tapETH Token Redesign

Our testnet campaign has been successfully concluded; we saw over 80,000 unique participants, almost 3,000,000 completed quests, and over 1,000,000 transactions. The campaign was spread over two phases and encompassed the Tapio dApp as well as integrations with protocols like Maverick and Gravita. We have seen our community grow and identify the benefits of Tapio within the LSTfi space.

This testnet campaign has provided a safe testing environment to validate our assumptions and ideas, as well as identifying unforeseen behaviours and issues with the dApp. It has been enormously beneficial, thanks to the participation of our community.

One of the core elements of our protocol is the tapETH model itself. During our testnet, we identified several points that could be improved upon; so let’s explore why, and how, we’re enhancing the protocol and product offering as a whole.

So how did the old/current tapETH token work?

The tapETH concept is quite unique, in that it not only functions as an ‘ETH stablecoin’ (with 1:1 value), but also accumulates rewards generated by the underlying Liquid Staking Tokens (LSTs), as well as swap/redemption fees from trading and arbitrage in LSTs and tapETH. This concept made it both a functional Liquidity Pool (LP) token, and highly useful as an  independent asset that is able to be used natively in DeFi.

There were two distinct reasons why we decided to go with this model:

tapETH having a peg with ETH

Being pegged to ETH made for a far simpler user experience, from both a holder and trader perspective. Holding and staking tapETH would be akin to holding and staking ETH itself, while being exposed to staking rewards and fees - with a user able to see how much tapETH, and by extension, ETH they held at a glance (due to the 1:1 nature).

Arbitrage opportunities for tapETH were also far more obvious, since it was always pegged to ETH, and users would be able to see whether or not it was trading at a discount or premium without any effort, and act accordingly.

UX and DeFi Compatibility

Since this peg was valued from a UX perspective - the most obvious solution was for it to operate as a rebasing token - similar in nature to Lido’s stETH, where token balances in wallets are updated daily, to reflect an increase from the staking rewards received from the beacon chain.

The dilemma with this however of course, was the difficulty when it came to integrating the asset within DeFi - due to the added complexity of not only having to deal with typical volatility in asset value, but also volatility in token balances, with rewards changing every day.

tapETH being pegged to ETH, with rewards being claimed manually and the initial tapETH not changing (just like regular ETH), meant that it could be deposited within DeFi applications like liquidity pools or yield farms, without the token balances changing and maintaining that 1:1 relationship with the ETH asset price.

Rewards being claimed manually meant that a user could either sit on their tapETH and claim on whatever schedule they preferred (since rewards were paid out every block rather than once a day), but also DeFi protocols could claim the rewards on behalf of tapETH users/depositors in their protocol.

However, thanks to the testnet - the team realized there were ways that tapETH could be improved:

Reward Claiming for Users:

While having the rewards and token separated added some benefits from the peg/token balance perspective - it became clear that users found the process quite time consuming and gas intensive. Having to frequently return to the dApp and optimize claims based on gas fees was not a great user experience.

Combine this with the fact that most users valued its capital efficiency and that they would be using it primarily in downstream applications, meant that claiming rewards was an irksome aspect of the product design that effectively created zero net-positives for tapETH holders.

Reward Claiming for Protocols:

This leads to the second key party within the Tapio ecosystem: the downstream applications that integrated and supported tapETH within their platform. Early on, many of our launch partners and potential integrators were indeed able to leverage our “Reward Claim Boilerplate API” to claim the rewards on behalf of their users who had deposited, or were using, tapETH, such that they could have the best of both worlds.

The issue, however, was that this was only possible because of our deep relationships with these protocols, who were often also trying to fight their own battles, and would try to leverage new and innovative products and technologies within the market.

The moment we began developing partnerships with larger teams and protocols, it became clear that the amount of time and resources (both developer and otherwise) to implement a unique mechanism like tapETH’s rewards would consume too many resources without overwhelming validation from the market in the form of TVL/Volume/Holders.

Cross Chain Strategy:

Our main focus for tapETH was Ethereum, as that is where the vast majority of both ETH and LST liquidity exists, but layer 2 protocols were also kept in mind: utilization of tapETH is critical, and as layer 2 solutions like Base, Optimism, and Arbitrum grow and find adoption, we need to consider them more and more.

There was however, uncertainty in our development plans and product design around how we’d implement cross-chain rewards for tapETH. As we discussed things with protocols like the Wormhole Foundation, we considered that and one option was Cross Chain Messaging. This means that holding tapETH on any chain would allow users to claim rewards from Mainnet Ethereum seamlessly. Another solution would have been to restrict claims to Mainnet Ethereum, or time limit claims on alt-chains to once a day or every couple of days.

Regardless of what we looked at, each of these ideas would be convoluted both to implement and from a user’s perspective. There is also the much larger difficulty of integrations of tapETH within dApps on other chains. While these weren’t problems that the team wouldn’t have been able to overcome and solve, it would make life harder on all fronts and so our cross-chain ambitions were made a lower priority.

