Primary AMMs: Designing Financially Composable Tokens at Issuance

Transcript

Tiago was actually one of my students there, one of the few to complete the exam successfully at the end of the at the end of the class schedule. Um and so that was 2 years ago now. We've run into each other a bunch of times around the conference circuit and so I'm going to let Tiago introduce himself. Now, I apologize for the regular AV issues. Hello everyone. Thank you Mark by the

way for the kind introduction for me. So as you already mostly fully introduced me, so I'm Tiago. I'm a co-founder at Floors. Floors is a DeFi protocol for assets that have floor prices. And what is actually what we're trying to do is revolutionize how ERC-20 tokens are built, how they get their liquidity, and how they find out their full financial infrastructure from day one. So as soon as is it working? Okay, sounds good. >> [clears throat] >> So the name of my talk is going to be primary AMMs designing financially composable tokens at issuance.

And what I want to introduce you here really is a design approach for bonding curve AMMs that can create composability of the assets. Is this too loud? That's not what I'm seeing here. Awkward silence. >> Okay. Awesome.

So, I would like to start out by defining what primary AMMs are. So, many of us here in the audience have mostly already interacted with other secondary AMMs from Uniswap or Banker and any other main DEX, but primary AMMs, the the key difference is that by interacting with a primary AMM, you're actually issuing or redeeming the asset in question. So, instead of, let's say in a AMM with two assets, where you're trading two already existing assets within the pool, you're minting assets whenever you provide the the reserve, and you're burning them every time you redeem against it, right?

So, primary AMMs, they are not something new. They have been quite a while, uh almost as as long as Ethereum. So, many of us who's been here for longer remember Banker introduced for the first time the smart tokens, which were the first iteration for primary AMMs. Essentially, any token that wanted to access liquidity, but it was really hard to through a gate-kept centralized exchange, they could have their guaranteed liquidity from day one as soon as they launched there. You may also remember Ocean Protocol from Trent McConaghy, uh which was very much inspired by Simon de la Rouviere.

He first proposed the first creation market paper, where we could use creation tokens as a signaling tool of what the quality of a certain material, a certain asset, certain information type, and Ocean specifically did this for data assets. We may also remember of Gyroscope. So, Gyroscope was the first one to actually coin the term primary AMMs uh in their first paper. They were using it for their GD GUID stablecoin as a issuing and redeeming redeeming mechanism.

You may also remember token engineering commons where they had the augmented bonding curve for a continuous fundraising mechanism. They had a hatch phase, they had a tribute that would continue to fundraise the the team the team's operations. And then no introductions. I think everyone already knows it's the mostly the most successful commercially successful primitive in bonding curves in the space. Instant markets for mints. Um there is a lot to learn about all these cases.

Um And there's also a way to think about primary AMMs and why they didn't become as successful as they were supposed to be compared to DEXes or secondary AMMs. Part of the reason being that they were optimized first for guaranteed liquidity. So, they're essentially a counterparty protocol that you can issue and redeem constantly without requiring external LP. Um it was great for early speculation. Uh usually curves that are deployed into these AMMs, they are usually very convex and exponential, which creates a lot of, let's say, excitement for traders.

Um and also as a continuous fundraising mechanism for which um you could the protocol could take revenue from all the operations within the AMM to bootstrap their operations. What didn't work? Having reserves within an AMM is very capital-inefficient. It means there are ERC-20s waiting to be traded and they are not they cannot go anywhere else until the a new trader interacts with the with a smart contract. Second, there is exit asymmetry in the sense that the ear the later buyers are the one that get the worst off trade-off.

Um usually the early buyers, they get to really good payoff whenever they sell afterwards. So, this is at least very unfair for most. Um And also being a temporary market. So, most primary AMMs are actually just um an initial bootstrapping tool uh for which they graduate the liquidity into a DEX right afterwards. And these characteristics essentially make primary AMMs as an ideal tool for a specific phase of the asset's life cycle, which is the launch phase. People launch their assets, they acquire some of the revenue, and then they they launch their their liquidity into a DEX that's optimized for trading depth and

tight spreads. And given this, the research that we developed at Inverter, which was the company that gave birth to Floors, was, "Is there a way to make primary AMMs as a continuous and a permanent venue for tokens?" So, not just a launching bootstrapping um tool, but a continuous financial infrastructure from day one. And the answer to this was the paper that was published um by the Floor teams. So, essentially, depth-aware bonding curves, non-decreasing floor prices, and non-liquidatable credit.

