

4. veTAP is used just like veCRV as a tiered incentive system, the more veTAP you have, the deeper you can boost your option discount, to a max of 75%.

5. Liquidity locusts are still incentivized to lend liquidity, but there’s no real way for them to extract value from investor’s shares without giving value back.

At its most basic level, DAO Share Options or DSO is simply saying, the expiry = one week, and for example, if locking their liquidity for 16 weeks offered a 50% discount, that’d mean the strike price = TAP spot price - 50%.

Let’s say this liquidity miner, mined 100 TAP; instead of simply receiving the TAP CALL option at a strike price of $0 and expiry now (100 TAP tokens for free, like current liquidity mining), with DSO instead they would receive the right to purchase 100 TAP for $100 (if TAP = $2). Even if they are a liquidity locust, they would still be incentivized to do this, since they still make $100 profit (trading 100 TAP @ $2 = $200 - $100 purchase). There’s actually even more incentive as with how unsustainable DeFi protocols have gotten, sometimes these liquidity-mined tokens are worthless anyway. With DSO, the liquidity provider is guaranteed to make a profit.

The “profits” ($100 in the above example), can now be distributed to veTAP holders and or go to the DAO, creating permanent liquidity. These treasury funds can now be used to provide liquidity for usd0 and TAP, creating a self-sustaining and growing ecosystem that cannot be toppled by a bank run.

To take this one step further, and take the expiry of one week, now for argument’s sake, we’ll say liquidity locusts were receiving options and exercising them and dumping directly after. Let’s say this has decreased the price of TAP from $2 to $1. One week later, the liquidity locust goes to exercise and dump their oTAP options, there’s a problem. The TAP call option price was also $1, so at this point, there is no reason for the “dumper” to claim the option anymore since they wouldn’t make any profit. This means that DSO has set a price floor, and no additional TAP will be circulated as the option will not be redeemed, stopping dilution. You don’t give value, you don’t get value.

The central goal of Tapioca is to become the cross-chain banking layer, the ultimate hub of DAO-owned liquidity for all of DeFi across 12 EVM compliant networks. Tapioca will capture all of the liquidity that comes in proximity with it, forever. DSO is but one of many innovations Tapioca offers to change the landscape of DeFi forever.

Join us, anon.