Equilibria Explained: L2 on top of Pendle
How Pendle Finance works, what Equilibria is and how it works, an overview of Equilibria's crosschain infrastructure
Disclaimer: The content presented in this article, along with others, is based on opinions developed by the analysts at Dewhales and does not constitute sponsored content. At Dewhales, we firmly adhere to a transparency-first philosophy, making our wallets openly available to the public through our website or DeBank, and our articles serve as vehicles for self-expression, education, and contribution to the ecosystem.
Dewhales Capital does not provide investment advisory services to the public. Any information should not be taken as investment, accounting, tax or legal advice or as a recommendation to purchase, sell or hold or to pursue any investment style or strategy. The accuracy and appropriateness of the information is not guaranteed by Dewhales Capital.
Introduction
1. Pendle
2. An introduction to Equilibria
3. Cross-chain infrastructure and tokenomics
4. Involved Players
5. Tokenmetrics
Conclusion
Introducion
The crypto industry is even now still a fairly young and rapidly developing environment that offers a huge number of different development options and ways to optimize in a variety of aspects. And unlike traditional financial markets, in DeFi it is much easier to create some new tools and complex multi-component strategies that could not be done before. You could say that Pandora's Box has been opened by Curve back in 2020, including with the launch of ve-tokenomics and bribery. In fact, the interaction between Equilibria and Pendle is very similar to what happened with Curve and Convex, as we wrote about in detail in the research "The Saga of Curve Finance 2: Curve Ecosystem as a Template for LSDFi". Let's dive into this in more detail about Equilibria.
1. Pendle
In order to understand how Equilibria works, a person must first understand how Pendle works. Pendle is a cross-chain protocol with functionality that allows for asset swapping and acting as an LP (Automated Market Maker), generating yield for LSD (Liquidity Staking Derivative). Pendle Finance bridges the trillion-dollar interest rate derivative market in traditional finance to DeFi, making it accessible to everyone. Pendle Finance works like traditional income swap markets, allowing users to buy and sell the yield or principal of a DeFi product separately.
Pendle is built on Ethereum and Arbitrum and offers yields in a multi-token structure. Initially, the deposited asset (a pair of LP tokens) is converted into SY (Standard Yield Token), which is further divided into:
PT (Prime Token), which is organized as a zero-coupon bond, that is, being essentially a derivative token that trades at a large discount, and the profit is realized at the expiration of the term, when the bond is redeemed at its current value. It is also worth bearing in mind that because a zero-coupon bond implies a payout at maturity of more than it is worth, these bonds are supposed to have a fairly large price swing, unlike a simple coupon bond. Investors receive income in the form of coupon payments, which are made semi-annually or annually over the life of the bond. Thus, PT token at redemption can be exchanged for the underlying asset at a 1:1 ratio, and PT can be purchased at a discount due to yield isolation. That is, if a user, for example, puts USDT or OETH into liquidity, he will receive the same amount of assets in exchange for the corresponding PT tokens.
YT (Yield Token) - this is exactly the same as a coupon payment, which allows user to receive income from PT (Zero Coupon Bond). After the maturity date (redemption back of the underlying token), YT loses value and does not generate income. That is, the YT holding allows holders to earn a return on the base asset (as of bearing-rewards assets). In this case, it means that when exchanging the tokens delivered back, the user will receive the profit accumulated by the supplied assets (USDT or OETH) exactly at the expense of YT.
In addition, Pendle has ve-token vePendle, which has voting power. Holders of vePendle can vote to allocate rewards among different liquidity pools (similar to Curve) and receive a share of the protocol's revenue for the swap. In fact, Pendle's mechanics are far more complex than our brief overview might suggest, but exploring them in detail is the subject of a huge research article in its own right. You can read a bit more about Pendle in our research "Global overview of the LSDFi ecosystem" in the relevant section.
2. An introduction to Equilibria
Equilibria is similar to Pendle, some consider one of Equilibria's features to be a liquid locker for Pendle. Specifically, Equilibria uses the vePendle model to take advantage of vePendle rewards, in which regard an analogy may be appropriate: Pendle is Curve and Equilibria is Convex, L2 over Curve. Accordingly, Equilibria's goal is to create a kind of level-aggregator control on top of Pendle, which should increase demand for PENDLE in a manner similar to what CVX did for CRV. In addition, this approach allows to the vePENDLE flywheel to spin in a similar way to the CRV-veCRV (you can read about how this works in our research, which breaks down this mechanism in detail). Equilibria also offers a bribery mechanism (which the EQB token is involved), as protocols that have liquidity on Pendle may be interested in buying votes from Equilibria to get more PENDLE issuance at the expense of their liquidity.
Thus, Equilibria works as follows for its users:
LPs on Pendle can make deposits into Pendle via Equilibria even if they don't have vePendle positions and receive increased rewards in PENDLE and EQB.
Pendle holders can convert their PENDLE to Equilibria and receive an ePENDLE in exchange (a liquid version of vePENDLE similar to the cvxCRVs that users received on Convex in exchange for CRVs). Accordingly, ePENDLE can be either staked traditionally or staked for additional yield. ePENDLE stakers can earn a share of protocol performance fees, which is approximately 12.5% of Equilibria's revenue. These rewards are paid out in PENDLE and WETH. In addition, ePENDLE stakers receive EQB rewards.
