A look into the future of omnichain lending and borrowing - by Vorpaxis
Launch: End of March, 2023
Chain: Arbitrum (and 12+ other)
Category: Borrow/Lending
Overview
Tapioca DAO enables users to borrow and lend across 12+ EVM and non-EVM blockchains. The core products feature Singularity, an isolated risk borrow and lending market (based off of Sushiswap's Kashi product), and Yield Box (BentoBox V2), a permissionless token vault. It will also offer the ability to mint 'usd0' which is a decentralized overcollateralized omnichain stablecoin. Tapioca will utilize LayerZero's technology to enable cross chain composability without the need for bridging.
Core Products
Singularity
Licensed to Tapioca from BoringCrypto, Singularity was created to offer composable lending and borrowing markets across various networks. By doing so it aims to tackle the problem of fragmented liquidity. Singularity’s markets are isolated (instead of pooled) so that riskier assets can be used as collateral. An elastic interest rate is employed to encourage utilization. For example, if utilization of ETH borrowing was very low, interest rates would decline until optimal utilization levels were achieved. Users can also take leverage (up to 5x).
Check out this super cool demo video of the product live on testnet!
Big Bang Markets (usd0)
Big Bang allows users to mint the omnichain stablecoin called usd0. There is no borrow cap, but a debt ceiling function does exist and can be enabled. The planned accepted collateral to mint usd0 are native gas tokens (or their staked derivatives). These include ETH, MATIC, AVAX, wstETH, rETH, stMATIC, and sAVAX.
Minting usd0 with ETH will have a fixed interest rate of 0.5%, and ETH is the most desirable form of collateral. Other collateral types will have a debt ratio against ETH with a variable interest rate. For example if AVAX has a 1:2 debt ratio compared to ETH (and lets assume 100M usd0 is issued against ETH) AVAX's potential debt would be up to 50M. The interest rate for AVAX would be based on utilization, and vary between 0.5% to 3%. If 50M of AVAX debt is taken out, the rate would climb to the max of 3%.
Each of Big Bang market's interest rate parameters can be set via governance. Tapioca also offers something called peg protection mode. This feature doubles the interest rate of at-risk collateral in a specified market every 72 hours, up to 10% or until disabled. This is used to encourage debt repayment from borrowers to mitigate risks.
Flash mints are also available for usd0, with a fee of 0.001%. Similar to Aave's flash loans, this feature could be used to increase usd0 market efficiency and arbitrage opportunity.
Yield Box
Yield Box is a token vault product where users can deposit tokens to generate yield. It offers risk-isolated strategies and has the ability to support NFTs and rebase tokens. It automates rebalancing of funds across multiple chains (ex. Aave lending on ETH Mainnet, Arbiturm or Optimism). To begin, the feature will only offer low risk strategies. However in the future Tapioca plans to offer medium and high risk strategies.
The TAP Token
TAP is the liquid tradable token only acquirable through the DAO Share Options program or the open market. It has a max supply of 100M and is distributed in the following ways:
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15% Team (Pearl Labs) - 12 month lock at TGE, linear unlock over 36 months
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3% Pre-seed Investors - Pre-seed valuation = $0.22 per TAP, linear unlock for 24 months starting at TGE (initial unlock = 180K TAP)
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8% Seed Investors - Seed valuation = $0.44 per TAP, linear unlock 18 months started at TGE. (initial unlock = 640K TAP)
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5% Liquidity Bootstrapping Pool
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2.5% oTAP Airdrop - Various criteria (more on this later)
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66.5% DAO Share Options
DAO Shares Options Program (oTAP)
The DAO Shares Options program is the mechanism Tapioca is employing to incentivize liquidity and sustainable growth of the protocol. It utilizes the mechanics of American style call options (which they call ‘oTAP’).
A simplified example of how it works: A user deposits liquidity into a lending market and receives a receipt token called 'tOLP'. They can lock this receipt (representing their liquidity) for a set duration they choose. Based off of Tapioca's formula of AML (Average Magnitude Lock - more on this later), a discount factor is applied to that receipt and that discount is valid for the entire length of the lock duration.
At the end of each epoch (about a week) the user is issued oTAP with a specified strike price. The user has the right, but not the obligation to buy TAP at this strike price. The price is determined by the following formula: strike price = spot price - X%, with X% = discount factor.
oTAP has a one week expiry and can be exercised at any time. At expiry, any unexercised oTAP becomes worthless. The amount of oTAP issued to a user is based off of their percentage share of the market, which can be dynamic and change between epochs. The discount is fixed and is based off of the Average Magnitude Lock formula, and can range anywhere from 5-50%.
The system is beneficial for both the user and protocol. The user has the option to buy TAP at a discount and sell for profit, or lock TAP for twTAP (which has other benefits). The protocol acts as the OTC seller of TAP from the DAO and obtains protocol owned liquidity.
