TapiocaDAO Explained: Part 1 - The Infrastructure
Singularity, Big Bang, YieldBox, twAML, DSO, and PearLayer
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Introduction
Singularity
Big Bang
YieldBox
twAML
DSO
PearLayer
Conclusion
Introduction
Tapioca may be seen as a rather complex product for the ordinary user, despite the apparent simplicity of the user interface. In essence, Tapioca aims to ensure long-term stability in TVL while enabling its protocol token to possess genuine value. The focus lies on sustainable growth and value creation. After all, Tapioca's ultimate goal is to become an interconnected banking layer, the ultimate DAO-owned liquidity hub, and to attract liquidity needs strong and long-term incentives.
Utilizing LayerZero's generalized messaging network, TapiocaDAO introduces the first "omnichain" money market protocol where the objective is to eliminate the risks associated with bridges, which carry well-known smart contract risks and create deep friction for users.
By allowing users to borrow and leverage a wide array of assets that can be settled to (and from) across any network. This approach seeks to increase capital efficiency by defragmenting liquidity, while adding more lending opportunities.
DeFi has a main issue in the liquidity that is fragmented in different chains and protocols, which lowers the capital efficiency. Still nowadays, two different chains don't share the liquidity of the same asset, resulting in a higher slippage. The same happens with different protocols.
One notable characteristic of TapiocaDAO is its unique token economy, which we will delve in the second part of the article. It includes distinct tokens such as TAP, twTAP, oTAP and USDO. Each one of them is designed to tackle specific aspects of DeFi, ranging from risk management to yield optimization. Here's a brief mention:
$TAP, similarly to CRV token, is the linchpin of the whole protocol. It's implemented by LayerZero's OFT20 Omnichain token standard.
twTAP is a Time Weighted escrowed token that possesses transferable properties, primarily utilized to access rewards. The distribution of revenue is set such that twTAP holders receive the entire revenue stream (100%) and half of the revenue (50%) generated from the Arrakis vault. Represented by OFT-721 token standard.
oTAP is Omnichain NFT call options that allows you to buy TAP below-market value. Also following OFT-721 Omnichain token standard.
$USDO is a decentralized and over-collateralized stablecoin.
Furthermore, there are additional tokens, such as SGL which is a ONFT-721 representing the Singularity Position, tETH, which is the wrapped version of Arbitrum ETH , Mainnet ETH and Optimism ETH; tOFT also known as Tapioca Omnichain Fungible Tokens that are liquid wrappers of Layerzero's ONFT and lastly aoTAP distributed by airdrop and has shorter redemption period for exchanging to $TAP.
The Tapioca infrastructure tightly integrates different protocols, which will be mentioned in this part as we explore the infrastructure and components of the Tapioca protocol. Projects such as Arrakis Finance, Gelato, Chaos Labs and others play a large role in the functioning of Tapioca. However, the description of the functionality of these projects and the functionality they perform for Tapioca requires a separate study. So in the first part we will touch on these protocols indirectly as part of the infrastructure, and in the next part we will cover them in more detail. So stay tuned, we'll be releasing the next part soon. But now, let's begin by dissecting each component of this intricate framework.
Singularity
At the heart of TapiocaDAO lies Singularity & Big bang, both are modified versions of Kashi by BoringCrypto.
Singularity was designed to address fragmented liquidity. Unlike protocols such as Aave or Compound, which share a systemic risk among all collateral assets in a unified pool, each market shares risk with another — in which high-risk assets can pose a risk to the entire protocol. Singularity breaks down this risk, isolating these markets allows for riskier assets to be supported without affect each others. Also, the elastic interest rate allows liquidity to fluctuate between 70-80%. The closer the usage gets to the extreme, the faster it adjusts.
It also allows one-click leverage in which users will not need to borrow assets on one platform in order to lend on another. Kashi also has elastic interest rates which provide better utilization of volatile assets by splitting markets into pairs, lending and borrowing. In practice, Singularity can automate leverage up to 5x in one click.
Basically, Tapioca’s Singularity iterates Kashi for Omnichain composability, sharing market liquidity between many chains and aims to optimize the utilization of volatile assets.
Big Bang
Big Bang allows USDO Stablecoin to be issued using gas tokens as collateral, allowing the possibility of getting self-repaying loans. That is, Big Bang, like Singularity, is a modified version of Kashi Lending that allows users to mint USDO by supplying an accepted asset as collateral. With Big Bang also supporting Liquid Staking Derivatives, for example, Lido's stETH, users have the ability to mint USDO in a self repaying loan.
Singularity allows USDO to be used, while Big Bang allows USDO to be minted for future use.
