Star Warps; The Force Awakens
Hello dear readers,
The fifth edition of “the $warp magazine” is here. As usual, the magazine will run through developer updates from the past fortnight, community questions and feedback, and an Alpha section.
Below are some links relating to the Warp universe;
- Warp finance website
- v2 dApp platform
- Deconstructing the Warp vision (the three core pillars)
- Previous $warp magazine edition #01 ($WARP, the ultimate incentive mechanism)
- Previous $warp magazine edition #02 (Looping, the ultimate gains multiplier)
- Previous $warp magazine edition #03 (Chisel, the ultimate DeFi yield aggregator)
- Previous $warp magazine edition #04 (Lending versus minting)
- Old v1 platform
Featuring the latest development updates:
Since our last update, the Chisel audit process has officially begun! We received the first pass of feedback from the auditors, which our team is now going through and determining our response to each of the items. The team’s view is that the feedback from the auditors was well thought through, and provides some valuable suggestions. We hope to finalize our implementation plan by the end of next week, such that we can holistically make any improvements to the code (without opening up any new bug potentials), before proceeding with the next round of the audit.
As always, we will continue to keep the community informed about the progress of the audit as we continue along the process.
1-Click Leverage Looping
Since the last devlog, the team spent quite a bit of time determining the simplest and intuitive user experience that we can provide without limiting versatility. As part of these we determined the ideal process flow for the frontend and backend to make the experience as seamless and empowering as possible. Furthermore, we worked on improving the user feedback with dynamic calculations such that even novice users can make informed decisions about the risk versus reward of different leverage and position sizes. The front-end user flow will soon enter design-freeze such that the graphical design and UI can be finalized and implemented. More information on looping is provided in response to one of the community questions.
Misc Frontend and Backend Updates
As always, the team resolved some minor UI bugs, and cleaned up the outdated bug log. Furthermore the team was able to optimize and reduce unnecessary provider requests.
The team also spent time on dynamic projections for user feedback, to be able to accurately forecast post position state. An example of this is presenting the user with a projection of interest rate based on the post utilization dynamically linked to the requested borrow amount, rather than the preexisting borrow rate at current utilization. Such information is crucial to understand the limits at which a position may be profitable based on current vault funds and requested position size.
As introduced in the previous Warp magazine, the Chisel Admin UI design and flow was also finalized. This UI will easily allow the implementation of the liquidity rebalancing once live, and allow for manual Admin operation and oversight based on Snapshot voting as an interim to veWARP governance.
The team has also been working on internal documentation to detail all of the important aspects of the Warp protocol. This included highlighting the overarching vision and values, and the core team and roadmap in a presentation design format. Who knows, such a document may also come in handy in the future for presenting for Venture Capital investment….
We also intend to make public versions of some of the less-sensitive documents in the future.
Some example slides of the draft presentation below;
Q.1: What’s the outcome from the poll to give more value to v1 nft? Will v1 nft have value in the next phase of warp? (@Dipps3000, Telegram)
Answer: The result from the poll was that many of the active Warp TG members possess a Legendary TVL-boosting v1 NFT. Therefore, we intend to provide some benefit to v1 NFT holders for the v2 NFT Chisel liquidity drive. However, to keep things fair with new users, the v1 NFT will not automatically transfer to the v2 platform, and active V1 users will still need to add liquidity to V2 to be eligible to win a V2 NFT.
At the moment, the team believes the best way to transfer value of the v1 NFT into the new v2 NFT platform is for the v1 NFT to provide a “boost” in the TVL-drive game to win one of the new v2 NFTs. In this way, although v1 holders will need to provide liquidity to Chisel to earn the NFT along with everyone else, they will get a boost for their loyalty, and thus make it easier for them.
As v1 holders will know, the TVL-boosting NFTs are very lucrative, and therefore we hope this encourages strong competitive TVL accrual to our Chisel pools upon launch, to kickstart the v2 ecosystem. Further, we will accompany the launch of Chisel with some high APY lending pairs, such that Chisel suppliers will also be handsomely rewarded in yield.
Chisel is a unique concept to Warp, and we believe will create significant value for the WARP ecosystem… more on this in the Alpha section below.
Q.2: When loop? (Benji, Telegram)
Answer: Looping is one of the technologies to accelerate TVL on the borrow-side through leveraging yield, and increase lending rates (through increased utilization) on the supply side. In short, looping is a TVL booster for both sides of the equation. As documented in the devlog, the team is focused on making this leverage looping process as simple and intuitive as possible for the user, presenting important feedback to make informed decisions about leverage and position size.
