Tokemak (TOKE): A New Liquidity Layer for DeFi
Tokemak offers a new method for creating DeFi liquidity as well as more decentralized market making for investors and exchanges alike.
Updated November 16, 2023 • 4 min read
Tokemak is a generalized crypto liquidity aggregator for decentralized exchanges (DEXs) that is designed to give users the ability to provide liquidity and earn incentivized yields for staking different crypto assets while controlling where liquidity is allocated via a decentralized market making system. Tokemak leverages the use of its TOKE governance and utility asset to facilitate the use of its underlying blockchain protocol.
The Fragmentation of DeFi Liquidity Mining
Liquidity in the crypto and decentralized finance (DeFi) landscape can be fragmented, unpredictable, and costly. This is because many exchanges use legacy market making systems and service providers that can sometimes feature low levels of transparency, high costs, and heavy reliance on large crypto holders. This creates a state of unfavorable market liquidity for everyday traders, resulting in poor pricing and high price volatility for most crypto assets. These challenges directly impact the ability of decentralized autonomous organizations (DAOs) and new crypto projects to bootstrap deep liquidity for their tokenized assets.
In DeFi, “liquidity mining” has become an increasingly common community-based incentive mechanism for platforms to improve access to liquidity. Even so, a substantial amount of effort, resources, and capital is often required by upstart DeFi projects to increase liquidity and offer appealing forms of liquidity mining (and other yield farming incentives) for newly launched tokens and platforms. That’s because fragmented market liquidity — in which various platforms and exchanges hold liquidity in siloed repositories — impacts the ability of exchanges to offer the best pricing to their customers. This poor crypto liquidity can make it difficult for DeFi protocols to interact with one another and may increase slippage for traders because of higher discrepancies between the bid-ask spread. This can in turn render DeFi investors highly susceptible to impermanent loss when relying on centralized infrastructure.
What Is Tokemak? Crypto Liquidity Reimagined
Tokemak is a decentralized crypto liquidity engine that was created to address the inefficiencies discussed above. Tokemak acts as a generalized liquidity aggregator for decentralized exchanges (DEXs) and DeFi. The Tokemak protocol is designed to allow users to choose where liquidity is allocated and used, providing a cheaper, more efficient method for liquidity provisioning and sourcing.
Here’s how it all works: The Tokemak crypto protocol provides a decentralized base layer for liquidity accessibility and interoperability. In order for Tokemak to carry out crypto liquidity provisioning for liquidity directors (LDs), liquidity providers (LPs), DEXs, market makers, and other investment service providers, Tokemak leverages several main components, including its native asset TOKE.
The TOKE crypto asset is designed to represent a homogeneous form of tokenized liquidity throughout the Tokemak platform — from staking to liquidity providing and yield farming via Token Reactors and Pair Reactors. TOKE token allows LPs and LDs to generate liquidity on demand for the tokens they choose to purchase on their desired DEX by controlling and directing the platform's total value locked (TVL). In turn, network participants are rewarded in incentivized staking yields for their efforts. The TOKE token is also being integrated into the platform’s underlying DAO governance structure and its role will continue to expand as the platform and ecosystem matures.
TOKE Token and the Inner-Workings of the Tokemak Network
Token Reactors and Pair Reactors: Token Reactors are essentially specialized token pools for user-provided assets on Tokemak. On Tokemak, liquidity providers deposit their assets into their desired Token Reactor, while liquidity directors allocate TOKE crypto assets to a specific Token Reactor to direct the liquidity of that asset to different DEXs (like SushiSwap, Ox, Balancer, Uniswap, and others) in order to earn a predetermined annualized percentage return (APR). This effectively allows users to vote on which DEX receives their liquidity with pools of capital that are deposited into different reactors.
Pair Reactors are token pools composed of ether (ETH) – as well as USDC and other stablecoins – paired with TOKE. Let's say a liquidity provider selects the ETH/TOKE Pair Reactor. Once TOKE tokens are given to the liquidity provider, the depositor has the option of pairing their TOKE with other project-specific assets, such as sushi (SUSHI) or synthetix (SNX), within a Token Reactor. For example, if the TOKE/SUSHI Token Reactor is selected, they would then be able to choose which asset to pair with their SUSHI and which DEX (such as Uniswap) they want to send assets to so they can open an initial liquidity position with SUSHI and USDC.
The Tokemak liquidity model differs from existing models in which protocols are forced to dilute their own token supply by giving tokens away so as to incentivize users to provide liquidity and use the platform. Instead, Tokemak users are able to vote on the creation of new Token Reactors, and the project has many Token Reactor candidates in its voting pipeline.
Cycles: To ensure the protocol works optimally, Tokemak makes use of time-based epochs called cycles that help determine when LPs are able to withdraw and deposit crypto liquidity into Token Reactors. If liquidity providers or liquidity directors deposit an asset or stake TOKE into a Token Reactor mid-cycle, the user’s assets do not start accruing rewards until the new cycle begins. The user cannot withdraw their assets until just prior to the start of the new cycle.
Liquidity Directors: Liquidity directors (LDs) are users who stake the TOKE they earn by allocating votes to a specific Token Reactor. This is done by depositing tokens into a Reactor (in a process similar to voting). Through such token deposits, users indicate which specific assets and DEX platforms (such as 0x, Uniswap, and SushiSwap) they wish to provide liquidity for. LDs are then able to earn incentivized APR in the form of TOKE tokens. The rates LDs accrue depend on the Reactor and DEX being used as well as numerous other variables.
Liquidity Providers: Liquidity providers (LPs) are Tokemak Network users who deposit tokenized assets into a specific Token Reactor to contribute to the inventory of their tokenized assets, which are then paired and deployed as liquidity. As a result, LPs earn incentivized APR in the form of TOKE. The main difference between LPs and LDs is that LDs are responsible for actually directing which DEX their tokenized assets are allocated to, whereas providers are more passive in their engagement.
T-Assets: T-Assets, or Tokemak Assets, are tokenized assets that LPs receive on a 1:1 ratio in exchange for depositing their assets into a Token Reactor. For example, if a user deposits SUSHI tokens into the SUSHI/TOKE Token Reactor, they receive t-SUSHI assets in exchange. T-Assets represent the LP’s underlying claim to the assets deposited, and can be redeemed at any time pending Tokemak’s cycle withdrawal period. T-Assets are analogous to Aave’s “a” tokens and are burned by the depositor when they claim the underlying asset they initially deposited into the liquidity pool.
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