Exploring compliance considerations in the development of a tokenomics strategy.

DISCLAIMER: I am not a lawyer and any ideas explored in this article should be discussed with professional legal counsel before implementation.

Protocols and token-governed ecosystems must make many crucial decisions when implementing tokenomics. Besides the mechanical ones described in Part 1, The actions a team must take to ensure they can continue building and operating depend mostly on their time horizons, with short-term projects allowing for much more leeway than long-term ones.

Let’s start off by thinking about the hazy crypto regulatory space in the context of a “gray area,” which is a constantly shifting zone of poorly defined regulatory requirements.

Generally, it takes years for courts to react to things that happen within the gray area, and since crypto-specific regulation hasn’t been well defined, there’s a lot of decision making left up to teams and their counsel. The challenge here is that doing anything overly risky can cause your organization to become totally invalidated, but making the correct decisions can allow your project to significantly disrupt existing markets.

This process is called regulatory arbitrage, and is a battlefield on which innovation and regulation fight to create precedent. Teams who are trying to exit in a short period of time may tend toward the risky end of the spectrum for the sake of short-term market penetration, while teams with long time horizons will be extra cautious to ensure they can achieve their long-term goals.

The SEC’s Perspective

In crypto, making compliance decisions is even more challenging due to the unwillingness of organizations like the SEC to help teams create a real framework for understanding their perspective. Using a ‘regulation by enforcement’ approach, the SEC has sought to establish precedent by punishing select actors with lawsuits in lieu of creating the documentation and resources necessary for teams to refine their compliance strategies.

This approach has stymied innovation in the US, but has allowed the SEC to become the most important voice in the room, as one false move could stop an organization in its tracks.

Let’s take a high level look at what guidance we’ve got from them so far:

• Teams should ensure that their tokens have a clear utility beyond investment purposes
• Teams should avoid marketing their tokens as investments
• Teams should ensure that their tokens are not primarily dependent on the efforts of others for their value

To put simply, any demand for a token should be a function of its utility and any effort to increase awareness of a token should be grounded in that utility and the utilities of the platform it governs. Abiding by these points of guidance will allow your community’s token to retain its status as a ‘digital asset commodity’ and enjoy the relaxed regulatory requirements therein as defined by the CFTC.

MiCA

A much anticipated regulatory framework is also coalescing in the EU called MiCA, which proposes a new classification for “crypto-assets” and associated regulatory requirements. This is especially exciting as it will create a documented set of guidelines for teams to follow as they seek to engage European markets.

MiCA is focused on transparency and governance, and would ensure companies doing business in the digital asset space have adequate resources and licensure to operate. Teams working within the MiCA framework will need to focus on satisfying the following requirements:

• Authorization: Issuers of crypto-assets, such as cryptocurrency exchanges, would need to be authorized by a national regulatory authority in the EU.
• Disclosure: Issuers of crypto-assets would be required to provide clear and concise information about the nature and risks of the crypto-assets.
• Governance: Crypto-asset issuers would need to establish and maintain effective governance arrangements to manage conflicts of interest, among other things.
• Capital Requirements: Crypto-asset issuers would be required to hold a certain amount of capital.

Though not yet implemented, these requirements reflect many of the industry’s expectations, and give us a good idea of what a real regulatory framework for cryptocurrency in the US might look like in coming years.

The Challenges Facing DeFi

The most difficult part about working in DeFi is that very little of the clarity provided from the SEC, CFTC, or MiCA applies directly to decentralized infrastructure or smart contracts.

Regulatory bodies generally assume crypto organizations are for-profit businesses with centralized infrastructure doing business in centralized spaces. DeFi projects, however, often exist as public infrastructure managed by their users through non-profit entities, with most of the management of crypto-assets being non-custodial and automatic.

Given this reality, the prime directive of DeFi developers is to ensure they are following existing regulatory guidelines to ensure their team can create an efficient solution for users without crossing any regulatory lines.

Adding to this challenge, the efficiency and utility of DeFi platforms is directly correlated with the depth of its liquidity and number of users it has, so creating incentive structures that can serve these needs while avoiding the marketing and mechanical pitfalls described by the SEC and MiCA can feel like walking a tightrope.

The most important consideration for teams designing tokenomics is the users who receive incentives and how. The most obvious pitfall for new DeFi teams is issuing incentives to holders or stakers of their native token, which can easily cause that token to fail the Howey Test, which is touted by the SEC as their primary means of classifying crypto assets.