Regarding the timing, the team intends to release the looping mechanism and Chisel together, along with the start of the TVL-drive game to win one of the new v2 TVL-boosting NFTs. There may be an additional launch surprise, depending on timing 😎
In the previous Warp Magazine edition #04, we discussed the superior revenue potential of Warp versus other models which mint their own stablecoin (à la ABRACADABRA SPELL / MIM). If you haven’t already read that, I suggest you do before this ‘Alpha’ installment.
In that episode, we explained why lending exogenous stables is a superior business model for Warp, but also hinted at its potential for collateralising the collateral.
What did I mean by that?
Chisel; B2B bribable TVL
We have previously discussed how Chisel represents a dynamic liquidity aggregator at the behest of veWARP stakeholders. Such a liquidity aggregator is unique to Warp, and represents our solution to the liquidity fragmentation challenge of isolated pairs. But who controls it?
In WARP magazine edition #03, we talked about how Chisel also represents the ultimate yield aggregator of DeFi for users, by providing isolated risk allocations into a diversified plethora of yield generating assets, with a dynamic ‘fund management’ pricing model demanded by the collective wisdom / ‘decentralized brain’ of the borrowers in aggregate.
But we have yet to delve into the other side of the equation; representing the predetermined asset allocation limits per pair, as voted by veWARP stakeholders. This asset allocation provides a guideline for the overall platform risk versus reward appetite, and also determines which collateral assets and yield strategies are most favorable to the platform. Why is this important?
Let’s step back and understand the importance of yield. #Realyield can only be generated by providing a service of value to someone else. In the past, I have grouped my own interpretation of some of DeFi’s primary-service yield sources;
- Demand for Blockspace
e.g. security, infrastructure, mining (POW/POS), MEV, etc.
- Market Making
e.g. trading platforms, liquidity providers, etc
- Money markets
e.g. borrowing and lending, leverage, and capital efficiency.
- Risk Premia
e.g. underwriting options, insurance, predictions, etc
- Valuable Governance
e.g. in cases where governance outcomes have tangible economic impact
However there are many other types of yields found in DeFi which cannot be considered a “primary service” providing an explicit tangible benefit of another user, and thus are not sustainable. A common example of non-sustainable yield would be native emissions offered to stake liquid tokens, simply to reduce circulating supply, whilst actually increasing long-term overall supply (aka debasement).
In all cases, there is a yield source which can either come from another user directly, or via the platform/dApp in which the action was based. In many cases, the service or use of a dApp is considered a platform common-good (because service is how the platform generates value), and therefore the platform will incentivize activity by providing additional token rewards. In primary-service cases, this is performed as a yield supplement to reward good behavior, and comes at a cost to the platform.
Such behavior to bolster yield is quite typical by protocols for cases which benefit the platform. For example, this could be to attract the TVL necessary to kickstart/maintain the ecosystem and earn revenue, or to incentivize market makers (e.g LP) such that the native token is tradeable with sufficient depth. There are many such cases where a protocol may wish to buy a users behavior, and this opens up the opportunity for B2B. However, it’s important for the protocol to ensure that the benefits always outweigh the cost of the service, and therefore direct feedback loops with quantifiable value are preferred. At Warp finance, we have internally identified five different B2B opportunities for Warp where we can provide a valuable, transparent, and direct service to other protocols;
In this installment, let’s finally dive into the first B2B opportunity…. Liquidity-as-a-Service, or #LPaaS.
The first B2B; LP-as-a-Service
The first goal of a dApp with native token is to ensure the token is tradeable. Therefore, a good example of the aforementioned combined primary-service yield (fee + emissions) is a protocol’s desire to attract enough market-making liquidity to a trading platform. Unless trading volumes are high, or using concentrated liquidity (univ3), trading fees alone (e.g. 0.3% LP fee is typical) may not be substantial enough to offset opportunity cost or impermanent loss. Therefore, traditionally many protocols have incentivized LP through offering “staking” of receipt tokens as proof-of-LP, in order to earn additional rewards in the native token as a show of gratitude for this communal service of market making. A user taking advantage of this is sometimes referred to as “Liquiduity mining”.
