When cycles end, it is typically due to factors that were present at the start, which have progressively developed to form critical masses that can no longer be ignored. Naturally, many projects in DeFi are currently grappling with the long-term fallout of the very things that made those projects so appealing to the masses in the first place: inflationary tokenomics designed to incentivize provisioning liquidity. Those who took advantage of these inflationary systems are coming to realize that while they have more tokens in their portfolios, in many cases, their holdings have barely increased in value at all; those who did not are realizing that their value has not remained steady, but gone down proportionally to emissions paid out instead.
These are the natural consequences of inflationary systems that function not by adding value, but by smearing the same amount of peanut butter across the surface of a limited slice of bread. Nor, within the norms of the DeFi space, are projects able to effectively utilize their treasuries to better manage this problem: deploying these treasuries to their own yield farms, even ones not powered by their own emissions, is seen as a grave transgression within their communities. While proper treasury management could lead to developments that allow projects to ameliorate their woes, recent studies have found that only 5% of treasury assets across DeFi are currently deployed in ways that might sustainably benefit their parent project. A disturbing trend emerges where projects enter tail-spins of unsustainable emissions and cannot effectively deploy their treasuries to manage or reverse this trend; for the DeFi experiment to succeed, this needs to change.
From the creators of the Revest Protocol, Revest Finance is proud to introduce Resonate: the solution to the biggest problems of DeFi. Resonate is built on top of Revest and uses an automated queue-based matching system to create and sell yield-futures. Using Resonate, DAOs can trade time for money, offering up-front payouts on yield in exchange for the rights to interest on locked and staked tokens. For an emissions-based protocol, this means a way to slow the burn-rate of their treasury significantly; for protocols with revenue streams, a way to actively deflate their circulating supplies. For token-holders, rather than having to wait on future token payments in an uncertain market, token-holders are able to instead realize their yield upfront, even receiving stablecoins under certain conditions. This upfront payment, made in exchange for the token-holder locking their tokens into the native staking or yield-farming system, allows the token-holder to safely and effectively hedge their long on the underlying token, protecting them against future market instability. For those yield farms and staking systems with whom Resonate is working (20+ protocols, at time of publication), Resonate drives sticky-liquidity to their system by locking tokens within it, boosting TVL and powering long-term liquidity. All this, powered fully by Revest FNFT technology.
So how does it work?
Resonate utilizes a simple concept to power its offering: time-value-of-money. To illustrate, it is more advantageous in a world where yearly interest rates are 50% to have $35 now than $50 a year in the future; one could invest that $35 at 50% interest and have $52.50 by the time they otherwise would have received only $50.
Imagine that you had 100 ABC tokens. For ABC token, there exists a yield-farm that offers 50% interest rates over the course of six months. If you were to deposit your ACB tokens into this yield-farm and leave them there for 6 months, you’d have made 50 ABC, giving you a total of 150 ABC tokens. The “present-value” of the 50 ABC tokens when you deposit your initial 100 tokens is given by the time-value-of-money equation and comes out to 33.3 ABC tokens. If the value of ABC token and its associated 50% interest rate was guaranteed, you would never accept less than this amount upfront in exchange for the future interest. Except that this is crypto and neither the token’s value nor its interest streams are guaranteed; this “time-preference” means that having tokens (or stablecoins) upfront can offer an attractive proposition to traders looking to create a hedge.
Another person has 30 ABC tokens. They aren’t as concerned about fluctuations in the price of the token, nor are they worried about interest-rates going down. They feel very strongly that they want to get as many ABC tokens as they possibly can. If they deposit their ABC tokens into the yield farm, in 6 months, they’ll have 45 ABC tokens.
However, if instead of depositing their 30 ABC tokens into the yield farm, they use those 30 tokens to purchase the rights to your 50 tokens of future interest, they receive 50 tokens over 6 months instead of just 45. We call this second person the “Purchaser” and the person locking their tokens (you, in this example) the “Issuer”. Figure 1 illustrates this entire process and should be referred to as a guide.
Resonate is a system for automatically matching Purchasers and Issuers. Anyone in the world can create a “pool”, choosing the amount of tokens to pay out upfront, the underlying asset, the payout asset (native token, stables, etc.), the underlying yield farm (Yearn, Beefy, Convex, native-token staking, anything that uses ERC-4626 or can be converted to it). Once that has been done, underlying tokens are deposited into either side of the pool (Purchaser or Issuer) and placed in their respective queue. When someone enters the opposite queue (i.e. the Issuer queue contains existing orders and a Purchaser shows up to fill some, or vice versa) the two positions are “matched”, the Issuer’s tokens (the 100 tokens) are locked into an FNFT for the lockup period (then deposited into the yield farm underlying the pool), the Purchaser pays the Issuer the upfront payout (here, 30 tokens), and the Purchaser receives an FNFT that represents their rights to claim interest generated by the Issuer’s principal throughout the lockup. By relying on pools rather than attempting to analytically price the value of future-interest, Resonate accomplishes this in a manner wholly reliant on the “invisible-hand of the free market” rather than the somewhat contrived AMM systems that have attempted similar functionality in the past.
Yet, what does this have to do with treasury management?
Resonate Powers Treasury Deployment
Let’s begin by examining the role of the Purchaser a little more closely to reach an understanding of what kind of person fits the role of an “ideal” Purchaser. Resonate users, beyond the typical systemic risk intrinsic to smart-contract based systems (security flaws, stolen keys for tokens, etc.), accept two additional types of risk: opportunity cost and interest rate fluctuation risk.