Let’s think through the Howey test through the lens of single-token staking:

1. Issuing yield to token holders, no matter the denomination, would classify purchases of the token as an investment of money.
2. Because token holders are pooling their resources to accrue this yield, the behavior could be classified as common enterprise.
3. Depending on the token issuer to distribute yield or further adoption of the protocol would constitute relying on the efforts of others.
4. Issuing staking rewards or yield would tie an expectation of profit to the token.

To ensure these lines remain uncrossed, we often see teams distributing tokens directly to users of the platform and to liquidity providers instead, which provides a benefit to their protocol without the clear-cut violation of the Howey test. This is because providing incentives to service providers and users of the software is totally natural, and any beneficiaries are taking on risks that are vital to system operations.

With these facts in mind, developers can design tokenomics systems capable of increasing utility and adoption of a DeFi protocol without putting their organization at risk of regulatory capture.

Conclusion

Maintaining compliance within DeFi is a major challenge with no easy solution. Following in the footsteps of top teams in the space and staying as ahead-of-the-curve as possible is important. Studying precedent, moving with the herd, and taking the safe approach is often the best way to keep your organization operational.

Using the ideas explored in this article and the previous one, our team seeks to propose a tokenomics system for the $OATH ecosystem in Part 3 which can facilitate sustainable long-term adoption for the ecosystem.

Establishing a framework for understanding tokenomics for future application to the OATH Ecosystem

With the launch of Oath Governance, it has become especially important for our community to develop a common understanding of tokenomics. To this end, I will be writing a few articles to explore the subject both generally and in the context of OATH. Let’s start this article with a brief overview of what exactly tokenomics are, how they work, and how we can think about them.

What are Tokenomics?

Tokenomics generally refer to an economic framework that protocols can use to manage supply and demand of their token and align incentives between stakeholders. As central banks can use inflation to modulate the behavior of citizens, token administrators use inflation to program behaviors in their ecosystem participants.

As a risk manager, I view tokenomics in those terms. Much like energy, risk cannot be created or destroyed. It can only be deferred (vesting), diffused (marketing), and better understood (auditing). Economic risks and rewards affect how protocols and their users behave, and understanding them better allows us to manage them effectively.

How can we Evaluate Tokenomics?

Expressing something as complex as tokenomics mathematically is like catching a greased pig. Think of the below equation as a simple mental model more than a formal tool for analysis.

With this in mind, let’s establish a simple differential equation to help our evaluation:

where…

Tokenomics work by modifying different aspects of this equation. Performing buybacks, burning tokens, or getting users to stake assets increases the b variable and reduces the s variable, resulting in a fundamental shift in value as well as increasing the magnitude of that shift overall. This growth can increase the R variable as traders attempt to price in future growth based on each fundamental change.

As inflation decreases and more tokens are removed from the liquid supply, it’s easy to see how protocols can unlock exponential growth opportunities:

where…

So, in plain English, effective tokenomics will increase the value of a token by increasing the amount of tokens removed from the market (b), decreasing the amount of tokens added to the market (i), and surfacing the data and intelligence required for speculators to understand the value of these changes (R). Effective tokenomics will also ensure any tokens added to the market (i) are encouraging behaviors that will result in an increase in token burn (b) and speculative demand (R).

A keen observer will note that the opposite is also true. Aggressive tokenomics strategies that feature locking, options, and heavy inflation can be viewed as a means of creating leverage. As locks expire, options are exercised, and yields diminish, the economic effects of these mechanisms will have a similar yet opposite impact on an ecosystem’s value.

Why utilize tokenomics?

Tokenomics have a number of compelling use-cases, as exercising influence over the supply of a digital currency allows protocols to shift risk upstream, create leverage, and punch way above their weight class. If well-planned, these shifts can unlock massive opportunities for growth.

One of these use-cases is user onboarding, which is best accomplished through things like airdrops, referrals, and other one-off incentives. User retention and sybil resistance are the two strongest considerations, and can be achieved through nuanced reward weighting, good infosec practices, and vesting.

Another strong use-case for tokenomics is reducing concentration risk. Money managers rarely want to be providing a large share of a protocol’s liquidity, as it would put them on the hook for anything that goes wrong and increase the likelihood of insolvency.

Finally, tokenomics strategies can allow protocols to generate income to finance developments, diversify their treasury, or fund incentives. We see this being done through bonding, distribution of option tokens, and treasury management.

