An Introduction to Tokemak
The Utility for Sustainable DeFi Liquidity
Tokemak is a novel protocol designed to generate deep, sustainable liquidity for DeFi and future tokenized applications that will arise throughout the growth and evolution of web3.
It can be thought of as a decentralized market making platform and a liquidity router that disaggregates traditional liquidity provision and market making for DeFi. Sitting a "layer above" decentralized exchanges, Tokemak allows for control over where the liquidity flows, and also offers an easier, cheaper way for providing and sourcing liquidity.
The current state of DeFi is comprised of fragmented, unpredictable, and expensively sourced liquidity. Builders of new projects bear massive costs pursuing liquidity solutions through incentivized "pool 2's," which can dry up when the incentives are exhausted. Providing 50/50 paired liquidity is expensive for an individual, and has the looming risk of impermanent loss. Traditional market making solutions are opaque for native DeFi builders, highly centralized, and expensive. Finally, reliance upon whales to provide liquidity results in a perpetual state of uncertainty.
Insufficient liquidity results in poor pricing and volatility. This negatively impacts projects/DAOs seeking deep liquidity for their tokens, exchanges looking to offer the best possible pricing, and the individual, hoping to avoid slippage due to the price impact of their trade. Additionally, protocols interacting with other projects' tokens require reliable liquidity.
Tokemak enables users to both provide liquidity and control where that liquidity goes.
Liquidity Providers deposit single-sided assets into individual Token Reactors and/or Genesis Pools (ETH, USDC), and earn yield in the form of TOKE, Tokemak's native protocol token.
Liquidity Directors stake TOKE into individual Token Reactors and vote how that liquidity gets paired from the Genesis Pools and to what exchange venue it gets directed. They too earn yield in the form of TOKE.
TOKE can be thought of as generalized or tokenized liquidity. TOKE holders are able to generate liquidity on demand for whatever tokens they want, on whatever exchange they want, by controlling and directing Tokemak's TVL.
Tokemak has several different mechanics and guardrails in place to mitigate IL risk to ensure that Liquidity Providers can always claim their underlying assets deposited, 1:1. These mechanics involve some risk to TOKE stakers, but only as a last resort.
The protocol captures fees from providing liquidity across DeFi. Over time, this will allow Tokemak to build a strong reserve of various assets in Tokemak's PCA (Protocol Controlled Assets). In the end, the PCA is controlled by TOKE holders through decentralized governance.
Tokemak allows for unique composability opportunities for new and existing token projects and DAOs, allowing for more strategic liquidity deployment, ownership, and control.
It offers opportunities for exchanges to reinforce their liquidity and for market makers to leverage the PCA to create deep liquidity for a specific project.
Eventually, Tokemak will allow for new projects to stand up their initial liquidity as determined by TOKE governance.