Understanding TapiocaDAO: Solving DeFi Liquidity Fragmentation on LayerZero

07/25/2023·1years ago

DeFi remains the foundation of the entire industry, but the problem of liquidity fragmentation is a major challenge facing the DeFi sector. In response to this issue, the current conventional solutions mostly involve strategies such as cross-chain bridges, intermediate chains, and multi-chain Dapps, with varying degrees of effectiveness. In addition, there is another solution, which is the TapiocaDAO discussed in this article, and its adoption of a full-chain LayerZero solution; in fact, this solution is not unique to TapiocaDAO, as Wormhole was one of the representatives of this solution, but it suffered a hacker attack last year, resulting in a loss of up to 326 million US dollars.

However, we should not view Wormhole's failure as a failure of the full-chain LayerZero solution. TapiocaDAO has its own understanding and technical advantages for the full-chain LayerZero solution. The following is a detailed introduction to TapiocaDAO. By reading the following text, perhaps we can gain a clearer understanding of TapiocaDAO itself and what it aims to achieve.

This article is sourced from @DewhalesCapital, and veDAO Research Institute has obtained authorization for the Chinese translation.

Original link:

https://dewhales.substack.com/p/tapiocadao-explained-part-1-the-infrastructure

Introduction to TapiocaDAO Project

https://app.vedao.com/projects/4fd42244d7fc918b996e23a643474505d9c1e152ab13b2f29de54afa4f067798

This article is divided into two parts. We will start with the first part to delve into the details of the Tapioca infrastructure:

Singularity
Big Bang
YieldBox
twAML
DSO
PearLayer

Remember: these are not just random terms. They are the building blocks of TapiocaDAO's unique DeFi ecosystem, with each module playing a unique role in creating a seamless financial center. TapiocaDAO aims to solve the problem of liquidity fragmentation in DeFi, enabling borrowing and utilization of various assets on any network. This initiative enhances capital efficiency and increases lending opportunities through unified liquidity.

Liquidity fragmentation between different chains and protocols in DeFi reduces capital efficiency. Liquidity for the same asset is not shared between two different chains, resulting in significant slippage. Thanks to the broad message network of LayerZero, TapiocaDAO becomes the first "full-chain" money market protocol. Its goal is to eliminate well-known bridge-related risks, including smart contract vulnerabilities and user friction.

TapiocaDAO's unique token economy involves $TAP, twTAP, oTAP, and $USD0 tokens, each targeting specific aspects of DeFi. From risk management to yield optimization, these tokens form a dynamic ecosystem aimed at driving protocol growth.

Lending Market: Singularity

We will start with Singularity, which is a modified version of BoringCrypto's Kashi. Singularity, as a lending market, supports high-risk assets by isolating markets to diversify risk without jeopardizing the entire protocol.

Unlike traditional lending protocols, all assets share a single liquidity pool. This means that if one asset fails, it could have a catastrophic impact on the entire system. On the other hand, Singularity takes a different approach. It allows users to create individual lending pairs. Each lending pair is isolated from other pairs, meaning that if one asset fails, it only affects that specific lending pair, not the entire pool.

Additionally, it also allows one-click leverage, automatically providing up to 5x leverage with a single click. Its purpose is to optimize the utilization of volatile assets by sharing market liquidity across multiple chains.

Stablecoin Minting Mechanism: Big Bang

Big Bang is another evolution of Kashi, using Gas tokens as collateral to mint USD0 stablecoins. This concept introduces a self-repaying loan protocol. In other words, it allows users to mint USD0 by providing accepted assets as collateral.

To ensure the stability of the protocol, Tapioca uses a mechanism called Collateral Debt Ratio (CDR) to adjust the supply of USD0 based on market demand. By adjusting interest rates, this will encourage arbitrage, providing more favorable conditions for borrowers or lenders.

Permissionless Token Vault: YieldBox

YieldBox (BentoBox V2) is a permissionless token vault. Compared to BentoBox V1, YieldBox introduces upgrades, optimizes gas consumption, and simplifies the token approval process. It supports NFTs, token resets, and isolation strategies. Through isolation strategies, it allows tokens to rebalance between different risk-isolated yield strategies. Tapioca achieves this by using proxy contracts on Arbitrum outside of supported chains to pass messages between chains.

BentoBox is essentially a token vault where users can deposit tokens and use them across multiple DeFi applications without having to withdraw them from the vault. YieldBox builds on this foundation, refining and expanding its functionality. It aims to achieve the optimal yield for deposited assets, utilizing various strategies involving yield farming, lending, staking, and more.

YieldBox continuously tracks and adjusts to maximize the returns for token holders. In simple terms, when users deposit tokens into YieldBox, the system automatically utilizes these tokens to participate in strategies that maximize returns.

Economic System: twAML

twAML is an economic system that dynamically achieves maximum configuration efficiency based on economic activity. It employs game theory, where users' custody commitments continuously adjust AML, a metric defined by consensus and the free market. In traditional liquidity mining models, irresponsible issuance and high inflation often lead to unprofitable practices, resulting in a steady decline in the value of protocol tokens, reduced yields, user interest, and liquidity.

TapiocaDAO has released a detailed whitepaper aimed at addressing these challenges and improving models from OlympusDAO, GMX, Convex & Aura, OLM, and Keep3r to better address their limitations.

https://www.tapioca.xyz/docs/twAML.pdf

AML measures a user's system impact based on the scale of their contributions and the total number of participants when interacting. System incentives can oscillate based on user behavior and system state, avoiding stagnation and promoting new growth states. Tapioca's AML is influenced by Keep3r's OLM (Options Liquidity Mining), suppressing immediate profit-selling behavior by liquidity miners. It ensures the sustainable balance of user incentives and the long-term treasury, crucially creating a POL (Protocol Owned Liquidity).

DAO Call Option: DSO

DSO (DAO Call Option) is a mechanism that allows the creation of POL (Protocol Owned Liquidity), long-term TVL, and twAML. This concept serves as a key building block for operating their unique economic model.

DSO enables OLM to operate effectively. Inspired by Andre Cronje's Keep3r, this mechanism makes it possible to create POL, encourage long-term TVL, and support the operation of the twAML mechanism.

Users providing liquidity to the credit market will receive token receipts (tOLP) that can be locked for a period of time. At the end of this period, they will receive an oTAP with a specified exercise price, allowing them to choose (rather than obligating them) to purchase TAP tokens at a discounted price.

The specific role of DSO is to promote the creation of Protocol Owned Liquidity (POL), encourage long-term Total Value Locked (TVL), and support the operation of the twAML mechanism.

Tapioca's Relay PearLayer

PearLayer is Tapioca's relay, utilizing LayerZero's Pre-Crime mechanism, supporting chains such as Arbitrum, Optimism, Ethereum, Avalanche, Base, Berachain, ZKSync, Starknet, Mantle Network, Cosmos, Sei, Polkadot, and more.

With Pre-Crime, PearLayer can verify potential outcomes of cross-chain messages before delivery, ensuring the integrity of the protocol. Tapioca's oracle solution comes from Chainlink price data sources.

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