This is a preliminary working version of the Tokemak v2 GitBook accompanying the gated community release of the beta marketing page. All information and examples below will be in reference to ETH liquid staking token (LST)* markets, which will be the asset class supported with the initial launch. Additional information will be added in the near future and as smart contract audits are completed.
For a deeper dive into Tokemak v2 and its functionality, please refer to the Medium article: https://medium.com/tokemak/tokemak-v2-introducing-lmps-autopilot-and-the-dao-liquidity-marketplace-86b8ec0656a
Tokemak v2 was developed as an improved system for both liquidity providers (LPs) and DAOs. The new system encompasses two separate products: a dynamic pool allocator that optimizes yields for LPs across different pools and DEXs (Autopilot), and a liquidity order book that enables DAOs to rent liquidity at a transparent market rate (DAO Liquidity Marketplace).
Liquidity Management Pools (LMPs) support liquidity for a predetermined asset class and utilize the ERC-4626 Standard. They form the basic building block of Tokemak v2 and are the connection between the two products:
- Autopilot: optimally deploys assets deposited into the LMP by LPs
- Liquidity Market: DAOs have the ability to directly source LMP liquidity
Tokemak’s Autopilot system offers ongoing monitoring and dynamic rebalancing of LP positions to seek optimal yields, thus differentiating itself from traditional static vault strategies.
Autopilot assesses a comprehensive set of variables to identify rebalancing opportunities. In the case of Liquid Staking Tokens (LSTs), the initial asset class supported by Autopilot, the following are considered:
- Base yield (LST native yield)
- Trading Fee yield
- LP incentives
- Slippage (ability to enter/exit positions)
- Peg deviations and LST ETH backing
The rebalancing logic also takes into account their interdependencies and weighs them appropriately. For example, the different yield sources (Base yield, Trading Fee yield and LP incentives yield) are considered independently and weighted by their volatility (“Yield Source Weighting”). Additionally, Autopilot takes advantage of opportunities created by the ratio between the ETH backing of a particular LST and the current market price (“Relative LP Token Discount”).
Autopilot is designed to execute position rebalancing at opportune moments, without being confined to predetermined schedules. Moreover, to enhance robustness and minimize vulnerability to discrepancies in reported on-chain data, deployments occur gradually in steps rather than all at once to reduce the system's susceptibility to anomalies.
The factors and parameters utilized by Autopilot will depend on the asset class supported by the LMP (e.g. ETH LSTs vs stables).
The solver, as the only off-chain component, proposes rebalancing solutions to the on-chain Autopilot contract for validation. Once validated as an improvement over the current asset allocation and satisfying the imposed constraints, the on-chain component can execute the solution.
While Tokemak will be operating a solver starting with launch, external solvers will be enabled to participate in competitive fashion. This architecture offers a secure approach to decentralization.
DAOs will have the capability to source liquidity at a transparent market-determined rate through the Liquidity Marketplace. It enables DAOs to tailor liquidity campaigns to their unique needs by being able to set desired depth, desired budget etc. for specific asset pairs and DEXs.
By continuously monitoring yields the rebalancing logic will provide a transparent Liquidity Rate at which it will allocate capital to any given asset or pool. In essence, the Autopilot acts as a fully rational LP – offering predictability, reliability and transparency.
An Ethereum Liquid Staking Token (LST) refers to a representation of a validator's staked Ether (ETH) on the Ethereum network. When ETH is staked for participation in Ethereum's proof-of-stake consensus mechanism, it becomes locked in a smart contract. LSTs are created to represent this staked ETH, allowing holders to retain the benefits of staking (such as earning staking rewards) while having a tradable token that can be used in other decentralized finance (DeFi) protocols and applications. LSTs provide liquidity and flexibility to ETH stakers, enabling them to engage in additional DeFi activities and access the value of their staked assets without the need for unstaking and waiting for a withdrawal period.