From Curve War to TOKE War: Why Tokemak is said to become the liquidity router of Web3?

Author: Sterling Archer

Original Title: 《Tokemak, the Kingmaker of Web3》

Compiled by: Dong Yiming, Chain Catcher

Background

The data flow of Web2 is rapidly being replaced by value flows in the form of tokens. This ongoing metamorphosis is a catalyst for the development of Web3. However, interactions with this liquidity are still far from frictionless, as Web3 interactions correspond to value transfers. Therefore, it is necessary to minimize value loss, which means maximizing liquidity.

Tokemak is a decentralized market maker that maximizes the utility of tokens by aggregating and converting them into liquidity. This is achieved through Token Reactors and Pair Reactors, where LPs can deposit tokens that will be deployed as liquidity to DEXs. Through this mechanism, all token holders can easily earn yields and become Tokemak's LPs, with unilateral exposure and no impermanent loss. This user abstraction for LPs simplifies the aggregation of assets and their conversion into tAssets (assets represented in token form stored in Tokemak Reactors).

In addition to improving the economic bandwidth of Web3 by increasing liquidity, Tokemak also allows projects to overcome inflation dependency, which is the inherent liquidity cost of Pool2s (pools of native tokens and their currency pairs). When liquidity mining rewards decrease or disappear, instead of attracting TVL to provide "liquidity loans," protocols can acquire TOKE to inject liquidity into their pools, with unilateral exposure and no impermanent risk. As projects reduce liquidity costs and optimize capital efficiency, Pool2s will be modified into "Poolt1s" (pools containing native tokens represented by tAssets). This shift will drive demand for TOKE used in Token Reactors.

So what about the recently launched Pair Reactors containing ETH and stablecoins? The "Curve Wars" have dominated the DeFi space in the struggle for control over the issuance of CRV. These issuances have a purpose: to peg stability. However, the long-term sustainability and growth of stablecoin projects can only be achieved by increasing the usage of their stablecoins, which is where TOKE comes into play.

The TOKE control staked in each Pair Reactor is associated with the yields corresponding to that given currency pair. Therefore, it incentivizes stablecoin projects to accumulate TOKE and stake it in their respective Pair Reactor to increase their integration and demand. Through this process, the corresponding TVL of the Pair Asset increases, thereby maximizing its pairing and allocation within the Tokemak liquidity network.

Tokemak's ultimate goal is to become a ubiquitous liquidity layer across all DEXs and chains. By acting as a unified liquidity router for Web3, Tokemak builds a new layer that exists "above" the DEXs and chains powered by its liquidity engine. Thus, paired assets benefit from global exposure to the entire liquidity layer.

This article explores how TOKE aims to maximize the organic adoption rate of Tokemak within the liquidity network. Additionally, it addresses the complementarity between the current "Curve Wars" and the upcoming "TOKE Wars," where TOKE controls all flowing liquidity.

DeFi Fundamentals ------ Curve Finance

Stablecoins are a fundamental component of DeFi, providing the stability needed for a functional financial ecosystem. Before Curve launched in 2020, maintaining a pegged decentralized stablecoin was a mirage in DeFi. Given the AMMs available at the time, such as Uniswap, which only offered constant product curves (distributing liquidity evenly across all prices), this was to be expected.

The launch of Curve ushered in a new era for DeFi. By introducing stablecoin trading, it concentrated liquidity around specific prices, ultimately achieving reliable peg stability and significantly reducing slippage.

Deep liquidity on Curve became synonymous with stablecoins having tight peg stability. Due to the invariance of Curve stablecoin trading, arbitrage opportunities are triggered when prices deviate, thus minimizing slippage. This arbitrage process restores stablecoins to their pegged state.

As a result, stablecoin protocols began incentivizing Curve pools through liquidity mining rewards (e.g., SPELL rewards for the Curve MIM pool). However, this strategy led to inflation in the supply of governance tokens used to incentivize liquidity, thereby creating additional selling pressure for liquidity miners selling tokens.

The tokenomics of Curve constitutes part of the liquidity cost solution represented by pegged stability. By locking CRV as veCRV "voting locked" on the platform (locking for 4 years for maximum voting power), stakers can benefit from Curve's trading fees (distributed in 3CRV), earning up to 2.5 times the rewards of CRV, and more importantly, they gain governance rights over Curve's weighted metrics. These metrics control the issuance of CRV in Curve pools.

The rise of Convex has separated the income generated by veCRV from its governance. Each cvxCRV represents a claim to the income generated by the underlying veCRV locked by Convex, while each vlCVX represents governance rights associated with the same underlying. This governance derivative allows CVX to be "voting locked" as vlCVX for 16 weeks, enabling vlCVX holders to gain governance rights over Convex's underlying veCRV with a shorter commitment period.

