0xMaki, SushiSwap co-founder, has joined Tokemak as its new chief strategy advisor.
Tokemak, a decentralized market-making and liquidity provision protocol commanding a ten-figure total value locked (TVL), is designed to address inefficient liquidity provision and inflationary token incentives plaguing DeFi.
0xMaki announced his new position via Nov. 24 tweet, predicting the protocol’s vision for tokenized liquidity will have a significant impact on the DeFi landscape.
The Defiant spoke to Tokemak founder Carson Cook to discuss the project’s origins and growth plan.
Decentralized liquidity reactors
Tokemak also completed its liquidity direction pre-launch on Nov. 24, allowing TOKE holders to earn rewards in exchange for voting on how assets deposited into the protocol should be mobilized.
Tokemak aims to “generate deep, sustainable liquidity for DeFi and future tokenized applications” through its “liquidity reactors” and decentralized market-making platform.
The team criticizes the “fragmented, unpredictable, and expensive” ways in which liquidity is currently provisioned throughout DeFi, asserting that new projects bear massive costs by offering inflationary rewards to fickle LPs who will likely take their capital elsewhere once incentives have exhausted.
“Sitting a ‘layer above’ decentralized exchanges, Tokemak allows for control over where the liquidity flows, and also offers an easier, cheaper way for providing and sourcing liquidity,” the team stated.
Tokemak rewards users with TOKE in exchange for providing single-sided assets to “reactors,” and for staking TOKE, and voting on where liquidity should be deployed. Reactors have been allocated through two community voting rounds dubbed Collateralization of Reactor Events (C.O.R.E) so far.
The protocol is aiming for liquidity deployment to begin by mid-December, pending the completion of smart contract audits. At launch, liquidity will be deployed to popular decentralized exchanges Uniswap, SushiSwap, Balancer, and 0x.
Tokemak captures the fees earned through providing liquidity and expects to build a diversified reserve of Protocol Controlled Assets over time.
Cook began operating as a market maker on centralized exchanges in 2018 before shifting to decentralized trading platforms towards the end of the year. Around 2019, Cook and his team began exploring how they could decentralize their market-making operations on platforms including Uniswap and 0x.
“What does a decentralized liquidity provider look like? […] That was the initial question that spurred the idea for Tokemak,” he said, adding:
“We’re a decentralized market maker, but we’re not a decentralized-decentralized market maker […] We started to focus on what makes a market maker tick and how we could decentralize that.”
Cook came up with three core attributes that are critical to a successful market maker — “capital, strategic market knowledge, and trading technology and expertise.”
“In the case of Tokemak, we are then decentralizing that across the network. So sourcing liquidity providers, liquidity directors, and pricers in a decentralized fashion,” he said.
In addition to mobilizing Ether and USDC provided by users from its incentivized “genesis pools,” Tokemak will direct liquidity in a variety of assets chosen through C.O.R.E voting.
During C.O.R.E, the Tokemak community votes on protocols competing to secure one of five reactors. Once the winning five projects are selected, users can deposit their governance token into the reactor or stake TOKE to vote on how the liquidity is provisioned to earn a yield.
Cook notes that Tokemak plans to enable projects to launch their own reactors on the platform without permission in the future.
Projects selected for a reactor must provide a reserve of Protocol Controlled Assets by swapping a sum of their native governance for tokens in exchange for TOKE allocated by the Tokemak treasury. This swap allows the respective projects’ DAOs to act as liquidity directors and creates an asset reserve that is used to protect against impermanent loss.
Five of 36 projects were chosen by the Tokemak community for the protocol’s initial cohort of reactors. Hybrid collateralized-algorithmic stablecoin protocol Frax topped the list, followed by self-repaying loan platform Alchemix, Arbitrum-based binary options protocol TracerDAO,
algorithmic stablecoin trailblazer OlympusDAO, and grassroots decentralized exchange SushiSwap.
A secondary round of voting concluded on Nov. 17, with reactors being secured by crypto trading and management platform ShapeShift (FOX), Uniswap V3 market-making protocol Visor (VSR), synthetic asset issuance platform Synthetix (SNX), the highly anticipated play-to-earn game Illuvium (ILV), and yield tokenization protocol APWine (APW).
ShapeShift co-founder Jon told The Defiant the FOX token reactor will enable the project to “start weaning off liquidity mining rewards,” describing the transition as “far more sustainable long term.”
Fellow co-founder Erik Voorhees wrote that, “Tokemak’s liquidity engine will provide an important service in DeFi because it enables market participants to express […] where they wish to see liquidity applied across the universe of crypto assets. Liquidity is the lifeblood of financial markets.”
While Tokemak’s immediate use-cases center around “depending liquidity” and “reducing emissions,” Cook notes several utilities for the protocol that may appear less obvious.
Cook asserts that stable token issuers, “especially algorithmic stablecoin projects,” could use Tokemak “as a distribution pairing mechanism with their token” to ensure robust liquidity pairings involving their token on DEXes.
The protocol’s founder also predicts that decentralized autonomous organizations (DAOs) will use Tokemak to provide single-sided liquidity using tokens that are locked and vesting, stating: “I think over time you’re going to see vesting contracts retrofitted so that they can interact with Tokemak so these team advisor and investor tokens can actually be put to use as powerful liquidity.”
From the perspective of decentralized exchanges, Cook also states Tokemak can be used as “a massive liquidity nozzle” that can be directed to their platform. “More liquidity equals tighter pricing or better slippage, and therefore drives more trading volume and fees.”
Recent reactor winner APWine is one example of a DEX seeking to harness Tokemak to bolster the liquidity of its native markets, with founder Gaspard Peduzzi noting the project’s plan to divert liquidity towards the tokenized yield markets on APWine’s automated market maker exchange. “Bootstrapping liquidity to your market is essential,” he said.
Fellow reactor winner Visor will also seek to direct liquidity to its own protocol, using the capital to deepen its LP positions on Uniswap’s capital efficiency-focused v3 iteration.
Visor’s Miles Beckler argued that mobilizing Tokemak’s liquidity towards exchanges that do not offer concentrated provision is “essentially just wasting the liquidity,” highlighting the significant share of volume that v3 represents on popular DEX aggregates like 1inch.
He also emphasized that concentrated liquidity provision may also offer protections against impermanent loss, adding that he expects Visor will emerge as a “conduit to v3” for Tokemak in the future.
Looking forward, Tokemak also plans to support liquidity direction across a variety of Layer 1 and Layer 2 networks, noting that deepening liquidity on Ethereum’s Layer 2 ecosystem will “very much be a big part of [Tokemak’s] future.”