To maintain and protect its soft peg of $1.00 Tapioca utilizes a mechanism known as Collateral Debt Ratio (CDR) that has variable interest rates that adjust USDO supply in line with the market demand, meaning raising or lowering the interest rate to provoke arbitrage and make more favorable terms for lenders or borrowers - thereby safeguarding the USDO peg. Big Bang markets will feature a Minimum Collateral Ratio (MCR) of 110%. This allows users to extract the most capital possible for their deposited liquidity.
At the same time, in order to ensure the stability of the protocol, other assets have different risk scores and, accordingly, LTV (Loan-To-Value Ratios) and CDR parameter ranges (these parameters are provided as an example to beta, the real numbers will be determined during the mainnet launch based on Chaos Labs recommendations):
An interesting detail is that Big Bang won't support other Stables in the collateralization. The reason behind this is that the existing stablecoins are centralized controlled (USDC/USDT/BUSD) and the alternatives (DAI/FRAX) are predominantly backed by these stablecoins. And lastly, the truly decentralized stablecoins hasn't enough liquidity.
YieldBox
YieldBox, also referred to as Bentobox V2, is a permissionless token vault. Which means, that it is a vault that holds all the assets that have been deposited by users.
Bentobox V1 is used by Sushiswap and Abracadabra (Degenbox). In contrast to Bentobox, YieldBox has incorporated upgrades that not only optimize but also reduce gas consumption, as well as simplify the token approval process.
Yieldbox supports NFTs natively (Uniswap V3 LP), rebase tokens (stETH), and isolated strategies. Being able to isolate strategies allows for tokens to rebalance between different risk-isolated yield strategies. Tapioca uses proxy contracts in supported chains outside of Arbitrum to transfer messages between chains.
Yield Box can automatically rebalance funds in multiple chains (e.g. crediting Aave in the main ETH network, Arbitrum or Optimism). Initially, this feature will only offer low-risk strategies. However, Tapioca plans to offer medium- and high-risk strategies in the future.
Similar to Balancer Boosted Pools, lenders have the potential to earn returns not just from borrowers, but also from the yield strategy in place that loans a part of the market's liquidity to another protocol. Strategies can be created permissionless.
Omnichain tETH is one of Tapioca's Yieldbox Vaults which utilizes ETH from Ethereum, Arbitrum, and Optimism. Tapioca automates moving ETH between separate low-risk yield strategies within Yieldbox deployments on separate chains within the same risk tolerance via Gelato Network.
tGLP is a Yieldbox vault for GMX's GLP, which acts as an auto-compounder for the yield generated by GLP on the Arbitrum L2 network.
tTriCrypto is a Yieldbox vault for Curve's TriCrypto on Arbitrum. Yield is generated from Curve and Convex, and is autocompounded.
tSGETH is a Yieldbox vault for Stargate ETH on Arbitrum. Yield is generated from STG emissions to SGETH LP's, which is autocompounded.
twAML
twAML, or Time Weighted Average Magnitude Lock, is an economic system that can dynamically react accordingly to the economic activity to reach maximal allocative efficiency. It has a PVP (Player versus Player) competitive approach, in which users compete with one another with their escrow commitments that constantly modulates the Average Magnitude Lock (AML). AML is defined by a consensus and free-market.
twAML is essentially a standalone mechanism that even has its own white paper. The idea behind twAML is predicated on the fact that traditional liquidity mining models are unprofitable and inevitably lead to the protocol token trending downward under pressure from sellers liquidating their profits in the form of protocol tokens. This consistently undermines economic incentives, investor interest in tokens, and exacerbates the situation, further compounded by the decline in TVL among other factors. TapiocaDAO conducted a comprehensive comparison of ve(3,3), OlympusDAO, GMX, Convex & Aura, OLM, and Keep3r return models, and created their own model based on these, taking into account the shortcomings of other options. In addition to Keep3r, the OLM mechanism is implemented by projects such as Timeless Finance and Bond Protocol. The twAML mechanisms were meticulously designed with game theory in mind and are based on Rubinstein's negotiation model.
AML measures the user's impact on the system based on their contribution magnitude (the time duration of their escrowed liquidity) and the total number of participants at the time of interaction. As users' locks contribute to increasing the AML and thus decreasing the offered rewards by the Tapioca protocol, at some point the reward will be deemed too small by the collective, and economic activity will stagnate. At this juncture, the AML will begin decaying (offering better and better rewards) until a new growth state is triggered (users begin locking capital again).
Several scenarios were tested to evaluate the effectiveness of this approach, including a neutral scenario where the system does not grow or decay, a growth-based divergence scenario, static lockups, decaying divergence, and random participant forfeiture. In all cases, it was observed that AML could adequately respond to different conditions, helping to modulate system incentives based on user behavior and current system status.
