Introducing CAP Labs: The Yield Renaissance

It’s time to break the cycle that has plagued DeFi for years. Users have continually been confined to self-consuming economic designs that don’t scale, relying heavily on either cyclical user fees or new token emissions for yield. These markets are not scalable and push users to suboptimal solutions.

Some of these solutions include low return TradFi products and high risk instruments like memecoins. These pose a grave risk to users, and ignore the true potential of crypto native yield. The reality is that there is still much more than can be done natively within the block space. DeFi can still offer unique value propositions to the masses that are not simple copies of fintech products or predatory price pumping schemes.

Introduction

CAP offers a new option for users, which does not rely on endogenous models. It is opening the gate to a hidden side of yield that was previously only accessible to wealthy insiders and their institutions. These exogenous sources of yield, such as arbitrage, rank among the most profitable business models in crypto. However, due to their complexity, only a handful of actors have dominated the space. Through CAP, any user will be able to access this scalable, adaptive native yield.

Problems

The Ouroboros

The Ouroboros is a snake that eats itself. Since it does not eat anything but itself, it cannot grow beyond its current size. This is the perfect analogy for most financial structures on blockchains today, as most applications rely on endogenous economic designs.

Token flywheels

Token incentive emissions from the top 5 DEXs are $462M per year ($0 at Uniswap, $35M at Curve,~$400M at Aerodrome, $24M at PancakeSwap, and $3.4M Raydium). A large portion of decentralized stablecoins currently rely on these emissions for their economic flywheels, specifically through some adaptation of the veToken model. These include CDPs, AMOs, and passive strategy-backed stablecoins. They cannot grow without these emissions. As a result, these stablecoins are limited to always be smaller than the top DEXs. This is an extreme limitation to place on decentralized stablecoins.

User fee models

Stablecoins that rely on user fees are more sustainable than token emission models, because cash flows are directly tied to value creation. This is in contrast to value speculation, which occurs in token incentive designs. However, the value created via user fee models is still endogenous: it comes entirely from usage of each platform.

The issue with these endogenous user fee models is that they are capped by demand for individual stablecoins platforms. This is usually a function of leverage demand for volatile crypto-native tokens, which is both cyclical and insufficient for mass adoption.

Exogenous sources

There are several exogenous yield sources that can be used to create scalable stablecoin designs. For example, market making and MEV produced over $2Bn and approximately $686M (Ethereum only) in the past year, respectively. However, no stablecoins have captured the full spectrum of these opportunities. This market is almost untouched by decentralized stablecoin creators.

In addition to crypto-native yield, novel RWAs represent a significant and unexplored yield source for stablecoins that dwarf token incentive schemes. For example, investment grade corporate bonds, whose market stands at a collective $1.2Tn, currently distribute over $56bn per year in interest.

CeFi solutions are monolithic and manual

Monolithic strategies like T-Bill stablecoins can quickly find themselves obsolete due to changing market conditions. Complete solutions need to have multiple concurrent strategies that morph with the evolution of markets. However, the switching cost for strategies on CeFi and CeDeFi projects is quite high, given the reliance on team members to find new strategies, build additional infrastructure, and manage custodians. This lag impedes strategies from adapting efficiently and hurts scalability.

Users are always last

Users are always the most junior party in protocol hierarchies when there are exploits, bankruptcies, or other force majeure events. This is not only true with CeFi projects, but also with blockchains, bridges, and DeFi.

Bridge exploits and dApp hacks have destroyed entire ecosystems, with end users having no recourse against protocols or blockchains that advertised their usage. Hackers are often not found, and decision makers responsible for bad risk management hide behind the common phrase “DYOR”.

This precedent of user treatment and lack of protection is terrible for crypto power users that are constantly burned by bad experiences. It is also counterproductive for the industry, which is subsequently seen by regulators as a danger to the public.

Solution: CAP

CAP is a stablecoin engine to break users free from the cycle of endogenous models. It does this without having to resort to suboptimal TradFi solutions and predatory token pumping designs.

CAP’s stablecoin engine will produce redeemable stablecoins of various denominations, such as USD, BTC, and ETH. Their goal will be to democratize access to what was previously only available to a few sophisticated and already-wealthy actors. This includes the deepest wells of yield, such as arbitrage, MEV, and RWAs.

At no point are users directly exposed to custodians, centralized exchanges, bridges, or other infrastructure related to yield generation. CAP leverages a novel implementation of shared security networks to underwrite the risk of these operations.

1. Yield

   CAP stablecoins are designed to deliver competitive yield in any market situation. Due to their competitive agent model, strategies constantly shift as markets evolve. Stablecoins holders only need to choose which denomination of stablecoin they want to hold, and yield is produced on the backend.

2. Scalability

   A competitive network of agents will execute yield based on independent strategies. These strategies will have to continually adapt to market conditions in order to beat the median benchmark yield rate established by agent performance. This will allow CAP to perpetually offer competitive yield at scale and regardless of market conditions. Given that the protocol does not rely on slow infrastructure like offchain legal agreements and internal human dependencies, CAP is prepared to scale with deposit growth.

3. Stability

   CAP stablecoins are redeemable for the collateral that backs them. Users will choose what denominations and collateral baskets they wish to be exposed to. This ensures predictable stablecoin prices and a variety of directional exposures.

4. Censorship resistance

   CAP is pioneering a new use case for shared security networks like EigenLayer. By leveraging the coverage model of security delegations, CAP will shield end users (stablecoin holders) from the risk of yield generation by agents. This novel arrangement will result in restakers and agents collaborating to vet the risks and rewards of all strategies fueling value creation at CAP.

Stablecoin Alternatives

Unique Unlocks with CAP

Adaptive yield: CAP stablecoins do not rely on a single strategy, or a human team to manually change strategies. Yield is a competition, and only the best remain.

High-frequency strategies: Leveraging MegaETH high speed, CAP strategies will engage with native dApps to ensure an efficient DeFi experience for users. This includes market making operations at GTE, liquidations for lending markets, and arbitrage on new applications.

Covered agents: all active agents must receive security delegations from restakers to participate in the network. This will involve a careful vetting process by restakers and risk managers of participating agents as well as their strategies.

Evergreen protocol: Since CAP does not have a principal agent, offchain legal agreements, or other centralized execution components, it can continue to grow and thrive without its human team.

Mega Mafia

A small group of highly-performant teams has been gathered to produce completely novel applications on top of megaETH, that leverage the chain’s speed and low latency. These projects are fully supported by megaETH and are built to work in a symbiotic relationship.

CAP stablecoins will be integrated in all stablecoin-using protocols on MegaETH and will play a key role in TVL bootstrapping strategies.

Risk Highlights

Below are some of the main risks involved in CAP’s model. A more thorough review will be provided in CAP’s documentation. Please visit our Telegram to ask questions regarding CAP.

Slashing execution risk: slashing functions regulate activity within CAP. They safeguard the protocol and users from malicious agents as well as force majeure events related to yield generation. The ability of these functions to regulate activity rely on the efficient execution of slashing, when needed. There are several potential roadblocks in these operations, such as token risk of delegated tokens, particularly when engaging with liquid restaking token projects. Exposure to codebases at EigenLayer and other shared security markets also pose potential risks to slashing execution.

Pre-existing exposure risk: users have one decision to make, and that is what tokens they wish to be exposed to. These tokens may fluctuate in price, especially in the case of gas tokens like BTC and ETH.

Next steps

• Full documentation release

• Yield strategy modeling and testing

• MegaETH mainnet launch

• Launch CAP Q1 2025

Join our community’s forum to discuss CAP, ask questions, and make suggestions!