Wise Liquidity 2.0
By Peter Girr, Founder and CEO of WiseSoft, LLC
Liquidity 2.0 refers to the improvement of the tokenomics following a Wise launch event, specifically the liquidity formation aspect at the end of a token sale. Liquidity 2.0 allows for 50% of the funds raised in the sale to be used by the team without breaking or diminishing the original liquidity structure. All partners in the Wise Ecosystem use Liquidity 2.0 technology. This document is an extension of the original WISE white paper.
The Original: Liquidity 1.0
The Wise Liquidity 1.0 model was a proof-of-concept fair-launch protocol designed to create the first Ether-backed token. Of the 57,900 Ether raised, more than 28,000 Ether is provably and immutably locked below the mathematical price floor, priced in Ether. The 28,000 Ether is mathematically calculated from what would remain in the WISE/ETH liquidity pair, should all WISE (staked and unstaked) be sold back into the liquidity pair.
There are several factors that add complexity to this otherwise hard price floor of 28,000 Ether — inflation of the WISE supply, Uniswap transaction fees, and burned/lost WISE tokens:
- WISE token has a 4% annual supply inflation. This means that more minted WISE could slowly remove the remaining 28,000 Ether in the pair; however,
- Each time someone swaps between WISE/ETH on Uniswap, a transaction fee is generated that increases the amount of locked Ether in the pair. Currently, these transaction fees comprise a 5% annual growth, essentially flattening the effects of inflation.
- Additionally, any lost wallets cannot be sold back into the pair, increasing the minimum remaining amount of Ether in the pair further above 28,000.
- Lastly, the intentional burning of WISE tokens raises the price floor by lowering the amount of WISE that can be sold. The Wise Ecosystem consists of many protocols that generate revenue, most of which are planned to launch in 2022. The majority of this ongoing revenue is intended to go to stakers, but a portion is meant to buy and burn WISE until the total supply remains static at 500 million or becomes deflationary. The extent of this decision is regulated by the Owl DAO which is detailed in the Wise Ecosystem 2.0 article.
The Wise Liquidity 1.0 model is at least 50% inefficient, but why?
Primarily due to the mathematical design of the Uniswap code. Remember: the original Wise launch event started with a 50-day auction that sold 50% of the supply for ETH which was paired with the other 50% of supply to form WISE/ETH liquidity. If the 50% of supply in the hands of the community were all sold back to the liquidity pair, the price would decrease incrementally until 50% of the ETH was removed, leaving 50% of the ETH remaining in the pair, a purchase price for WISE that is 75% below the original listing price, and zero WISE holders. Liquidity 1.0 is 50% inefficient because 50% of the ETH is beneath the mathematical price floor.
This inefficiency was purposely allowed mainly because of optics. The Liquidity 2.0 model involves a wrapped token and it was deemed paramount to have the WISE genesis pool paired with ETH rather than an unknown synthetic token. The WISE/ETH locked liquidity pair is now the largest pool on Uniswap V2, providing a trusted beacon of decentralization to the DeFi community, not to mention an amazing talking point for onboarding partner projects!
Enter Wise Liquidity 2.0.
The Upgrade: Liquidity 2.0
Liquidity 2.0 allows 50% of the funds raised from a launch event to be removed without changing the amount of liquidity that would have been added to the DEX in the original model. The removed funds are meant to be used as working capital by the team to launch the necessary products for success.
The scope of Liquidity 2.0 includes additional smart contracts, with the primary difference being the creation of a synthetic token contract that works with the DEX pair.
Imagine, if Uniswap were a human that could be reasoned with. One could ask for the release of the 28,000 ETH in the WISE pair since this money is below the price floor and could never be accessed anyway. The contract could work just the same with 28,000 less ETH even if the last WISE token in the system were sold. That 28,000 ETH could just be a digital tally without any real ETH backing it and the system would work just the same. Since Uniswap cannot be persuaded to comply, Liquidity 2.0 involves a helper contract that efficiently patches this issue.
Upon the conclusion of a launch event, the money raised does not immediately go into the DEX pair. Instead, it is sent to a wrapping contract that creates synthetic duplicates of each token, and those synthetic duplicates are then used to create the main DEX pairing. For this example, we will use synthetic BNB (sBNB) since Binance Smart Chain was the first example of Liquidity 2.0. The BSC launch raised 21,000 BNB which was first sent to the wrapping contract. 21,000 sBNB were created and then paired with the WISE-B tokens (WISE on Binance Smart Chain) to create the main liquidity pair.
The wrapping contract was programmed to split the 21,000 BNB in the wrapping contract into 2 equal parts, one for the team to remove and use, the other to back the value of WISE-B. To further smooth out the user experience, the remaining BNB were used to create a secondary liquidity pair on the DEX consisting of sBNB/BNB. This way users can cash out WISB directly into BNB because the DEX routes the trade seamlessly through the two pairs (WISB/sBNB -> sBNB/BNB). Routing through two pairs does cause a certain amount of slippage, and users can alternatively take sBNB directly to the wrapping contract and exchange 1 for 1 if they are making a particularly high-value transaction.
How does this work for partner projects?
Projects launching on Ethereum and EVM compatible chains will pair their token with WISE using the Liquidity 2.0 model. Specifically, this means they will host a 50-day fair launch auction of which 50% of the revenue coming in buys WISE each day. A synthetic WISE is created (sWISE) and two liquidity pairs are created, the main one being their token and synthetic WISE (XXX/sWISE), and the secondary being sWISE/WISE which creates the possibility to cash out of their token directly into ETH (XXX/sWISE -> sWISE/WISE -> WISE/ETH). The remaining 50% of funds are released to the team through a DAO. If launching on a chain other than Ethereum, this pair will be facilitated on a trusted DEX using existing WISE tokens that were bridged over from Ethereum.
Conclusion
Wise created the first fully decentralized asset-backed token that isn’t a stable coin. The benefit of this model is the mathematical impossibility of WISE losing all its value vs ETH. If 100% of the supply were sold, the liquidity pool could not only facilitate this black swan event, but the community as a whole would average 50% of their ETH returned! The average crypto project cannot sustain a 25% supply sell-off without going to $0.
Despite WISE’s unique asset-backed design, tokenomics are not a viable substitute for a product. Tokenomics are like the hull of a ship that could either be made watertight, or have holes in it that cause the ship to sink. But even the most watertight ship needs a motor to go somewhere. The revenue-generating products in the Wise ecosystem are essentially the motor in the Wise mothership. (Also see how the Owl DAO facilitates the flow of revenue through the Wise Ecosystem in a fully decentralized manner). Using the safety of Wise tokenomics, combined with powerful revenue-generating products, the Owl DAO, and strong partners, Wise is creating the fairest, most equitable, and most decentralized ecosystem in all of DeFi.
Authored by Peter Girr — Founder and CEO at WiseSoft, LLC
Email: contact@wisetoken.net
Website: www.wisetoken.net