A beautiful marriage of each of the above use-cases is deepening liquidity, which inherently reduces concentration risk, allows a protocol to onboard larger customers, and scales protocol revenues up. If managed properly, increases in serviceable market associated with deepened liquidity can even help diffuse the risks associated with tokenomics strategies.

How can we utilize tokenomics?

Since the beginning of DeFi in 2020, countless mechanics have been created with varying degrees of efficacy. Below, find a non-exhaustive list of mechanics, and please comment any I missed.

Additionally, incentivizing different types of tokens carries different types of benefits. Putting incentives toward 2-sided market liquidity, for example, won’t take as many native tokens off the market (b), but will allow for greater speculative demand (R).

Tokenomics in Practice

Ideally, tokenomics allow protocols to better serve users. In many cases, this means deepening liquidity to facilitate new stages of growth and creating new methods for ecosystem participants to generate income.

It’s always good to remember that any tokens taken off the market temporarily will find their way back, so scaling up yields, emitting deferred assets, and promoting lockups will create a pocket of risk that will eventually need to be diffused.

Additionally, this article is only half of the equation. Analyzing risks associated with tokenomics may start with math, but it ends with compliance. Different types of token incentive mechanisms carry different regulatory weight, with some of the above mechanisms being illegal in certain jurisdictions without adequate compliance measures.

In part two, we will explore the regulatory drawbacks and benefits of different tokenomics strategies, followed by a discussion thread on forum.oath.eco to start shaping the future of OATH in part three.

Introduction

For close to a year now, our team has been laser-focused on shipping software and less-so on communicating why. We spend a lot of time studying history, analyzing trends, and investigating top businesses in finance to create simple yet ambitious strategies that solve some of DeFi’s biggest challenges. In this article, I would like to distill some of the ideas that drive our mission to fix DeFi business models through protocol-to-protocol lending.

Fixing problems here and now

When designing Ethos, the DeFi industry was in the throes of a painful bear market. Demand for leverage was low and interest rates were even lower, and while we watched households take on more debt in the trad-fi world our team wondered whether DeFi lending had the product market fit we thought it did in 2021.

Looking deeper, we found that even in 2021, DeFi lending was vastly under-utilized. Major lenders were sitting on hoards of crypto-assets without anywhere near enough demand to fully utilize them. It seemed that more users were interested in farming tokens than they were in using these protocols as intended.

While many teams were describing fantastical worlds wherein millions of new users would ride in like the Rohirrim at Helm’s Deep to re-cement DeFi’s product-market fit, our team was wondering how we could make DeFi work right now, and how we could better service each of the users marching through Crypto Winter with us.

So where do we find demand?

A little while before the DeFi crash of 2022, I spoke heavily about lending protocols’ incessant drive for more counterparty risk as a means of gaining market share. I likened stablecoins during this era to mortgage-backed securities, as popular protocols repackaged sub-par assets into seemingly premium collateral, shifting huge amounts of hidden risk onto users. The results, I believe, have spoken for themselves.

Our team has chosen to address these issues from an infrastructure level first, through smart-contract innovation. To us, this meant overhauling the architecture our teams build applications on. We wanted Ethos to address a larger market without taking on significantly larger risks.

So we looked to where demand was insatiable — other protocols.

The Reaper.Farm team has been serving protocols’ demand for liquidity for over 2 years now, and sees a big opportunity in DeFi lending to service this market with un-utilized capital. In this way, protocols like Ethos are able to address a much wider market without exposing themselves to hard-to-quantify counterparty risks that come with accepting sub-par collateral. Furthermore, these risks are much easier to manage, as smart contract behavior is programmable and outcomes can be predicted more reliably.

The result is a protocol that acts not only as a lending service provider, but as a programmatic capital allocator on behalf of its users, capable of absorbing yield and distributing it back to lenders and borrowers.

Identifying and Managing Risks

The most obvious drawback to a protocol-to-protocol lending system is the increased risks associated with external dependencies. While any new token introduced to a system may introduce similar dependency risks, interacting directly with external protocols carries a different set of challenges that our team has been managing for nearly 3 years.

There are two main types of risks when targeting protocols to lend to: Downside Risks and Long-Tail Risks.

Downside Risks are often exogenous, and include risks associated with one-off events that may wipe out a portion of the lending pool’s principal. These risks can turn otherwise ‘only-up’ strategies into lossy ones, and must be accounted for within any risk management strategy. Because of our team’s risk-off approach to yield generation, these measures are often preventative, with initial periods of due diligence and regular audits of security and risk parameters.

