In this Twitter Space the Tokemak team joined Swell to discuss their approach to liquidity management and the role they will play in the future of liquid staking token (LST) liquidity.
Tokemak is described as a metalayer for liquidity. Can you explain this in simple terms?
Tokemak’s focus is the concept of liquidity bandwidth within web3.
With Tokemak v1 we were focused on governance token liquidity, and Tokemak v2 will be focused on liquidity aggregation across multiple underlying DEXs and pools, starting from the LST market with plans to expand from there.
Tokemak v2 will be a brand new way to provide liquidity (LP), where users will deposit ETH or an LST which Tokemak will take and then optimize the yield across different liquidity pools.
Our core concept for v2 is liquidity management pools (LMPs), which are similar to yield-optimizing vaults.
V2 will integrate an ‘autopilot’ which is the LP facing product for holders of LSTs or ETH. The autopilot acts as a pool allocator that optimizes the yield across the constituents of the specific LMP, which could consist of one or multiple assets. The LP supplies the assets, and then the rebalancing logic takes care of the liquidity allocation, across the different options e.g. Balancer pools, Curve pools, and Maverick pools etc.
This concept takes into account the different types of yield, i.e. base yield and trading fees, and the arbitrage opportunities that could open up at slight depegs. The autopilot also mitigates the gas costs for individuals, and is acutely aware of the rate at which it will be willing to deploy liquidity to any DEX.
The advantage of LMPs is that they basically provide an interface for DAOs or LST issuers to rent liquidity in real time, removing the guesswork of more traditional incentive mechanisms.
This helps eliminate stagnant liquidity, providing a different dynamic where we pass from a static pool, to single pool exposure, to a dynamic pool exposure and capture the variance between all the different pools without the switching costs that would normally exist.
Through the Voyage, Swell aims to disrupt the liquid staking market and create a healthy competition and market. How does Tokemak feed into the creation of a diverse and healthy liquid staking market?
Swell and Tokemak are running similar parallel missions, where Swell’s aim is to create a healthy liquid staking market, and Tokemak’s mission is to create a healthy liquidity market for LSTs.
What Tokemak brings to DeFi is dynamic liquidity, where LP deposits are automatically rebalanced across different DEXs and pools to ensure that there is no monopoly or stagnant liquidity being denominated or concentrated on a single LST protocol.
Tokemak is algorithmically ruled by market dynamics, meaning the autopilot has a job and that is to simply optimize returns for LPs. By optimizing these returns for LPs, you get the optimal rate that protocols can use to rent liquidity in real time which is the overarching model of v2 as an IP centric component with an autopilot, and a DAO centric component with a liquidity marketplace.
How is Tokemak supporting the market and making it economic and sustainable for everyone in the long term?
Tokemak is putting users who have assets in the best position to be productive and earn the best returns. If they are successful and feel as though they are getting value from that, then that naturally builds long term participation and sticky liquidity. Now that we have these liquid accessible markets for everybody, it helps build utility and composability with protocols and optimizes the opportunities for users to put the assets to work in other ways i.e. lending protocols and using their asset as collateral.
For Swell particularly, Tokemak can configure an LMP that is specific to Swell where swETH holders will have natural exposure to all of the swETH pools, and be rebalanced across them to optimize the best yield.
The autopilot that we mentioned above will not only break down into different types of yield according to their reliability i.e. base rate fees, incentives and underlying yield, but will also take into account the onchain backing that the LST has on the beacon chain, meaning that it will be compared with the exchange rate to see if it is trading at a discount or premium, and taking into account the slippage when moving between pools and liquidity constraints. All of these aspects create a complex set of decision making which can only be done algorithmically.
What is Swell’s approach to liquidity and market share expansion?
At Swell, we are working towards building out the best possible LST experience for users, and part of that necessitates liquidity and us being at size.
On the liquidity front, we are trying to facilitate seamless swaps between our LST, swETH, back into ETH, at size and in a manner that is capital efficient as possible. We have been able to establish fairly deep liquidity across various DEXs without a token. We have optimized for this at the onset as we believe it is a key part to developing a best in class LST experience.
We also have a dynamic pool range, concentrated pool range and full pool range that we have set up at the foundational layer and continue to drive integrations on top of, i.e. emissions layer, Aura layer, Pendle layer etc. A lot of our users are crypto native so we have been able to present them with a range of opportunities that they can take up.
On the market share front, it is sort of a flywheel. The more liquidity we get, the bigger we get, which increases users' confidence in the project.
The Swell core team is driven to make the protocol as available as possible for the community and we believe that Ethereum is better with decentralization. We continue to build the project in a competitive, innovative and entrepreneurial way and that is why we have set up these fairly aggressive commercial incentives, so users can get not only the staking yield, boosted eth, pearls, and emission layer yields, but also get the airdrops that come off the top of that.
From the start, our approach has always been to drive as much community focus as possible and give users the opportunity to receive the best staking yields within DeFi. But at the moment it is a bit more of an art than a science. And that is why we are very excited about Tokemak’s v2 autopilot, because it will present a more algorithmic and empirical way to assign some of these emissions making it more efficient.
What are each protocol's plans for the next year, and how do you see the liquid staking market developing over that time frame?
Tokemak: It is pretty clear that LSTs will continue to become the base accounting and financial layer of DeFi. We can see that starting now with the launch of LSTs, and it has been incredible to see Swell’s growth over such a short period of time.
Tokemak is working towards creating one of the most efficient liquid markets in the space that builds a foundation for a more robust financial ecosystem that continues to develop. With this, we can start to do things like securing ChainLink oracles and enabling more composability in the space which the rest of the ecosystem can build around.
Swell: The next year for Swell will be a continuation of what we are doing now, which is building the next best possible LST experience for our users.
Our first stage involved launching the product and driving liquidity, which we believe we have done, and we are now hitting a steady operational rhythm as we continue to search for new and interesting pieces of technology that allow us to continue to serve that purpose.
Our next step is to bring in swETH as collateral, establishing decentralized secure manipulation oracles against swETH so users can utilize swETH as collateral. We also have plans to go omnichain for our users, so that they can bridge and deploy their swETH across chains and L2’s. Furthermore, we will also continue to expand our accessibility and deepen swETH liquidity.
Thank you to everyone for attending this Twitter Space!
Listen to the recording.