And essentially, what we were doing here is applying a design of a discretized bonding curve to provide a floor price, premium tiers, and composability of the reserves within the AMM. Um and I would like to right now I would love to get you through what are the biggest novelties of this primary AMM design, and how they can provide a con- a contributing factor here into the token engineering space. So, first of all, the primary AMM um so, this is essentially how the primary AMM looks like in a 2D model. Um on the x-axis, you have the cumulative issued

supply, while on the y-axis, you have the reserve assets, which can be any ERC-20. In this case, we're going to be choosing dollars for simplicity of a presentation. Um but it's essentially like a step-wise um bonding curve. So, the first step is essentially the floor price. So, it's a flat All All the lines All the prices have a flat line. But the first one uh indicates the minimum price that the the token will ever be traded at. And the price tiers above signify premium levels that they can trade afterwards.

The curve in specific, um so it is fully solvent at all times. It has programmatic invariants that cannot be broken regardless of market conditions. And for which they are optimized for floor price monocity. So, in this scenario, in a scenario where the bonding curve um has certain market conditions that are endogenous to primary AMM, and and it achieves certain thresholds, it is possible to reconfigure such that thicker liquidity can stay in optimal price levels um above or closer to the floor price.

We are not using This doesn't require any oracles whatsoever. So, the entire primary AMM is an autonomous system that reconfigures across the parameters chosen for the reconfiguration necessary. >> [snorts] >> The second part is the rising floor price. So, the first price The first price tier of the curve, which signalizes the minimum price that I mentioned before, um and essentially this floor price is the baseline of whatever the market price could be traded at.

Even though this is in dollar value right now, the primary MM takes a single ERC-20 token. So, if the ERC token becomes in is wrapped ETH or wrapped AVAX or USDC, the quote of the exchange will always be in the reserve asset. So, not in the dollar value of the exchange of the reserve token. So, being USDC and assuming USDC does not lose does not lose its peg, then it becomes a full-on backed floor value of USDC.

Um so, this is as I mentioned before, this is always a solvent market. So, even if all holders of the primary MM token sell at the same time, the protocol could still redeem all the operations. We're not doing treasury management behind the protocol. We're not holding um the tokens reserves for ourselves or deploying into a vault. That comes down to a user. Lastly and not least, composability of reserves. So, this floor price, which is the first price tier, is not just a downside protection for the asset. It's also a facility for borrowing and a facility for deploying reserves across

the whole DeFi. And the reason why this works and doesn't break is because whenever you're deploying or using this floor value as a facility, um you're borrowing or deploying reserves quoting at the floor price. And because the market price will never go below the floor, then the loan or the staking mechanism is always collateralized or at least the same as the loan value, right? So, assuming for example the market price is at 2 USDC, floor price has one USDC. You could always deploy the one USDC or across, let's say, a vault or an LST or borrow it for your own use case um while still

holding the asset even though locked. Um and of course, so the way this works for um as a long-term mechanism is that the the loan that's taken against the floor is a permanent one. So, this is there is no risk of liquidations for the first part because the loan is taken at the floor value, not the market price, but also because the interest that's taking place isn't ongoing. It's a single origination fee at the start and because there is no ongoing payments needed to be done across time, um essentially, it the loan never defaults to um a liquidation. So, um it's a permanent loan that can be

repaid at any time or can be harvested um whenever the user decides to do so um in a way that gives them full um accessibility and freedom to the choices that he wants to make. So, what is the end result? So, our goal is exactly this picture. So, a floor price Manifold that improves the price performance of um the ERC-20 and at the same time provides financial infrastructure from day one. So, by issuing with this primary AMM design, the asset no longer fully requires to have um LP DEX pool where he requires uh rented liquidity to come in and

provide liquidity constant liquidity positions at a certain price tiers. He can have um that liquidity in within this AMM can be optimized again for different price um price tiers, price ranges, and the reconfigure in a way that's optimized for tradability, for thickness, for spreads. There is inherent credit facility. Um again, credit facility being the LTV is lent at the floor value instead of the market price, um which means that the LTV depends on the ratio between the market price and the floor price. That means the lower the market price, the higher the LTV.