However, for the protocol, pricing the rewards/emissions “just right” to achieve the desired level of liquidity is difficult. This is especially because the emissions themselves lead to debasement and a reduction in token price, thereby requiring more emissions over time to incentivize the same behavior. On top of this, this model created mercenary liquidity providers, who systematically pivoted to ‘farm and dump’ such offerings, until the debasement sell pressure diminished the profitability and they moved to the next opportunity. As these mercenary liquidity providers pulled their LP and dumped rewards into the rest of the pool, the price decline would accelerate, and cause a cascade effect of even more farmers to leave. This all meant the protocol could either not attract enough liquidity, or lead the token into a death spiral, if the variables were not carefully managed.
As a result of the issues of the standard ‘liquidity mining’, new methods of liquidity management gained popularity. For example, Curve finance was a project born to overcome such liquidity native reward issues, and created a democratized market making platform using their 3rd-party native currency as the reward structure. Now protocols could outsource their liquidity incentive and emissions away from the protocol, using a free-market platform to efficiently price the true cost of liquidity on a level playing field. Such methods provided a solution to the ‘race-to-the-bottom’ issue of providing the highest emissions to attract liquidity and risking the death spiral. The first layer of B2B Liquidity-as-a-Service was born. From herein, we’ll focus on the largest and most well known for now; The Curve Finance Ecosystem.
Using Curve, protocols can create a tradeable pair, where the community or the protocol can vote (or bribe) rewards to the pool in the hope to attract liquidity depth. In the absence of community voting on their behalf, the protocol must pay themselves to increase the rewards directed to their LP pool. They can either buy this liquidity incentive through purchasing $CRV or $CVX, or via ‘renting’ the liquidity through bribing CVX holders on Votium for example. Either way, a protocol must still raise the money to ‘buy’ or ‘rent’, which may be raised through selling or emitting tokens. The aim is for this B2B transaction to reduce the cost of liquidity, over straight emissions from the protocol itself.
The aim of the game for the protocol is to reduce the cost burden of incentivising liquidity for the protocol through buying yield. The ultimate metric for the protocol is to maximize the LP gained per dollar spent (ie LP/$). Since users are incentivized by the resulting yield, we can evaluate the effectiveness of a strategy by applying a metric of the resulting magnitude of yield for liquidity miners per $ spent by the protocol (Yield/$). From the user’s perspective, the yield is only relevant by their share of the total TVL in a pool, so the user is most incentivised by the resulting APY/$. A higher number is better, where APY/$ can be improved by either increasing the magnitude of yield, or reducing the cost (bought or rented) to achieve that yield. However, the protocol’s goals of increasing LP/$ necessarily decreases APY/$, so there are diminishing returns, unless additional methods are found to leverage APY (more on this later).
In the curve ecosystem we can refer to Curve as Layer 1 of the B2B, and the voting aggregator service of CVX/Votium as an additional layer, Layer 2. We can see that Layer 2 multiplies the benefit of Layer 1, by offering additional reward structure (e.g. CVX) and voting aggregation/concentration. That is, Layer 2 attempts to boost the resulting yield/$ of the protocol, thereby presenting better value.
Within the curve ecosystem, other aggregators have tried to come on top of CVX with an additional layer, but these have diminishing returns. An example would be Bent finance which applied a fork of Convex to sit on top of Convex to further concentrate voting power in return for an additional layer of rewards. Let’s call these Layer 2.5 due to diminishing returns and lack of engenuity of the concept.
But what if there was another true value multiplication layer? A new liquidity king maker?
WARP; the *NEW* LPaaS king maker!
If APY/$ is the key metric for users to step in and deepen a protocol’s liquidity, Warp’s liquidity aggregator and yield multiplier service is perfectly suited to help!
Let’s give an example of a prolific Curve/Convex liquidity outsourcing B2B user, Alchemix. Over the past 5 rounds they have bribed in Convex alone;
AlETH-ETH bribes (source; https://llama.airforce/#/bribes/rounds/votium/cvx-crv/)
Round 25; $105.5k
Round 26; $88.3k
Round 27; $79.9k
Round 28; $79k
Round 29; $78k
That’s an average of ~$86k per fortnight (~$2.3M per year) on maintaining just one of their liquidity pools. This is on top of the 340,000+ $vlCVX (~$1.8M) the protocol already owns.
Currently, the alETH-ETH APY on Convex is ~6.4%, with ~$54.9M in the pool. We can therefore assume a magnitude of around ~$3.5M in CRV/CVX yield. For recurring OPEX, let’s call this a yield/$ of $3.5M yield for $2.3M spent, providing a direct liquidity mining cost saving of 1.52x compared with an internal LM offering. Can this be improved?