The twAML mechanism (time weighted Average Magnitude Lock) is carefully designed to enable the protocol to adjust the incentive mechanism when needed. For example, the AML could be adjusted during periods of protocol decline (such as when less users are providing liquidity to markets, or locking up their TAP). This would issue more of a discount factor on oTAP, or more locked twTAP obtained for a shorter lock duration.
Conversely, during periods of expansion the opposite can be done (less of a discount on oTAP, or less twTAP obtained via locking).
This is only a brief overview. It is recommended to read the twAML whitepaper for more in-depth understanding of Tapioca’s unique Time Weighted Average Magnitude Lock.
Link: http://tapioca.xyz/twwp.pdf
What is twTAP?
twTAP stands for 'time weighted TAP'. It is obtained through locking up TAP. Users who lock receive rewards paid out in tETH (more details on tETH below) each epoch. The protocol distributes 100% of revenue and 50% of Arrakis Vault yield to twTAP lockers. twTAP is also used for governance, and can influence the oTAP incentives that are distributed through voting (Hidden Hand, anyone?). Similarly to the discount factor above, the amount of twTAP allotted is based off of the twAML mechanism. As more twTAP is locked, it will require more TAP or a longer duration to obtain the same amount of twTAP as previously before.
usd0 - the omnichain stablecoin
usd0 is a decentralized CDP, pegged to $1.00. Fully composable across blockchains with zero bridging, slippage, or wait times. It is only minted in Big Bang Markets and the protocol owns liquidity that is managed in Uniswap V3. Tapioca employs a variable borrow fee to encourage arbitrageurs to maintain the peg. For example, if usd0 climbs to $1.02 the borrow fee is set to 0%. If it falls to $0.98, the fee turns to 1%. The target mint fee is set at 0.5% when usd0 = $1.00. The loan to value ratios (LTV) for each type of collateral can be found below.
tETH, and tAssets - OFT20 standard
All Tapioca assets are liquid omnichain wrapped assets which are based off Layer Zero's OFT20 standard. They are backed 1:1 assets that are freely movable between chains via a burn and mint mechanism.
tETH is a unified wrapped version of Arbitrum ETH, Mainnet ETH and Optimism ETH. A user can wrap ETH on any of those chains and obtain tETH, which is easily transferable and used as collateral in Tapioca’s markets.
Various other tAssets are planned, such as tGLP, DopexLP, Sushi SLP, Arrakis LP, rETH, stMatic to name a few. No more bridges and fees.
Revenue Streams
Tapioca has 4 sources of revenue:
1. Initial Liquidity Bootstrapping Pool
- 5mil TAP (5% of supply) is tentatively scheduled to be sold on 3/23/23. The auction will last 72 hours. The initial starting price will be $3.52 and end price is calculated to be 4X less at $0.88. The open market and supply/demand will determine the final price. It is possible to be below $0.88 or above $3.52. The proceeds will be used to seed initial liquidity, and assist in price discovery.
2. DAO Share Options
- Exercised options (oTAP) is the DAO selling TAP to the user. The proceeds of this sale are then used to deepen protocol owned liquidity.
3. Protocol Fees
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Borrow Fee = 0.5% (Variable Big Bang, Fixed Singularity)
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Interest = 0.5% (Variable, except ETH/usd0 market)
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Liquidation = 10%
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Performance = 15%
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Flashmint = 0.001%
4. Arrakis Vaults
Tapioca DAO is using Arrakis to manage the protocol owned liquidity on Uniswap V3. 50% of fees earned will accrue to twTAP lockers.
The Option (oTAP) Airdrop
2.5m of TAP supply (2.5%) will be airdropped in the form of oTAP. 1.5mil of that will be to the participants of the Liquidity Bootstrapping Pool. The earlier a user enters the LBP, the higher the discount will be on the oTAP call option.
The weight in airdrop allocation will be 10:3, meaning that if a user buys 10,000 TAP in the LBP, they will receive 3000 oTAP in the form of an airdrop. The strike price is based off of the final LBP price and discount factor. It has an expiry of 72 hours.
Discount factor tiers:
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[user buys tap at Start Price $3.52] - 50%
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$3.51 - $3.00 - 33%
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$2.99 - $2.50 - 25%
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$2.50 - $2.00 - 10%
Any TAP purchased below $2.00 does not qualify for the oTAP airdrop.
The remaining oTAP will be distributed at various discounts to discord members (OG and less), and to Pearl Club NFT holders, who were beta testers.
If any oTAP is not exercised from the airdrop, the final amount will be distributed to twTAP lockers.
Conclusion
Tapioca DAO is building one of the most interesting projects yet. An omnichain money market that is fully composable across multiple blockchains without the hassle, slippage or risk of bridging assets. They have well planned tokenomics that accrue value to holders in a sustainable way. The scope of this project is massive, but the attention to detail the team has displayed gives me confidence that they have a great shot at being successful. The Liquidity Bootstrapping Pool is scheduled for the end of March 2023, so set it in as a reminder!
Bonus: they host Tap Talk (a podcast), which features awesome guests throughout the industry.