The Updated tapETH Token Model:

Thanks to valuable feedback from our community, as well as from protocols, we decided that it would be best to redesign tapETH into a dual-token model, a rebasing tapETH, and a reward bearing wtapETH.

An excellent graphic on the difference between the 2, courtesy of Binance Research.
An excellent graphic on the difference between the 2, courtesy of Binance Research.

tapETH - Rebasing Token:

The claim functionality, while a good idea - hindered UX and to remedy this, we’re making the base tapETH (what you receive when depositing liquidity into Tapio) a rebasing token, much like Lido’s stETH.

As a rebasing token, users will have a simple experience when collecting rewards, as the token balance of tapETH in the user’s wallet will automatically update, meaning you no longer have to visit the Tapio dApp repeatedly, and that tapETH maintains it’s 1:1 relationship with ETH - giving ample opportunities to arbitrage.

tapETH will rebase on a daily basis (although could be more frequently) and token balances will increase to reflect the staking rewards of the underlying LSTs within Tapio, but also fees generated by the protocol - all the while able to be redeemed for ETH and/or LSTs at any moment.

A key point however, is that tapETH will only be available on Mainnet Ethereum.

Reward Claiming with the old tapETH:

  1. Navigate to Tapio Finance dApp.

  2. Enter the Claim Reward page.

  3. Click “Claim” to execute the transaction.

  4. Pay the associate gas fee.

  5. tapETH rewards would enter the user's wallet.

Reward Claiming with new tapETH:

  1. tapETH balance in the user’s wallet automatically increases without any input from the user.

wtapETH - Interest Rate/Reward Bearing Token:

To address the fact that rebasing tokens are sometimes incompatible with DeFi protocols, we are introducing wtapETH, which uses a “cToken” model. wtapETH uses an exchange rate (relative to ETH) to determine value, much like wstETH, or rETH. It is acquired by wrapping the regular tapETH within the Tapio dApp. When wrapped into wtapETH, the token no longer rebases and simply increases in value as per the exchange rate calculated by the protocol itself.

This wtapETH can then be utilized within DeFi, without any additional work from either the Tapio or the partner team, and can be integrated by anyone without having to delve into our development documents. Furthermore, this means that wtapETH can be utilized cross-chain without having to do anything special regarding rewards, since they’re natively “built in” to the token itself.

The interest rate model works via the exchange rate constantly being determined and altered by Tapio itself; it is also reflected within the wrap and unwrap feature: At the beginning, tapETH will wrap to produce 1 wtapETH, but as the exchange rate of wtapETH (vs tapETH) increases, the ratios will change - e.g. when the exchange rate is 1.1, then you’ll need 1.1 tapETH to wrap and receive 1 wtapETH, and of course this is reflected in the reverse flow (unwrap) as well.

As a result, arbitragers can take advantage of mispricings, by either buying wtapETH at a discount and unwrapping (which will most likely have a fee) to receive more tapETH, and then either selling this or simply redeeming it for ETH/LSTs; this is what keeps the exchange rate on DEX’s, as well as within the rest of DeFi, in accordance with (or close to) the exchange rate listed by Tapio.

This also allows for additional arbitrage opportunities (and by extension solidifying pricing) from cross-chain platforms, as more markets means more sources of mispricing, which will lead to a low cross-chain flow of wtapETH. Furthermore, we’ll look to make wtapETH native to multiple chains (similar in concept to $USDC with CCTP), such that you will be able to leverage a “burn and mint” bridge mechanism, as opposed to the typical “lock and mint”.

Existing LSTs often suffer from the dilemma that the bridged/wrapped version of their LST on chains other than Ethereum trade at a significant discount due to the fact that it’s not attractive to easily realize an arbitrage because of bridge security risks, as well as associated gas fees.All of this means that cross-chain use of wtapETH will be far faster, more secure, without the need for a 3rd party bridge, and with far lower gas requirements—meaning pricing across all supported chains will be far more uniform (since arbitrages can happen by simply “teleporting” wtapETH back to mainnet Ethereum).

wtapETH will be available on both Mainnet Ethereum and all other supported chains.

Where to from here?

The team is working diligently on developing the new dual-token model, and keeping our cross-chain strategy as a top priority as we architect the next iteration of Tapio Finance.

We have already completed two audits: by Mixbytes and Secbit, as well as running our Immunefi Bug Bounty program. We are going to continue to ensure our security and codebase is up to scratch for the token upgrade, in addition to the other aspects of Tapio Finance, such as the governance module.

We’ll be updating the community often and regularly, so keep an eye out on our Twitter and Blog!

Stay Updated

We want to work with anyone within the LST and LSTfi ecosystem, and we call on anyone invested in the long-term future of Ethereum and liquid staking, in general, to join us on this journey - follow us on Twitter and join the rest of the community on Discord, as well as our Blog.

Website: https://tapio.finance

Documentation: https://docs.tapio.finance

A rising tide lifts all boats - JFK

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