Novel Token Launch Model Ripples Through DeFi

White Lotus ‘Partially Backed Asset’ Design Has Inspired Over 20 Forks

By: Owen Fernau Loading...

Novel Token Launch Model Ripples Through DeFi

As memecoin season fades, talk of a new liquidity mechanism has been rippling through DeFi circles.

The novel token launch mechanism was pioneered by a project called White Lotus that launched on Arbitrum on May 8, billing itself as a ‘partially backed asset with no inflation and unlimited liquidity.’

White Lotus has inspired more than 20 forks so far, according to Adam, who developed its initial contracts. It utilizes an on-chain market-making algorithm built atop Trader Joe’s liquidity books to rebalance liquidity in response to price movements.

The mechanism’s defining feature is the “risk-free value,” which doesn’t decrease and has the potential to increase over time, said Fish, the pseudonymous co-founder of the decentralized exchange Trader Joe.

White Lotus

Adam launched the LOTUS token on Trader Joe, with liquidity distributed equally along a wide price range.

Initial Liquidity Distribution

When traders swap ETH for LOTUS, the ETH remains in the liquidity pool, and as the price of LOTUS moves, so does the ETH liquidity — 10% of the liquidity remains in a tight band close to the current price, and 90% of the liquidity is deployed at a price that makes it possible to acquire all tokens in circulation, theoretically guaranteeing a “floor price” or “risk-free value” for LOTUS.

Liquidity after Rebalance

“One of the reasons why Lotus has captured the industry's imagination is because this mechanism not only offers relative safety for investors but also opens up opportunities for other applications to be built on top of it,” Adam said.

Transparent Mechanics

The creator of Lotus sees it as a way for retail users and investors to understand the risks they are taking when buying a token.

“The way it achieves this is by keeping all the money users spend to buy the initial tokens in a liquidity pool to create a fully backed floor price – any user can sell back into the pool if they wish to exit the project,” he said.

DeFi has had its fair share of its hyped economic mechanisms — some have flourished while many others have floundered. The automated market maker (AMM) model popularized by Uniswap is perhaps the most dominant, but crypto is full of experiments of varying usefulness, exploring how to program value.

With developers rushing to release new and improved iterations of Lotus, it’s too early to say if the design could become an important building block in DeFi or yet another soon-forgotten crypto mechanism. A bad outcome could be comparable to OlympusDAO, which inspired dozens of forks before crashing over 90%.

“If it works out, it could be huge,” said Fish. The Trader Joe founder went on to acknowledge that there hasn’t been a huge amount of innovation in DeFi lately. “That’s why people are interested in it. If they can get it to work, it’s your next billion-dollar protocol,” they said.

Lotus isn’t all the way there, says Fish. “There are some mechanics that need to be figured out.”

When users sell LOTUS, the protocol levies a 10% tax. The protocol burns 8% of the LOTUS and allocates 2% to a vault where users can stake their LOTUS, according to the project’s documentation.

Staking Bug

There was a problem when the staking contract first launched — ManaMoon, a trader, staked in the contract only to find that a bug made it so they couldn’t withdraw their LOTUS tokens. The trader told The Defiant that some developers allege that the bug could have been included purposefully.

Adam pushed back, telling The Defiant that ManaMoon posted misleading screenshots and deposited tokens into an unannounced and unofficial contract. Both sides agree that no official interface had been deployed by the time ManaMoon and others decided to stake their tokens.

ManaMoon conceded that they couldn’t say for certain that the bug in the code was an intentional error. Despite the loss on the staking contracts, ManaMoon thinks, like Fish, that the mechanic has the potential to be influential.

“I think, in general, whichever one has the most hype and works will be king,” the trader told The Defiant via Twitter DM.

The project also levies a 2.5% tax when people buy LOTUS tokens from the Trader Joe pool, which Adam said will go back to the community for marketing and other initiatives.

Fair Launch

“The project founders and team earn money based on buy volume,” he said, adding that the mechanism “is fairer for all parties involved when comparing it to just raising money and expecting a team to deliver something while you relinquish all control, or over-inflating your tokens with liquidity incentives that don’t work.”

Liquidity incentives have typically been a great way to get people to use a protocol, but once they run out, it’s hard to keep users from chasing free tokens elsewhere.

Adam said he’s working on a simple lending protocol that can work with Lotus and its forks. He added that while he chose Trader Joe, a Lotus-like mechanism could also be deployed on Uniswap V3.

For now, he’s focused on expanding the project’s value proposition. “In Lotus, investors maintain control over their funds and can make decisions based on their own interests, including the option to exit at any time,” Adam said. “They retain the potential for profit while understanding the maximum risk associated with the floor price.”