In delta-neutral strategies, downside risks can include smart contract exploits, dependency mis-management, and op-sec failure. These are events which can wipe out months of work in an instant, and must be avoided at all costs. What this means is that only battle-tested, well-audited, and well-understood protocols with trustworthy teams can be considered for integration.

Long-Tail risks are ones that build over time, and are often endogenous. We see these risks evolve from innocuous mis-configuration or lack of oversight into potentially existential threats. We find long-tail risks surface in poorly configured loan-to-value ratios, wherein lending platforms issue loans that would be impossible to liquidate at scale.

Mitigating these threats is a much longer and more complex process than introducing them, so the answer to long-tail risk is often moving slow and triple-checking work. Our team thinks hard about how system parameters will scale with market size and the amount of accessible liquidity, and analysts are always looking for these risks before they metastasize.

A New DeFi Business Model

Protocol-to-protocol lending isn’t unique: firms have been lending to each other since the dawn of finance. Where TradFi often fails, however, is ensuring that this lending is transparent, auditable, and that risks are sufficiently minimized. DeFi allows us to permissionlessly enter and exit these lending agreements, and through the power of composability, their associated risks can be managed block-by-block.

For more information about our approach to protocol-to-protocol lending, risk management, and security, please reach out to us on Discord or read our documentation.

Do you remember 2020?

If you don’t, it was a magical time in DeFi. The prospect of being able to own a piece of the future was exhilarating, with projects like Yearn, Uniswap, and Compound handing over huge swaths of their governance power over to the community.

And then venture capital came.

Suddenly, principal protection became a far more important concept than innovation. Teams began to focus on tokenomics instead of tech, and the market began to move away from fairness. Infighting, ineffective governance, and a focus on moat-building has stymied technological growth.

Now, anything that approaches innovation comes with 10 years of development priced in, with astronomical valuations pumped up by VC liquidity. The opportunities for normal people to govern the future of finance are getting fewer and further between.

We want to change that with Granary.

With a strong presence on 7 networks, deep liquidation infrastructure, and a track record of success through the most volatile periods in crypto history, Granary is primed to become a key innovator in the DeFi space, owned and governed by the community.

Through the liquidity generation event on grain.sale, the Granary team seeks to give the DeFi world a chance to guide the future of the industry. Users can contribute funds to receive a share of the initial circulating supply of $GRAIN: 12.5%, or 100,000,000 tokens. Users can also receive a bonus of up to 60% by vesting their shares for up to 5 years.

At the end of the fair launch, funds contributed will be placed into liquidity pools so that Granary can start to create yield opportunities on the 7 networks it operates on, with each chain’s $GRAIN incentives being proportional to the amount raised on the network.

Apart from $GRAIN sent to LGE contributors and used for market liquidity, 15% of the supply is set aside for team members, vested for 4 years. The rest of the supply is set aside for incentives to be distributed over 10+ years.

You can watch a video walk through of grain.sale here.

So what’s the point of $GRAIN?

$GRAIN not only governs Granary incentives and deployment priorities, but also aligns incentives for lenders, borrowers, and governors through buyback and distribution strategies. Instead of relying on inflation to grow market share, Granary can continuously use interest paid by borrowers and other protocols to create $GRAIN demand and fund the next stage of growth.

Doing this, we can always ensure Granary is the best place to lend assets and that $GRAIN governors aren’t diluted with unbound inflation. This creates a stable foundation for growth that keeps every ecosystem participant happy.

What’s coming next?

In the immediate term, Granary is focused on growing the addressable market of DeFi lending. Through its unique architecture allowing for direct, permissionless lending to external protocols, Granary can grow DeFi lending revenues nearly 10x. By using these revenues to buy back $GRAIN, Granary can create a more stable, non-inflationary means of incentivizing users. Read more about Granary V2 here.

Further down the road, the Granary team seeks to develop on-chain credit, algorithmic risk management, treasury management tooling, and even debit cards backed by Granary deposits. Follow our twitter and discord to stay on top of developments.

In conclusion…

More than ever, it’s imperative that users have control over their financial futures, and Granary is determined to ensure everyday people maintain ownership of these systems. Through grain.sale, we hope to usher in the next generation of user-governed DeFi development.