Interest rate fluctuation risk is nuanced from pool to pool. Managing this sort of risk is accomplished by choosing the “fixed-income” pool option over “fixed-term” at pool-creation and when utilizing Resonate; fixed-income pools produce FNFTs that will not unlock until a predetermined amount of interest has been generated (for example, 50 ABC tokens) by the principal. Obviously, as with all pools within Resonate, a balance must be struck between Issuer and Purchaser appetites for risk, as fixed-income pools shift risk from Purchaser to Issuer relative to fixed-term.
Opportunity cost is the risk that the underlying asset will decrease in value throughout the lockup period: so the ideal participant for the role of Purchaser is someone to whom opportunity cost means very little, if anything at all. Someone to whom the value of the underlying asset is not a concern; someone who cannot sell their tokens but has them regardless would be an ideal example. All the more so if that participant cannot enter a yield farm under normal circumstances.
DAO and protocols cannot market-sell their treasuries without violating core tenants of the DeFi community. They cannot use their tokens to enter their own staking systems or yield farms, as that would be dilutionary: however, they can use those tokens to bribe others to enter positions on their behalf.
Let us begin with the case of a token where all yield produced is paid out entirely from the project treasury. In this case, we will assume that for every 100 tokens staked, 50 tokens will be paid from treasury to stakers. Figure 2 provides a flowchart to follow along with this example. The DAO deploys a small part of their treasury upfront to act as the Purchaser on Resonate; when a position is created, they pay out 30 tokens while locking up 100 tokens that were already in circulation. Through this upfront payout, they have already removed a net 70 tokens from circulation for the next six months; all the better, since Resonate is dependent on locking mechanisms, should the price of the token plummet, the FNFT representing the locked principal can be sold, but the principal itself is locked in place within the yield farm. Once the FNFTs unlock and the principal re-enters the marketplace, the net result is that there are 130 tokens in circulation, rather than 150 tokens in circulation. The 50 tokens the project paid out as staking rewards went on a circular journey right back into protocol treasury: rather than paying 50 tokens over 6 months as staking rewards, only 30 tokens were paid, all up-front. The project has used Resonate to decrease their token burn-rate by 40% while also making tokens significantly less liquid for a period of time.
With the case of a non-inflationary project, where all yield is generated purely through protocol fees (LOOKS or RVST itself being good examples), Resonate offers a sustainable system for deflationary mechanics. The situation plays out as before, except that once the six months have passed, the project treasury has accrued 50 tokens that were previously in circulation. With an inflow of 50 tokens and an outflow of 30 tokens, that means that the project treasury has deflated the circulating supply by 20 tokens per 30 tokens paid out as upfront yield. A deflationary mechanic in DeFi that does not rely on transfer-taxes has been a long-sought mechanic and Resonate produces it as a byproduct. Figure 3 showcases a case-study describing the LooksRare token and how a hypothetical dynamic-stability might be reached, where staking emissions are able to continuously be emitted and pulled back off the market in cycles. Please note that the numbers used in the aforementioned example are a contrivance for the sake of example and would, in-fact, result in a deflationary rather than dynamically stable system.
Among the more niche applications of Resonate are token buybacks. While we will have more articles out soon detailing case-studies of how Resonate can apply to particularly unusual scenarios, a short example will be given here. In the case that a protocol prefers to use USDC over their native tokens (or an individual, as buying yield-futures at dollar discounts is an effective way to enter positions on a token), Resonate offers the ability to make upfront payouts in a wide variety of different tokens — only price-oracle access is a prerequisite. Assuming that 1 ABC token is worth $1 in USDC, an interested party might find it quite convenient to pay only $30 for $50 worth of tokens in the future: a 40% discount to enter a position is quite a good deal, after all. Figure 4 showcases this for the well-known OlympusDAO, a protocol currently in the process of effecting buybacks using treasury-held DAI. Through the use of Resonate, OlympusDAO could decrease their DAI burn-rate by 50%.
The Silent Partners
While this article has been primarily concerned with the roles of Purchaser and Issuer (and who in DeFi best fits them), there is a third demographic which Resonate aims to capture extensively. That is the demographic of yield-farms and yield-aggregators, particularly those who are ERC-4626 compliant. The Revest Team have been proponents of ERC-4626 since its inception and Resonate is designed with native ERC-4626 support, allowing those who build for this standard to sidestep the need for adapters and get plugged directly into Resonate. For these yield-farming systems, Resonate drives long-term, sticky liquidity into their systems; many do not have locking mechanisms by default, and Resonate ensures that even during market instability, the value locked into these yield farms cannot be immediately drained and panic-sold.
Now that an understanding of Resonate has been developed, Revest Finance is happy to share an update on the ongoing development of Resonate as a product. Currently, Resonate is Solidity-complete, with audit only a few weeks off and optimizations ongoing. We are hard at work on developing the webapp for Resonate, along with accompanying web2 backend infrastructure.
The Revest Finance business development team is contacting and securing partnerships with protocols who can utilize Resonate. We are happy to say that our pre-launch partners are well into the double-digits, in terms of lineup, and past 11 digits in terms of TVL for Resonate to capture.
Revest Finance plans to launch Resonate within Q3 of 2022. We will be sharing more with you in the coming weeks and look forward to detailing everything our groundbreaking creation has to offer.