To reduce the liquidity costs inherent in pegged stability, stablecoin projects have begun to bribe vlCVX holders through Votium in addition to accumulating CRV and CVX. This approach is more capital efficient than directly incentivizing the Curve pool to increase the corresponding TVL.

In summary, the so-called "Curve Wars" represent improvements in capital efficiency, where stablecoin projects seek to control Curve's weighted metrics as a stabilizing mechanism. Consequently, there is often a discrepancy between the issuance of CRV received by these pools and the amount they generate. This discrepancy can be compensated by bribing vlCVX holders; however, there remain concerns within the Curve community regarding high issuance and low trading volume leading to low adoption rates in the stablecoin market.

Beyond Pegged Stability ------ "TOKE War"

As mentioned earlier, in terms of capital efficiency, the "Curve War" represents the next frontier where stablecoins seek to control Curve's weighted metrics as a stabilizing mechanism. This enables them to achieve reliable pegging and deep liquidity on Curve. However, pegged stability alone is insufficient for these projects to achieve long-term success.

• Bob deposits ABC tokens as collateral into a CDP (collateralized debt position);
• Bob mints 1000 units of stablecoin A;
• Given that stablecoin A is not widely integrated into DeFi, Bob exchanges it for 1000 DAI;
• This exchange causes a small portion of stablecoin A to become unpegged;
• Alice also has a CDP and wants to repay her debt;
• Alice purchases 1000 units of stablecoin A and destroys it to close her CDP;

In this overly simplistic example, it is clear that without integration that fosters organic demand, the growth of stablecoin A will have an upper limit. Therefore, this stablecoin cannot expand its supply as it lacks the utility required for users to be willing to hold it.

This means that to maintain its peg, the above protocol needs to incentivize Curve pools through inflation, where LPs are willing to hold stablecoin A in exchange for inflation rewards. Thus, it can be concluded that without organic demand for stablecoin A, its long-term sustainability will be compromised.

There are many promising protocols with stablecoin distributions, primarily concentrated in Curve pools. This reflects a lack of organic demand and a reliance on liquidity mining rewards to maintain pegged stability. Furthermore, LPs providing liquidity for such pools will exert strong selling pressure on reward tokens, ultimately diluting their holders. So how can stablecoins overcome the challenge of lack of adoption?

There are several ways to maximize integration and improve organic demand for stablecoins:

• Collaborate with DEXs aiming to become the dominant trading pair in the market;
• Target DAOs and propose initiatives to promote capital diversification;
• Create opportunities that can only be accessed by specific stablecoins;

While these methods have their merits, they are not the most ideal compared to the distribution achievable through the use of Pair Reactors. Tokemak's liquidity layer unifies liquidity between exchanges and chains. Therefore, stablecoins present in its Pair Reactors are exposed to the inherent distribution of the Tokemak liquidity layer.

With this in mind, TOKE can be seen as a kingmaker, expanding the distribution of stablecoins as trading pairs. The insight applied to Pair Reactors is simple: if one maximizes the amount of TOKE staked for a given paired asset, then they maximize its yield. In this case, the Pair Reactor will attract more TVL, thereby increasing the pairing within the liquidity deployed by Tokemak.

For stablecoin projects, this means TOKE is a tool to catalyze integration. By fostering organic demand and increasing the utility of stablecoins, the vicious cycle of minting purely for farming or trading purposes is broken. This creates a symbiotic relationship where "Curve War" signifies stability, while "TOKE War" signifies utility.

Example: The Duality of TOKE/FRAX

Tokemak integrates several promising stablecoins (e.g., Fei, UST, LUSD, Frax, MIM) in its Pair Reactors, along with well-known and widely adopted stablecoins like USDC and DAI. To illustrate the synergy that can arise between TOKE and the adoption of such stablecoins, we will use Frax as an illustrative example.

Frax Finance recently approved a proposal to allocate up to 100 million Frax to its Tokemak Pair Reactor, which is a significant value addition for both parties. Tokemak ensures it has a substantial reserve of Frax to be deployed as pairing for its assets, while Frax benefits from the extensive distribution achievable within Tokemak's liquidity network. However, this is just part of the symbiotic relationship that can develop between the two projects.

First, let’s delve into the mechanisms of Frax Finance. Frax adopts the veCRV token model, thus its FXS (Frax's governance token) inflation is controlled by veFXS, which can be attributed to any pool paired with Frax. It is important to emphasize that, unlike Curve metrics, Frax metrics can appear on any DEX and chain as long as there is a pool paired with Frax.