Why Granary? was originally published in byte-masons on Medium, where people are continuing the conversation by highlighting and responding to this story.

The Ethos Reserve team has been showing off their work for the last few months, and is proud to announce launch is a few short weeks away. A testnet environment will be deployed soon on Goerli as the Ethos crew continues to polish UI and devops. Expect an open beta shortly thereafter followed by world domination.

Our team has been working hard for nearly a year to bring Ethos Reserve to fruition, and believe it has the potential to unlock a new level of sustainability for DeFi. We hope Ethos Reserve sets a new standard for protocol design, focused on upending traditional financial business models without sacrificing their efficiency — distilling premium value and services to the end user.

Let me break it down its features for you:

Managed CDP Vaults

Ethos Reserve is special because it can deploy its underlying assets to DeFi yield strategies, as well as manage their risk and liquidity block-by-block. Users can enjoy highly efficient $ERN loans while deposited assets are put to work in the lowest-risk environment possible. Yield generated by the protocol is directed back to $ERN stakers, who also benefit from liquidation income. This system allows the protocol to take advantage of Ethereum’s low-risk interest rates, resulting in a DeFi system that has the network effects of a liquid staking derivative with highly efficient lending and stable-asset yields built in.

Multi-Collateral Debt Management

While this may not seem so special, the way Ethos manages debt involves highly complex data structures that allow the protocol to isolate and liquidate multiple collateral types more efficiently than competitors. Additionally, assets can be redeemed right from the protocol, ensuring that users have a right to their assets no matter the state of market liquidity. This combination of features allows for extremely high LTV ratios and additional yield for users. It also removes the need for market-making, as the protocol will always swap under-peg tokens for collateral.

Self-Contained, 0-interest lending

Ethos Reserve is able to issue interest-free loans denominated in the Ethos Reserve Note, or $ERN. Instead of paying interest, users pay a small issuance and redemption fee, which is directed to $bOATH (Bonded $Oath) stakers. Because debt doesn’t continue to accrue after a loan is issued, users don’t need to worry about micro-managing their position and the protocol doesn’t need to worry about bad debt piling up. Issuance and redemption fees also allow $bOATH stakers to derive value from arbitrage and $ERN volatility.

Through these features, stakers will always be earning ($ERN-ing?) the most sustainable stable-asset yield in DeFi, with competitiveness growing as the protocol scales. Beyond its highly efficient liquidations and stabilizing mechanics, $ERN’s long-tail value allows loan-to-value ratios to be pushed very close to 1, giving users powerful new ways to hedge their volatile assets.

So what is $bOATH?

Bonded Oath, or $bOATH, is both OATH and ETH, backed by a Balancer-powered 80/20 liquidity pool. $bOATH will not only earn all platform fees, but benefit from trading fees generated by Ethos’ incentive buyback and distribution strategies.

These strategies will create a constant source of demand for $OATH as it buys it back to fund yield. As trade heats up between CDP vaults and $ERN compounders, yield for this pool will naturally increase, adding further to the flywheel effect created by Ethos’ unique architecture and benefiting all stakeholders.

In Conclusion…

The Ethos Reserve team has forged a sustainable path forward for decentralized stablecoin infrastructure, powered by $OATH. With extensive testing and a full audit (view here) now complete, the Ethos Reserve team is getting ready for a new age of DeFi stable assets. You can follow Ethos Reserve development @EthosReserve.

Introducing Ethos Reserve was originally published in byte-masons on Medium, where people are continuing the conversation by highlighting and responding to this story.

Bear markets are times of opportunity, with less downside, more serious users, and more breathing room. The Granary team has spent this bear market with their heads down, focused on building a product which addresses common DeFi pain points and pushes the space forward.

Read more about it here.

The most important innovation of Granary V2 comes in its Nitro Pools. Nitro Pools are a solution to under-utilized supply-side assets that allow Granary to transparently lend to both users AND other protocols simultaneously, ensuring APRs stay competitive without creating a dilutive effect for protocol tokens.

Granary v2 features a fully integrated MEV capture system, designed to take advantage of the protocol-level information edge in order to liquidate positions with maximum reliability, while redirecting profits back to the users. Gone are the days of shadowy validator nodes extracting value & creating bad debt for lending protocols — sustainability is the future.

The Granary team has finished the development of Granary V2 and are in the process of testing and securing its systems. Once the codebase is deemed satisfactory, the team plans to work with top audit firms to validate Granary V2’s security.

