Perennial $BTRFLY Thesis
0xE90c
December 12th, 2021

Chaos is not simply randomness or disorder. Chaos is what happens when tiny seemingly insignificant changes create ripple effects and eventually form tidal waves of change in future scenarios. Deterministic chaos was glimpsed by Edward Loranz as small rounding errors in mathematical computations leading to large-scale variations in future outcomes. Another term was coined for this ripple effect - The Butterfly Effect. A single butterfly flapping its wings could lead to a chain of events leading to a storm all the way over on the other side of the world.

Capital efficiency!!!

When one looks DeFi straight in the eyes, what looks back at you is just one thing: capital efficiency, whatever DeFi “2.0” is, is just a continuation of this trend. So, what is capital efficiency? A business or person wants to do something with their capital (money) and they want to feel like they got a good deal on that service. In DeFi, the “good” part comes from capital efficiency. If their friend starts chatting on about how they found a 20% coupon that person missed, well, then that “good deal” looks less good. They didn’t use their money as well as they might have. Most of what businesses and persons wanted to do in DeFi this summer was swap between their filthy dog coins, but unfortunately decentralization hasn’t quite caught up with that need yet, so that story ends here, for now.

When you’re not swapping dog coins, there are good equivalents to forex markets in DeFi—capital-efficient AMMs (automated market makers). If you’re swapping stablecoins, the AMM you want is Curve Finance. Despite the intimidating UI, the engine under the hood running Curve pools is liquidity utilization like you have never seen before.

Curves have layers

To those new to this rich and complex ecosystem, you can compare it to your favourite blockchain, Ethereum. Like ETH, the Curve ecosystem has layers. Treat the "L1" in this scenario as Curve. The "L2s" built on top of it, scaling Curves influence and liquidity, are yield optimizers such as Yearn and Convex. However, due to the economic incentives tied to the protocol, the layers keep going. We’re climbing up a new branch of the tree. [REDACTED] Cartel might be the L3. (If you choose to leave now because we called ourselves an L3, we understand.)

So what does [REDACTED] bring to the picture? Why is it Curve’s L3? When did we get so far down the rabbit hole? [REDACTED] Cartel is a yield-aggregator’s yield-aggregator. It’s the *uber-*Convex. It is perhaps the monster sitting on the other side of the event horizon.

Like a baby in the womb, [REDACTED]’s identity is still evolving from its initial state. Yes of course, [REDACTED] will self-govern as a DAO, [REDACTED] is an OHM fork, and BTRFLY is the name of its rebasing governance token. Blah blah blah. In operation Swallowtail, the treasury will bond OHM, CRV and CVX tokens in exchange for BTRFLY. Minting off of that OHM and expanding out into other influential governance tokens are also on the horizon.

[REDACTED] wants to play an altruistic—but not selfless—role in the Curve wars, and all the wars to follow. By creating a blackhole (the DAO treasury) for governance tokens, it is empowered to offer some built-in services to both BTRFLY holders and the entire ecosystem.

Foremost among these services is plans to work on a new approach to the veCRV-gauge weight voting process. With enough tokens in the treasury, BTRFLY has the potential to become a veCRV “meta-token,” taking a slight twist on the concept of Convex, while not intruding into their own efforts, where Convex offers a pegged and liquid solution to veCRV, BTRFLY seeks to value itself off of the influence that the token offers. After all, the token is backed by CRV and CVX, why compete when the success of the token is banked on the success of its collateral? A cooperatively-minded service that could come from its POL is the ability to tighten up pegs in the space e.g. the cvxCRV peg, and help push bonded retail liquidity towards other complicated initiatives that help grow the Curve ecosystem as a whole, such as Convex. Curve wins, Convex wins, which means we win, if we win, then Curve wins.

Maybe [REDACTED] could become something more than what you think it is now. If permitted to do so, $BTRFLY may be able to take the innovation that Convex proposed one iteration back, and then take a left, and in doing so shake up the concept and valuation of voting power. Perhaps $BTRFLY could find the seat at the table it’s looking for, and in doing so find something else: a pattern that could spread outside of the Curve ecosystem.

In addition to driving vote distribution, [REDACTED] can be an efficient vote-pricing machine—a kind that’s never quite existed before in DeFi. In the same way that [REDACTED] is forking OHM to focus on governance tokens, [REDACTED]’s design might spawn forks that focus on other governance tokens.

Suggesting some nomenclature for this: a la OHM’s liquidity-as-a-service business model (LaaS), [REDACTED] could serve up voting-efficiency-as-a-service, which provides a fortuitous acronym for the Curve space, ve-aaS

ve-aaS

There are many complementary dynamics that come together to make good ve-aaS, but let us focus on two main ones—the ones that best define the upper and lower bounds of [REDACTED]’s potential influence. One of them is old to civilization, and one new; both of them are rate-sensitive. Their interplay is where the magic happens—if the conditions align.

Let’s start with the old dynamic. Alongside being literally primitive, auctions are a formal primitive of the “pricing shit” world. Auctions are everywhere: the limit orders on a CEX’s order books can be framed as an auction process, if the item up for sale is the right to buy a token within a price range. The highest bid when the liquidity comes ‘round wins the tokens. AMMs are the same, but with an additional dimension of time—since users (mostly) can’t leave an order on the books, you have to buy it when you think it’s “capitally efficient” to do so. If you’re right, you get a good deal, proven over time.