The higher the market price, the lower the LTV. Productive reserves in the sense that they don't require the holder of the asset to have the reserve in the protocol. They can choose to deploy across the whole DeFi and earn a yield on the reserve at the same time as they hold their primary issuance asset, as well as revenue internalization. So, for every fee that's being taken on transactions, on borrowing operations, on loops, on stake yield, a portion of it internalizes to the floor value and hence to all the token tokens of the uh token holders of the AMM.

So, this is essentially um a full-on cycle that feeds to all the token holders. So, we're recycling the value that this okay is generating with volume, um with yield, and so forth, such that everyone benefits from the activity of the asset. Um and this what pretty much uh what we're trying to move away from is my my personal perspective is that tokens today they are launched as mostly empty containers. So, they don't really have the infrastructure needed to sustain a price, and they're mostly reliant on narrative. And in our view, we want to change that through this primary AMM design. We want to be able

to provide structural guarantees to the asset that are not based on a momentum or are not based on an X thread. Um they are based on actual um guarantees that the protocol can provide from day one. So, in what can this be applied to? So, this actually this whole research started in the beginnings of Inverter. Uh we had a a client project that wanted to tokenize RWA assets um specifically uh NBA sports teams. So, he wanted to bring in on-chain equities of these teams.

Um but he also didn't want to launch it in a way that it would be have a memetic effect and hence undermine the NBA sports teams brands and so forth. And so, he intended to create a new on-chain asset that provides more guarantees that would sustain reputation um at the club and the brand that the issuer. And so, this was really the beginning. The application layer of this can be very diverse. It can be applied for crypto-native tokens such as projects or even launchpads. Can be provided for RWAs. It can also be provided for on-chain credit, private credit without any liquidations. We are just exploring the tip of use cases of what we can be

applied to this primary AMM, but in our view, this has a lot of potential to change what a a standard ERC token is from the beginning until the end. Uh one more thing I want to highlight here um is that being the issuer and the market of your token no longer requires you to be dependent on as I said before, LPs or gate-landed um gate-capped lending facilities or dependencies on a vault operators to provide liquidity or create your vaults.

This is a full-on finance infrastructure that you can launch autonomously and which the all the token holders can benefit from day one. So, this is a full on circle primary AMM that provides infrastructure from day one. There are We're going to launch this market soon. So, we already have the smart contracts being audited as of now. Uh this has been the floor research for the past year. There are still a lot of questions that are yet to solve. Uh first one being for example, whenever locked tokens are permanently taken away from circulation, what is the impact for the transaction volume and borrowing activity which rises the floor

growth of the protocol? Essentially, if you inhibit inhibit locked assets, what happens to the overall ecosystem? Uh second one being the convergence of traders from secondary markets to primary AMMs. We cannot guarantee a floor price across DEXes, but we can enforce and discipline them to do so such that if there is let's say momentarily there is a price deviation at the secondary market, the primary AMM can always do a buyback of it. Um such that even though it doesn't enforce there, it disciplines informally.

Um and last one being activity. So, the floor price cannot rise if there is no activity within the protocol whatsoever. So, it requires liquidity go to the primary AMM in the first place for this to happen. So, these are questions that we cannot answer today. Uh where are the main drivers are strong enough for people to to go to the primary AMM instead of secondary markets, um but there is certainly a very strong um there are certainly very strong demand drivers for them to to to do so. Um We're going to as I mentioned, everyone here um feel invited to come to the testnet. It's going to be open within next couple of weeks. And I will learn I would love if this could become a great token engineering experiment for the

field and for the whole of crypto. Thank you very much. Uh, feel free to connect on with me or read the the paper on the website and I'm open for questions. Uh, Kristof, if you've got your presentation, would you like to come to the stage? Um, and are there any uh, questions for Tiago?