Together, these features create a means of incentivizing farmers without diluting token holders. Any $GRAIN poured into the flywheel will have a massive long-term impact as protocol revenues buy-back and redistribute the token. This ensures governors are well-aligned with lenders, borrowers, and the protocol.

Through this powerful alignment of incentives, Granary will function as a public good ad-infinitum, turning a formerly toxic relationship between protocol stakeholders into a symbiotic one, where all users are motivated to ensure Granary is as successful as possible.

$GRAIN is designed to grow the protocol without unrestricted inflation. Thanks to its massive improvements to capital efficiency, Granary can fund its own incentives. This stretches time horizons into the decades and means users can enjoy the benefits of $GRAIN without fear of excess dilution.

In order to seed liquidity across all chains on which Granary will be operating, the Granary team has designed the first ever multi-chain LGE. This event will kickstart the $GRAIN ecosystem and allow for the full deployment of Granary V2, V3, and beyond.

The Granary team is committed to engineering infrastructure that will change finance forever, and is excited to bring you all along for the ride.

To stay up to date on all things Granary, subscribe to the email list below. Please follow Granary on Twitter here and join the Discord at discord.gg/granary. The Granary team will continue sharing details about the LGE and subsequent airdrop as the protocol approaches launch.

Granary

DeFi and bonding go together like water and oil. Tight jeans and Thanksgiving dinner. Discrete math and concussions.

To be a bit more clear, floating rate bonds don’t make sense in an industry as volatile and accessible as crypto. Whether Curve’s voting escrow, Olympus’ (3,3), or some other bonding system, these complex financial instruments are often sold to laymen as a means of creating exit liquidity, advertising inflated short-term APYs to get users locked in for the long haul.

DeFi asset lockers are down bad right now, with veCRV users boasting less APR over the past 2 years than the current risk-free rate of ~4%, even ignoring underlying capital losses. Convex and similar protocols have worked to unlock escrowed assets for users, but the cost is the system’s original value proposition and an unsustainable cycle of value extraction.

Where bonding skews incentives toward the protocol at the cost of elasticity and value for users, the alternative paradigm puts power squarely in the hands of mercenary capital at the cost of solvency, sustainability, and dignity.

I’m talking of course about liquidity mining. Pioneered by Synthetix and Compound and popularized by Sushiswap’s MasterChef system, the idea behind liquidity mining is simple: users deposit an asset into a smart contract and receive a set amount of tokens for every block their assets are staked.

In long time frames, results of liquidity mining programs usually range from sad to catastrophic, with liquidity providers extracting as much value as possible before withdrawing and moving onto the next thing. Without incentive to stick around, these systems rely on speculators continuously moving in to stanch the bleeding as token prices and liquidity race toward 0.

Our team created Reliquary as a DeFi-native solution to the problems introduced by current incentive systems.

Through Reliquary, we seek to find a middle-ground between bonding and liquidity mining, with the protocol-level benefits of the former and elasticity of the latter. The result resembles a liquid floating-rate bond which increases in convexity over time, aligning the protocol with its liquidity providers better than ever before.

Put simply, the longer you remain in a Relic, the more incentives you’ll receive. This means the best liquidity providers will receive the largest share of rewards.

These rewards are distributed across Maturity Tranches, each of which represents a length of time a user will receive a certain level of incentives. This is done in a non-dilutive fashion, with the same amount of rewards always being emitted to the pool no matter how many users are in any tranche.

This maturity system allows developers to program desired holding patterns into each pool, giving them unparalleled control over their incentive structures. Additionally, each user is issued a custom NFT for use in external protocols: they can lock it, lend it, or sell it on their favorite marketplace to earn a premium on their time spent in the pool.

The best part of it all? Users can withdraw at any time. Though with built in airdrop mechanics, multi-asset rewards, and maturity bonuses, why would they ever want to?

In typical Byte Masons style, we’re solving problems simply by adding value. Reliquary is an open-ended, 3x audited platform with a plugin system and suite of tools that will supercharge any incentive program. We’ve been testing with a small group of users and will soon run a short incentive program for another group of testers. If you’re interested in joining, please fill out this form for a chance to win $1000 in Oath tokens.

DeFi’s New Yield Primitive was originally published in byte-masons on Medium, where people are continuing the conversation by highlighting and responding to this story.

If you read our veVelo Voting Vault breakdown, you probably know Byte Masons are playing for keeps. We have one of the best engineering teams in the industry, and our strategy is to write software that nobody can compete with.