Firstly, Tapioca addresses the issue of runaway inflation, and secondly, aiming to create enough POL*, so that issuance would no longer be necessary. Tapioca would thus become a capital provider for its own LP pairs (using Arrakis Vaults for LP management) as well as for the Tapioca markets.
This led to the conception of AML - Average Magnitude Lock, influenced by OLM (Option Liquidity Mining) from Keep3r by Andre Cronje, which was introduced back in 2021. Originally, it was designed to avoid the problem of immediate profit selling by liquidity miners, which constantly pressured token prices. OLM helps protocols preserve capital because they accept assets when oTokens are used within an acceptable window. This minimizes the disadvantages of issuing liquid tokens, limits mercenary farming, and ensures a sustainable balance between user incentives and long-term treasury sustainability. The problem with Andre's OLM was that the protocol still did not create a POL. Tapioca solved this dilemma implementing call options by creating twAML.
POL is a model originally developed by Olympus DAO to provide liquidity for tokens on decentralised exchanges. In general terms, it can be said to be somewhat similar to arbitrage. Rather than relying on providing incentives to the market to provide liquidity to liquidity pools, the liquidity model owned by the protocol instead uses a "tying" mechanism. Binding essentially involves the protocol selling its tokens to buyers at a discount, who in exchange will provide another token (such as a DAI) that is part of the protocol's treasury. The treasury can then be deployed to provide liquidity directly to the DEX (receiving trading commissions) and can be invested for profit.DSO
DSO (DAO Share Options), represents another building block through which the OLM can operate. This mechanism enables the creation of POL, long-term TVL, and the twAML mechanism.
This component of Tapioca is inspired by Andre Cronje's Keep3r (oKP3R and rKP3R) and employs the mechanics of American options. DSO, in very broad terms, can be likened to ve-mechanics, but it's important to note that DSO utilizes call options. There are two types of options: put (the right to sell) and call (the right to buy).
A simplified example of how this works: users contribute liquidity to the credit market and receive a token receipt called "tOLP". They can lock this receipt (representing their liquidity) for a set period of their choosing. Based on the Tapioca AML formula
At the end of each period (weekly) users receive an oTAP with a specified strike price. Users have the right, but not the obligation, to buy TAPs at this strike price. The price is determined by the following formula: strike price = spot price - X%, X% = discount factor. That is, with oTAP you receive a discount on the market's price of the TAP token. And one of the most important things is that the option has a validity period of 1 week, which allows you to limit the pressure on the token protocol from liquidity miners.
PearLayer
PearLayer is Tapioca's own relayer and it uses LayerZero Pre-Crime mechanism. It's the utilization of LayerZero technology that enables Tapioca to function as an inter-bank layer. At now moment Tapioca supports chains such as: Arbitrum (the host chain, which houses all Tapioca smart contracts), Optimism, Ethereum, Avalanche, Base, Berachain, ZKSync, Starknet, Mantle Network, Cosmos, Sei, Polkadot.
Opting for LayerZero as a base is a more innovative and intelligent approach compared to traditional bridges, which are prone to infrastructural risks. After all, the most significant thefts have been associated with bridges such as Ronin, Nomad, Poly, and Wormhole, rather than DeFi protocols.
With Pre-Crime, PearLayer runs a set of assertions, as defined by the Tapioca protocol, in a locally branched blockchain to ensure that each inter-chain message delivered never results in a compromised state. If assertions ever fail, PearLayer refrains from delivering the message to the Tapioca (UA) protocol, thereby thwarting the attack entirely. PearLayer will be immutable and incapable of updates. As for the oracle, Tapioca employs Chainlink price feeds.
Conclusion
Tapioca presents a complex and sophisticated architecture for what might seem like a straightforward protocol concept. The protocol incorporates comprehensive security mechanisms that rely on both Tapioca's smart contracts and automated solutions from Chaos Labs. Tapioca employs refined solutions for its infrastructure that have been previously tested in real-world environments and have identified shortcomings. Tapioca has taken these into account, refined them, and extended their functionality. These include:
Singularity, a modified version of Kashi
YieldBox v2, based on updated and improved version of BentoBox
twAML, tapioca’s answer to the old veTKN system which has its own whitepaper and is built upon a thorough analysis of ve(3,3) mechanics, OlympusDAO, GMX, Convex & Aura, and OLM Keep3r.
Despite appearing experimental, we may conclude that the combination forms a truly unique protocol that primarily focuses on its DAO and the creation of real utility and value.
As we move forward, the subsequent part will provide more detailed coverage of Tapioca's comprehensive exploration of the protocol's various components - tokens, partnerships, and closely-integrated protocols. This exploration began with an understanding of Tapioca's infrastructure or Core Technologies mention in this article. Therefore, we encourage you to stay tuned for further revelations.