If BTRFLY becomes an unpegged liquid substitute for veCRV (at some ratio) and other governance tokens, the price of BTRFLY will be a proxy for the price of its share of veCRV and other vote locked tokens influence controlled by the DAO. If [REDACTED]’s POL were to grow large enough, BTRFLY would effectively become veCRV’s “circulating supply”—the liquid fraction of buyable votes.

In this scenario, the price of a liquid veCRV vote would be:

BTRFLY price/(number of votes [REDACTED] controls/BTRFLY supply)

But not quite—there’s an important wrinkle.

Among votes, there is a hierarchy.

From the perspective of a vote buyer, not every vote counts the most—that right is reserved for the vote that decides the outcome. This distinction has important implications for BTRFLY. Since vote-buying is a game of prediction, controlling the deciding vote will usually levy a margin of error. Maybe you buy an extra 10 votes before the deadline, or maybe an extra 100 if you know your opponent is flush with capital. You’re buying an edge, and you’re buying confidence. This real and psychological hedging translates into liquidity pressure for BTRFLY—the excesses from these competitions flow into and crystallize in BTRFLY’s value.

This “deciding-vote auction” is more capital efficient than a bribe for a vote buyer because 1.) vote share can be continuously re-calibrated—votes can be both bought and sold in a liquid market so there’s less risk of “over-voting”—and 2.) the price increases in an auction are incremental, not arbitrary guesses, which minimizes the price of the deciding vote.

More CRV/CVX into the treasury as yield = more value accrual for BTRFLY holders + more votes controlled by the treasury = more-optimized gauge weights for projects bribing us with their LPs rather then governance tokens = more CRV into the treasury as yield, and so on. This “flywheel effect” is not new to the space—it’s a well-established mechanic.

Then, [REDACTED]’s treasury becomes the commodity.

Because of the deciding-vote auction mentioned above, the deciding vote has the potential to be settled in the BTRFLY market—but for large vote buyers, there will also be the “backdoor” option of moving their positions into the [REDACTED] treasury over time, shifting the odds of any deciding vote falling in their favor. This strategy is viable because of the selfish voting of BTRFLY holders, along with the fact that their competitors will be subject to the same pressures.

Given the choice between a competitive process with uncertain, escalating costs (that are still cheaper than available bribes), and a cooperative process where your protocol’s yield increasingly benefits from [REDACTED]’s increasingly optimized yield… Well, in that regime it seems like [REDACTED] could eat the world (as we know it). But idk, might be psyops.

A public good, if you want it to be.

Maybe efficient vote pricing is an important public good. Well, it’s a public good with an interesting quirk: unlike many public goods, it’s sustained by a positive feedback loop that prevents it from being used up.

This may be a quality generic to free markets, but engineering around structures that consolidate power (to keep those markets as close to free as possible) is not trivial, as evidenced by the carnage of human political history (and modernity).

Now that the POL-cat is out of the bag thanks to our frens at Olympus, the fate of CRV is a fate which may be… inevitable to all governance token markets, given enough time, and if under the hood the product the governance is for offers real utility (usually an upgrade to the capital efficiency of some process).

There is an analog in the physical world: efficient vote pricing for currently “valueless” governance tokens is like an exothermic chemical reaction waiting on its catalyst.

Like its analog, it has the same limitation that it could technically wait around forever on the right conditions—and what we have outlined above is just one path in a space with many, many degrees of freedom.

Of course, Convex will most likely continue to dominate the Curve wars for the foreseeable future, in fact it seems as though [REDACTED] can only accelerate their dominance, majority of the efforts for [REDACTED] is to make sure $CVX succeeds so that $BTRFLY can succeed, considering it is not only backed on its value, but that new butterflies can enter the etherverse when someone is kind enough to sacrifice their $CVX.

Now, let us rewind the whole tape: greater capital efficiency as “the next version” is inevitable to the space because it is DeFi’s primary product, not just a competitive edge or whatever else it might say on the tin.

From a bird’s-eye view, [REDACTED] can be ve-aaS, and it might one day have the potential to be a major player in the DeFi space, if luck is on our side.

Right now in the DeFi world, we’re testing the theory that code can be forked but POL can’t, making for a pretty good moat. However, if claim on a platform’s POL is not priced correctly or if its contents are not made accessible to the greater market as liquidity, POL can be seized by encapsulation. For those in the know, the content of a treasury is indeed treasure—it snares their ear like tales of a dragon’s horde or a pirate’s sunken treasure.

A happy ending 😸 (or, rent seekers beware 😿)

If $BTRFLY succeeds (who knows honestly), the story of [REDACTED] Cartel may be the story of how gauge weight voting became more capital efficient and booted out the rent-seekers. If it doesn’t succeed, the opportunity nevertheless remains open to the next contender, fueled by the same elemental energy that built bribe culture.

Whatever happens, there is the suggestion of a fundamental truth here:

In a free market, you can sit on the mouth of the pipe and mete out its flow only until something comes along to remove you (or eat you, as the case may be).

A shame in this case because Curve’s pipe actually looks really sittable.
A shame in this case because Curve’s pipe actually looks really sittable.

If your only value is custodial, it’s transient. In a free market, you rent-seek not just at your own peril, but to your own demise.

December 15

12pm EST.

🦋

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