To this end, we’ve re-designed our single-sided $BOO strategy to maximize rewards like never before — using the power of Magicats!

When designing our new $BOO vault, we realized we had two options: the easy way and the right way. Individual Magicats can’t boost our vault enough for an investment to be worthwhile, but several Magicats together can. We wanted to build a vault that could scale to millions in TVL and get the whole ecosystem excited without leaving that value on the table.

To accomplish this, we decided to build out a BOO-Magicat orchestration layer for our beautiful friends at SpookySwap. We call it the BOO-MAX Vault.

The BOO-MAX vault is composed of 3 main parts: the $BOO Vault, the Magicat Staking Vault, and the $BOO Farmer. Each of these plays a pivotal role in ensuring your ROI is as high as possible. Let me break them down for you:

The $BOO Vault

Our $BOO Vault works like you’d expect any of our vaults to work — it manages accounting and security, ensures that your principal investment is protected, and distributes your fair share of rewards. This vault lends $BOO tokens to the $BOO Farmer so that it can generate ROI on user deposits.

The Magicat Staking Vault

The Magicat Staking Vault gives Magicat holders a brand new way to earn revenue — without needing to stake any $BOO! It does this by lending all the staked cats’ boost power to the $BOO farmer, allowing it to generate extra APR.

In exchange for this boost power, the Farmer sends back a portion of the boosted $BOO rewards to Magicat stakers. This allows both $BOO and Magicat holders to benefit without needing to hold the other asset.

Additionally, as a cherry on top, the Magicat Staking Vault puts your share of the rewards right back into the $BOO Vault for you so that your cats are always earning as much as possible.

The $BOO Farmer

The $BOO Farmer coordinates both of the above vaults to maximize earning potential within Spookyswap’s revenue sharing farms. By combining the capital of the $BOO vault and the boost power of the Magicat vault, it’s able to generate more yield than any other system!

In addition to its orchestration power, it also re-balances positions automatically based on the level of dilution using information delivered by an off-chain algorithm.

The result is the actualization of Spookyswap’s vision for Magicat-boosted staking! Now Magicat holders and $BOO holders can both earn income without having to worry about coordination — the BOO-MAX vault handles it all for you.

We hope our BOO-MAX Vault will breathe new life into the Spookyswap ecosystem, adding financial weight to each of its constituent parts. Please make sure to tell all your friends holding $BOO or Magicats that the best place for staking has just arrived 😼

Since the launch of Velodrome on Optimism, the Reaper team has been researching and developing an efficient and scalable auto-compounding solution for veVELO NFT holders that maximizes their returns from bribing whilst minimizing the risks inherent to pegged assets and market-making that come with typical Convex models.

Leveraging the knowledge we’ve gained maintaining our fBeets vault and our upcoming Magicat staking vault for SpookySwap, we decided to tread on the road less traveled, by figuring out how to create a system that uses NFTs as its atomic unit, as opposed to regular tokens.

I’m thrilled to share that today that, after months of hard work, we are opening up the Reaper veVELO vault to public beta.

Within this vault, you will be able to generate significant APY without giving away custody of your veVELO NFT. By granting operator rights to the vault, your veNFT will gain access to a fully automated voting optimizer and compounder capable of:

• Voting
• Claiming Rewards
• Growing your NFT’s position with more VELO
• Automatically extending the duration of your lock (if you choose to)

… and that’s really all the vault needs to do. Security is paramount in this design. Your NFT never leaves your wallet and you can opt-out at any time. Thus, you as a veVELO holder get to have your cake and eat it too!

Head over to our experimental testing ground Pain.Finance to give the veVELO vault a try while we polish off the front-end and analytics.

This post wouldn’t be complete without speaking of the stunning engineering work that went into the veVelo Voting Vault. Between 6 long code review sessions and subsequent iterations, a massive amount of research and testing, and over 1000 development hours, we like to think our system deserves a seat in the Solidity hall of fame.

The Voting Manager, or VM for short, is the main contract that’s responsible for interfacing with the user. After you grant the VM your voting rights, it will distribute voting power to our various voting strategies, which will maximize your bribes and trading fees each epoch.

The VM is a brand new type of vault, which manages behaviors by proxy instead of through active management of underlying assets. This allows us to give a ton of power to users without taking on any custody risks to the vault itself — it never holds any assets!