Let’s say Alchemix instead reduced their Convex spend by ~20% to $1.8M per year. In theory this should only decrease the yield slightly, especially since they retain their purchased CVX voting power, and also due to the law of diminishing returns (non-linearity). However, allowing for the worst case, we can assume the yield also drops by ~20%, and the native TVL responds and reduces to ~$43M to maintain the ~6.4% yield (assuming that’s the equilibrium sweet spot of risk-reward).
Then Alchemix could use the remaining ~$500k OPEX budget to instead;
- Buy/bribe veWARP to add alETH-ETH as an ETH lending pair on WARP
- Buy/bribe veWARP to direct ETH Chisel liquidity (TVL) towards the pair
If, for example, Chisel had $50M in it, and Alchemix was able to control half the Warp votes with a $500k OPEX budget, they could direct this $25M TVL towards their LP pair. Furthermore, let’s assume the lending pair rate settles at ~5.5%, thus giving the Lion’s share of the yield potential to Chisel suppliers (we explain this phenomena in more detail in our previous Magazine Edition #03). This still leaves 0.9% of the 6.4% yield for the borrowers to leverage, which is still highly profitable. With a max 98% LTV enabled by ETH collateral and ETH debt (justification in Magazine Edition #02), Warp can offer significant leverage for borrowers of up to ~50x, meaning the remaining net 0.9% of the 6.4% yield can be highly profitable.
The result is that Chisel suppliers could earn an industry leading 5.5% #RealYield on straight ETH with *isolated* exposure and no-liquidation risk, while the borrowers can receive up to ~50%+ APY for adding LP to the alETH-ETH pool with ~50x leverage. A great outcome on both sides.
Assuming the leveraged APY (e.g. up to 50% APY) is attractive enough to saturate the $25M of bribed Chisel liquidity, Alchemix could therefore be able to boost their liquidity depth by a whopping ~125% for the same OPEX budget. This provides a significant boost in LP/$ metric from $54.9M/$2.3M = $23.8 LP/$, to $68M/$2.3M = $29.6 LP/$ by leveraging Warp B2B for #LPaaS.
If we further consider the sunk cost of the $1.8M in CVX Alchemix owns, and the law of diminishing returns, a reduction of bribes would have even less impact on the Convex yield, and thus, making it even more beneficial to direct a bigger portion of the allocated ~$2.3M in OPEX to WARP. There are obviously a lot of assumptions and caveats, but in this example, the $500k expense to direct $25M to the alETH LP pool provided the most cost effective B2B #LPaaS service with 50:1 return.
I have previously highlighted on a detailed twitter thread [here] how Warpv1 could have offered a 56:1 cost leverage for B2B protocols using its current TVL metrics if Chisel and veWARP were already instantiated.
“e.g; currently on Warp v1 there is $8.2M TVL, including ~$4.2M of supplied stablecoins
assuming ~10% of $WARP gets locked as $veWARP & quorum of 51%; given the current MC of $1.5M, just $75k of locked $veWARP will control $4.2M of stables.
If TVL in DeFi is king, then Warp becomes the new King Maker.
In short, 3rd party protocols can buy/bribe Warp to direct leveraged capital towards their liquidity mining strategies to multiply their liquidity depth at an industry leading LP/$ ratio. In the example above, Alchemix could improve their LP/$ by ~125% by splitting their current bribe rate to $1.8M to CVX and $500k to WARP, thereby leveraging the magnitude of impact of the previous layer’s yield, and directing value to the Warp ecosystem.
There are indeed some other protocols also leveraging CVX positions, however WARP’s LPaaS does not apply only to Curve, or even only B2B liquidity managers. Warp can also leverage in-house liquidity mining staking contracts to multiply the APY offered by protocols directly. This enables a protocol to minimize the amount of emissions issued, and thus avoiding the potential of “death spiral” whilst still attracting significant LP depth. As we saw previously, even a 6.3% APR can be leveraged to 50%+ APY for a user, while generating a significant 5.5% yield for Chisel suppliers. Isolating risk per pair, along with the programmable direction of liquidity is key here, and makes Warp a truly versatile system. Effectively Chisel unionizes the mercenary nature of LM farming capital, where protocols can directly buy or bribe liquidity allocations B2B to ensure an continuous adequate liquidity depth.