EQB holders when locked into vlEQB may receive a share of Equilibria's total commissions and revenue from other sources. Users who have vlEQB in Arbitrum, Ethereum, Optimism and BSC (vlEQB is available on these chains, allowing the protocol to be highly variable due to different transaction costs and coverage of users of different chains) can vote on Equilibria Snapshot Weekly Pendle Gauge Vote and receive Pendle rewards in ETH within 4-5 weeks. In addition, vlEQB holders can earn income in the form of bribes when voting for certain projects. But unlike the bribe mechanism around Curve, Equilibria will charge a 4.5% commission on all bribes and 0.5% for branding rewards, thus generating additional revenue streams for the protocol.
Equilibria utilizes accumulated vePENDLE to boost the rewards for users who provide liquidity through Equilibria, enabling them to achieve higher returns. Upon receiving rewards from Pendle, Equilibria allocates a majority of the rewards to LPs and a portion as protocol fees to other protocol participants (with the current distribution being 77.5% to LPs and 22.5% as protocol fees). The rewards allocated to LPs are transferred to the Streaming Payout Distributor of the corresponding pool, where they are distributed to all LPs based on time and the LP's proportionate TVL.
3. Cross-chain infrastructure and tokenomics
Equilibria uses an architecture having Ethereum as the main hub, all messagings and computations are done on the core network and then distributed to the rest of the supported chains. All cross-chain functions are built on Layer Zero technology. Like Pendle, Equilibria initially worked with Ethereum and Arbitrum, with support of BNB Chain added on 6 July and Optimism added on 28 August. Users can choose the chain to receive rewards. In case of delays with bridges, Equilibria utilizes reserve funds for the fastest delivery.
The particular interest lies in tokenomics, which are inspired by Camelot and GND. In addition to the EQB token and the governance token vlEQB, there is also xEQB, similar to xGRAIL and xGND. EQB and xEQB are interchangeable, but if xEQB is exchanged for EQB after 2 weeks, the user will only receive 0.5 EQB, but if redeemed after 24 weeks they will receive 1 EQB. At conversion below 1:1, unspent EQB are burned, which forms a deflationary mechanism in tokenomics.
Holders of xEQB are entitled to: integration with LSDFi based on the xEQB platform, additional sources of commission distribution, dynamic yield increase.
4. Involved Players
Backers
Dewhales, GBV, Incuba. In addition, Pendle, GBV, Incuba and the Equilibria team own parts of Multisig 3/4.
Partnerships
The most important partner integrator is of course Pendle, which we have broken down above.
Aura Finance is the launch partner for the Equilibria ecosystem, vlAURA stakers got the vlEQB airdrop
Camelot - also a launch partner, Camelot treasury and members also received vlEQB, and GRAIL /xGRAIL holders received an EQB airdrop
GMX - launch partner, treasury received vlEQB and GMX, esGMX stakers and Multiplier Points holders received an EQB airdrop.
Cobo Global - Cobo DeFi will allow LPs to use Equilibria easier, their presence also increases Equilibria's ability to better serve institutional LPs. This is possible thanks to Cobo's Argus V2 - this is their latest offering, which is a secure and efficient solution for managing digital assets online.
Stader - utilizing Equilibria for bribes, offering bribes to increase incentives in the ETHx-bbaWETH pool. Stader and ETHx Stader is a multi-chain liquid betting protocol that developed ETHx, an innovative liquid betting token on Ethereum.
Stafi is a decentralized protocol that opens up liquidity of staked assets. StaFi seeks to resolve the tension between Mainnet security and token liquidity in the PoS consensus. Offers bribes to vlEQB holders who cast their votes for the StaFirETH-WETH pool.
Maverick - Equilibria announced integration with it to launch pools and amplified positions.
Swell - Equilibria describes it as the first partner in the bribe market. Specifically, it is offering rewards to vlEQB holders who vote in favour of the swETH-bb-a-WETH pool.
Frax Finance - Equilibria announced a partnership with it, as with vlEQB the Frax community can vote for the sfrxETH pool.
Flux Finance - Flux Finance's fUSDC is a tokenised loan in stablecoins backed US Treasury bonds and allows for yield through Equilibria.
5. Token metrics
Native token: $EQB, total supply 100m tokens.
2% - Airdrop, 20% TGE, 1 year vesting
2% - Bootstrapping, users can claim with either a 30% loss or a 6 month lockout
45% - Pendle LP Incentives, the emissions will be distributed pro rata based on the amount of PENDLE received. The initial emission will be comprised of 25% EQB and 75% xEQB.
10% - Liquidity mining, The rewards will be emitted on a weekly basis, with a deflation rate of 1.1%. The emitted tokens will be securely stored in a multi-signature (multi-sig) wallet, ensuring a transparent and accountable approach to their management.
14,5% - Treasury, Initially, only 30% of the treasury will be unlocked, followed by linear vesting over a two-year period.
16.5% - Team/Advisors, 3 months cliff, further unlocking will go depending on TVL Pendle along with the allocation of LP Incentives
2,5% - Seed, 3 month cliff, 21 month vesting
7,5% - IDO, 50% TGE, 6 month vesting
Conclusion
As DeFi protocols evolve, they become more complex, more sophisticated, and begin to utilize the most successful mechanics from other protocols. And if you look at the graph of TVL Curve before Curve Wars, you can see that it started to grow after protocols that helped accelerate its flywheel appeared. The same thing is now happening around Pendle, which is targeting the actively growing LSDFi sector among others. Equilibria with a TVL of $46.32m was launched almost 7 months later than its competitor Magpie with a TVL of $55.5m, quickly closing the gap between the two months. It looks like we have an exciting battle ahead.
Equilibria links:
Website | Twitter | Discord | Docs
Our links:
🔗 Website
🐦 Twitter
✉️ Substack
🔸DeBank
🐰 Friend.tech