On the front end, you can grant or retract your voting rights to the VM on demand, which is a simple, low-cost operation.

The VM is responsible for distributing voting power to a series of Voting Strategies, each of which is designed to manage a chunk of the veNFTs under the VM’s management. If a strategy is full, the manager automatically deploys a new one.

These Voting Strategies are constantly receiving instructions from the VM, and their modularity allows us to manage everyone’s NFT with little gas or operational overhead. Additionally, though each strategy is a separate contract, their implementation can be upgraded in one go by the VM using ERC1967 proxies.

Both the VM and its strategies are secured by a timelock, 3/3 multisig, and the $OATH foundation, with each Byte Mason being under contract to provide the best service possible. Each transaction also requires approval from Tao on the Velodrome team, so you can rest easy knowing any modifications will be performed with users’ best interests in mind.

As a cherry on top, you can decide whether you’d like to re-lock your veVELO automatically or not. This will allow you to either maximize your voting power or let your lock expire. You can click on the Edit Lock button pictured above to enable or disable this feature at any time.

We hope you’ll consider using the veVelo Voting Vault to manage your interaction with the Velodrome ecosystem. It has the potential to save you hours of time and energy while maximizing veVELO income, all without taking your precious assets from you. This system sets a new standard for security and UX in the world of asset management, and Byte Masons are excited to see it grow alongside Velodrome for years to come.

The idea behind Granary sprang to life in mid-2021, when its founders saw unfairness in the world of DeFi. High fees, lack of revenue sharing, and inflexible control structures meant the average user wasn’t getting a fair shake. Beyond that, many of our soon-to-be competitors seemed more like pump-and-dump schemes than well thought out financial protocols.

Later that year, after months of community-building, the team approached Byte Masons to help make their vision for fair and open finance a reality. In the following few months, a senior engineering team from Byte Masons worked with the Granary crew to train their lead developer and build out deployment and management infrastructure.

Since then, we’ve expanded Granary to 6 networks together, built out our own liquidation infrastructure, and grown our audience significantly, with over 30k Twitter followers, 15k Discord Users, 30k lenders, and 20k borrowers.

We’ve also grown closer as friends.

What began as a service agreement evolved into deep cooperation with Granary on nearly every aspect of their business. We saw a future for Granary that would make other lending platforms obsolete, and over time the line between Byte Masons and Granary blurred into nothing.

Over sushi dinners, warzone meetings, and romps through San Francisco, the vision for Granary matured into a vision for all of finance: where DeFi could be more than just a niche or an experiment. We see an opportunity to build and mature a business capable of taking on Wall Street monoliths — not in theory but in reality.

Now that we’re nearing production with Reliquary and Ethos Reserve, our engineers have set their sights on Granary as our next big opportunity for innovation.

Using the same asset management system we built for Ethos and the same incentive flow described in my last article, we seek to close the gap between traditional and decentralized finance through the active management of Granary’s reserves.

Leveraging its re-hypothecation vaults, Granary will be able to absorb capital from the surrounding ecosystem in the form of interest, fees, and incentives, and distribute that capital back to Granary users in the form of $GRAIN. Over time, as growth continues to accelerate, it will become a gravity well for capital and yield, and its users will collectively determine the flow of capital throughout the entire DeFi ecosystem.

Another exciting aspect of Granary V2 is that it gets better with time. As Reaper‘s risk and asset manage improve and as other protocols create more impactful yield opportunities, Granary users will directly benefit without needing to do anything but collect interest. This value will percolate through the entire Byte Masons technology stack and give us and our users the tools to build up financial weight.

To visualize the value Granary is capable of delivering, I’ve compared Aave’s revenue generated over the past 20 months to what Granary would have earned in the same context. This was done by calculating the earning potential month-over-month using Yearn’s average interest rate over that same period multiplied by unborrowed assets sitting in Aave.

I think the simplest insight to draw from this chart is scaling potential. Beyond that, you may see the potential for new interest-rate models entirely, as revenue from borrowing will contend with broader ecosystem yield.

Reaper will also enable margin lending and under-collateralized borrowing through Granary, giving us the ability to build unique options and derivatives products, driving more and more value into Granary and $GRAIN. Below is a high level of this value-sharing mechanism:

This leaves one question… where does $OATH come into play? I’ll leave that for the tokenomics article coming up next week.

If you’re interested in $GRAIN or Granary V2 and would like a salesperson to reach out about our fundraise, please fill out the form linked here.