Eliminating the pain points of LP could even provide an offramp from the competitive “Curve Wars”, and instead direct this value towards the better value-for-money “Warp wars”. A reminder here that Warp pioneered using LP receipt tokens as collateral back in 2020 on our v1 platform. Unfortunately, this radical innovation was stymied due to the lack of risk-isolation per pair, and we thus limited our innovation to blue-chip assets only while we developed the isolated v2 concept. Now the isolated pairs of Warp v2 is launched, this unlocks the full potential of this pioneering concept, and combined with the unique liquidity aggregation of Chisel, we are excited to see where the market leads us.
Chisel value accrual
Since the 3rd party protocol would need to buy or bribe veWARP stakeholders to direct capital in their favor, we can see that the utility and value of WARP is directly tied to the TVL of Chisel. This is why the team is so laser focused on attracting Chisel TVL upon launch. With quantifiable metrics of $/TVL and multiple business cases for its use, we believe that achieving Chisel TVL could easily lead to the “Warp Wars” to gain control over the resulting TVL. This will be accompanied by a flywheel of user adoption, offering a diversified industry leading risk-versus-return APY, competitive reward structure, and tangible governance rights of quantifiable value. The more TVL, the more tangible value the ecosystem accrues.
We are thus hopeful to attract a large pot of Chisel liquidity upon launch to kickstart this process, and we have some tricks up our sleeve to achieve this. Our internal targets are substantial, based on the underlying TVL of the yielding assets we are targeting. Once Chisel is launched, any amount of TVL should be able to be controlled with high leverage, especially considering that WARP’s circulating market cap is $354k at the time of writing, allowing for a significant profitable B2B margin for robust competition for governance control.
To begin with, in lieu of veWARP implementation, B2B voting for additional pairs and directing Chisel liquidity can be done via snapshot. So therefore, the only truly outstanding blocker to unlocking this B2B application (along with the others), is Chisel… which is currently under audit. We are close.
All will hail the new #LPaaS king maker…. #soon
So it turns out the first “as-a-Service” was #LPaaS, an extension of the early LP receipt as collateral concept that Warp pioneered in ‘DeFi summer’ 2020 with our v1 platform. #LPaaS has a massive potential, as evidenced by the capital which goes towards sustaining LP depth.
But, we are not limited to this, and are planning to actively target four more B2B “as-a-service” concepts. We believe each of the five B2B opportunities have similarly sizable potential, and we will be sharing these concepts throughout this magazine series. Do you have an idea what they could be? If so, please feel free to join the conversation and speculate in our TG.
These targeted B2B opportunities will play an important component of Warp’s unique value proposition moving forward, and this informs our technology roadmap. As we have previously described (e.g. in Magazine #01), this valuable service directly accrues to Warp governance and its stakeholders. In this way, the TVL in our unique liquidity aggregator contract, Chisel, provides a tangible pseudo-backing to the $WARP token, as each governance share provides direct control over a quantifiable portion of the TVL on the platform. This makes $WARP a genuine utility token providing the basis of payment for the B2B services, where a third party needs to buy/bribe $WARP to direct the desired TVL towards their platform.
If TVL in DeFi is king, then $WARP is the King Maker.
Importantly, and in contrast to other platforms, Chisel provides a proportional yet isolated-risk allocation to each lending pair. This uniquely enables us to adopt riskier collateral, and/or offer higher leverage whilst avoiding systemic risk to the platform and its users. We therefore bootstrap our TVL through yield derived externally from the platform (rather than through using emissions like traditional Defi money markets). Ultimately Chisel becomes a risk-weighted adjusted aggregator of all of DeFi’s best yield opportunities, using the power of the decentralized borrower community for 24/7 active management. We provide many reasons why a user would want to add liquidity to Chisel, including how it operates as an actively managed high-APY “DeFi Mutual Fund”, in detail here. We believe these unique benefits will compound to attract a sizeable liquidity pool, further improving the attractiveness for B2B applications.
For an overview on how the total platform of isolated pairs, chisel, and governance work together in symbiosis, we invite you to revisit our Warp Vision article.
We believe the next crypto cycle will focus on a combination of #RealYield, risk mitigation, and project tokens with true utility; and thus believe our next generation money market is well placed to become a leader in the B2B and yield aggregation segments. We are now getting closer than ever, and invite you to join us on this journey.
Join one or more of our social platforms to follow our journey! We are creating DeFi’s first isolated lending protocol that optimizes and aggregates the yield of Defi!