Considering that Tokemak's liquidity layer will also extend to all DEXs and chains, this means that every asset deployed with Frax pairing is eligible for FXS metrics. To say this is a powerful dynamic would be an understatement, as the extensive metric distribution of Frax and the overlap generated by Tokemak's liquidity layer can create a symbiotic relationship. Frax accumulates TOKE to increase its reserves and corresponding pairings within Tokemak, while Tokemak can continuously accumulate and lock FXS as veFXS to vote on its own Frax metric weight.

Given that Convex has now integrated Frax Finance, FXS will be continuously locked as veFXS within Convex, and there will be a liquid cvxFXS secondary market where users can exit their staked FXS positions. Due to this integration, Tokemak will have the potential to incentivize vlCVX holders to vote on its own Frax pairings, maximizing the associated metric weight. By doing so, Tokemak can continuously accumulate FXS rewards, which can be locked as veFXS, thereby increasing its voting power over Frax metrics. Additionally, Tokemak will simultaneously benefit from the income allocated to veFXS stakers by Frax Finance.

In summary, as Frax Finance accumulates TOKE, it increases its Frax reserves in the Tokemak Pair Reactor, thus improving its distribution and enhancing existing organic demand for Frax. For Tokemak, this means that as Frax pairings increase, the number of pools available for metric weights will also be maximized. By accumulating FXS rewards, Tokemak can vote on its own metric weight, thereby maximizing its income without relying on the trading volume generated by such currency pairs.

Keep in mind that this is an illustrative example, and similar synergies exist for other stablecoins supported by Tokemak.

Meta Regulator, TOKE

Without delving into the undisclosed development strategies that Liquidity Wizard (the founder of Token Reactor) has prepared for the Tokemak community, we can confidently announce that Tokemak will begin strategically accumulating CVX and CRV.

Furthermore, if everything goes according to plan, Tokemechs will eventually be able to bypass the restrictions imposed by the Tokemak cycle and utilize Curve's deep composability to swap tAssets and Assets of the same pegged asset.

In addition to the benefits brought by the duality of liquidity debt, this represents a significant utility improvement for Tokemak users, as it will also drive trading volume in Curve pools, which can be promoted to any tAsset/Asset trading pairs present in Tokemak Reactors.

Thus, TOKE will be supported by CVX and CRV, which grants TOKE meta-governance power, allowing stablecoins to be maximally organically adopted while enhancing pegged stability through the underlying governance power of TOKE.

Conclusion

Tokens and Pair Reactors are the duality powering the Tokemak liquidity engine. This liquidity black hole absorbs tokens (regardless of their characteristics) and pairs them with Pair Reactors to deploy liquidity anywhere on any chain.

From the perspective of Token Reactors, this means that the costs and frictions associated with Pool 2s can be abstracted through capital efficiency with unilateral exposure risk and the absence of impermanent risk. This means that projects can reduce costs associated with liquidity, and all token holders can become LPs without the aforementioned frictions. The result is that Assets will become tAssets, and Pool 2s will become Pool t1s. By coordinating the interests of all stakeholders, Tokemak maximizes the available liquidity in Web3 while minimizing value loss during interactions.

From the perspective of Pair Reactors, this means that the very promising stablecoins that have been striving to increase their distribution are now endowed with a tool value by TOKE, enabling them to catalyze the integration of Tokemak's liquidity network and facilitate the organic demand necessary for their long-term success.

Curve is the building block of DeFi that enables pegged stability. Convex unleashes the power of the veToken model by separating income from governance rights. Tokemak constitutes a new superset, empowering all tokens with the power of extensive distribution, orchestrated by TOKE, and limited only by the expansion of Web3.

Over time, projects that add margin will overextend their liquidity budgets, and their demand for TOKE will grow. The rise of CVX, compared to direct incentives from Curve pools, is due to its improved capital efficiency, which is also a harbinger of TOKE's future success at the Pool 2 level. However, this will not be the only catalyst for such demand; stablecoin projects will also rely on TOKE as a tool to catalyze adoption, while DAOs will accumulate TOKE to control the flow of liquidity within the "value internet." Once again, Tokemak's growth is only limited by the growth of Web3.

It is also worth noting that as Tokemak externalizes inflation, it will internalize value through trading fees and LP rewards, thereby increasing its Protocol Controlled Assets (PCA). Once a singularity is reached, Tokemak will become independent of third-party LPs, and the issuance of TOKE will cease. This marks a transition from inflation-based liquidity to a sustainable model reliant on organic economic activity. Furthermore, the cessation of TOKE issuance will also mean that demand will intensify, while the underlying PCA will continue to rise.

In summary, for governance tokens, Tokemak represents capital efficiency and control over liquidity, while for stablecoins, Tokemak represents extensive distribution, and for Web3, Tokemak represents sustainable liquidity. In a new internet where liquidity is ubiquitous, TOKE is the kingmaker.