Providence dApp
Overview of Providence and why it is needed.
Last updated
Overview of Providence and why it is needed.
Last updated
Overview
Providence will allow users to speculate on DeFi growth metrics, utilising a decentralised conditional approach, leveraging ERC-1155 tokens on the EVM, offering on-chain metrics and boolean logic to define markets. Within the product we introduce a dynamic burn/mint swapping mechanism which does not require liquidity pools or an AMM. Despite this, a more traditional AMM-based swap for markets with deeper liquidity will also be utilised to provide superior capital effciency for users. The AMM allows users to engage in Providence liquidity pools, assuming a market neutral position and earning fees in the process. The utilisation of both technologies will allow users to speculate on markets regardless of liquidity conditions, bolstering the longevity and financial security of Providence.
Why Providence?
The DeFi landscape offers numerous investment opportunities such as farming, tokenised RWAs, and staking. However, there is only a singular mechanism for end users to speculate on the protocols themselves; purchasing their native governance tokens.
Tokens do have a part of play within the DeFi ecosystem. They are important for elements such as governance, pre-dApp launch fundraising efforts, initial ecosystem funding, protocol security, and liquidity incentivisation. However, we often see elements arise which lead to conflicts of interest between stakeholders, investors, and the protocol itself: for example, 'Team' token allocations. These allocations are the way early stakeholders are rewarded for their efforts in successfully launching a protocol. Although, when these tokens are vested it places sell pressure on the token. This can have a negative impact on the protocol because it lowers the token price in comparison to how it would perform without such vesting, which can lead to user protocol exits due to financial loss, potentially hurting components such as protocol liquidity. Ultimately team vesting comes at the detriment of the end investor and negatively influences the tokens proposition as an investment vehicle.
The vesting pressure cited above can only be partially mitigated by investors. Typically, the token vesting mitigation allocations for DeFi protocols (to prevent user token dilution and encourage user activity) stands between 15% and 65% of the total supply, determined by allocations such as airdrops or liquidity. If you evaluate the initial total supply tokenomic breakdown of COMP it was as follows:
Liquidity mining - 42.1%
Shareholders - 24.0%
Founders and team - 22.5%
Community - 7.7%
Future team members - 3.7%
Within the tokenomics of COMP, the vesting mitigation allocation stands at 50.2% with the remaining tokens not attainable for users through protocol actions e.g. supplying liquidity. Users positions upon total supply release (should they maximise the amount of tokens they can recieve) would therefore stand to be diluted by 49.8%, significantly detracting the investmemt proposition.
Beyond this, protocol tokens can often struggle to capture the value of the protocol itself. This can be measured through evaluating the protocol TVL (total value locked) : TMC (token market capitalisation) ratio. In theory as the TVL goes up so should the token market cap, as tokens are perceived to capture the value of the protocol increase.
For instance, if we take the Solana DEX Orca and calculate each month's TVL: TMC ratio since the TGE, the maximum result is 2.37 and the minimum value is 0.07, yielding a range of 2.30. Since the token's introduction, the TVL:TMC ratio has fluctuated dramatically, as shown in the figure below.
Additionally, evaluation of the raw data from the TMC and TVL shows that since 01/01/2024 the TMC of Orca has fallen from $269.10m USD to $102.27m USD (-62%), meanwhile the TVM has risen from $184.11m USD to $233.24m USD (+26.68%). When coupled with token inflation, had a user successfully predicted that the Orca TVL would rise and purchased ORCA tokens on 01/01/2024, HODLing the tokens until 12/06/2024 would have results in their token value decreasing -64.98%. Orca is not alone in these swings; such swings are a commonality, as displayed in the table below.
Raydium
3.72
0.26
3.46
Uniswap
3.19
0.17
3.02
Aave
1.31
0.06
1.25
PancakeSwap
1.09
0.15
0.94
What can be derive from the aforementioned information is that often tokens are not a viable option for speculating on DeFi protocol growth. Providence is the solution, enabling users to speculate on DeFi protocol growth, creating a new frontier for DeFi investment.
Why Now?
The origins of DeFi can be traced back to 2015 with the emergence of MakerDAO. Although it was in 2020 that DeFi was catapulted into a core pillar of the Web3.0 space, with the total DeFi market capitalisation increasing from $2.782bn USD to $44.976bn USD. This saw the rise of protocols such as Aave, SushiSwap, Curve Finance, Ocean Protocol, and many more with innovations rife during this time. From 2020, the usage of ERC1155 tokens also grew after their approval by the Ethereum Foundation the year prior. Innovations within DeFi and the widespread development, education, and usage of concepts such as liquidity pools, staking, and farming resulted in a new Web3.0 user group: DeFi users. However, as the sector grew and bearish times were faced, it became apparent that DeFi protocol tokens were heavily reliant on hype-cycles for their growth - tokens which were viewed by the holders as investment vehicles into the protocols themselves. Liquidity pools dried up as the tokens within them could not capture the value of the protocol they represented and swaps decreased, compounding dramatic market downturns and leaving major DeFi protocol tokens tumbling to losses of over 95% from ATHs.
What occurred was a critical issue as to how tokens were portrayed and perceived by users. Now is the time to evolve how tokens are viewed and utilised. They should be used for effective participation in a protocol through leveraging their governance mechanisms, rather than as an investment vehicle into a protocol. Providence is an alternative to token investments, providing users the ability to speculate on the growth of protocols. With the technical groundwork laid by the core generation of DeFi protocols, it is time to build upon the progress made, as the DeFi market leaves its early childhood and moves into adolescence.
