Shade Protocol - Protocol As A Service (PaaS)
It is Monday night, July 25th. I write this from my kitchen table after eating a chicken breast and drinking some iced coffee
After reading many a forum post and reflecting on the current state of Shade Protocol’s potential emissions and long term strategy, I believe it would be prudent to walkthrough the holistic strategy that I’ve had in my mind the last 1.5 years. I want to note, feedback is critical in this entire process and that this is a collective decision on long term strategy and positioning.
What is a holistic strategy? Simply put, it is the combination of focusing on multiple variables that differentiate the protocol in a way that creates a compelling experience and service to users - driving both user loyalty and usage of the underlying applications.
I want to pause here and emphasize that Shade Protocol is providing services for users, if users do not use the services then we will fail. There will be no revenue, no sustainability, no nothing. No amount of tokenomics can save a protocol from a lack of usage.
As such, the principle that has always existed in my head is as follows:
Everything we do must be centered around serving customers - as such, Shade Protocol revenue and equity should be used to maximally improve the services provided to customers in a way that sustainably compounds and improves the quality of service we provide to users.
Let’s start with the services users can interact with assuming the full product suite gets built:
- Lending (you can leverage your existing value)
- Silk (you can safely store, use, and transact your value)
- Silk Pay (you can safely send and request value)
- Silk Save (you can safely earn yield on your value)
- ShadeSwap (you can safely trade value)
- Synthetics (you can invest in uncorrelated assets)
- Options (you can hedge against your current set of investment risks)
- Insurance (you can hedge against catastrophes)
Next, let’s look at services provided by the protocol:
- Protocol arbitrage improves the accuracy of pricing
- Bonds empowers the protocol to acquire other assets for the treasury to either improve existing services provided or for the treasury to speculate with
- Shade staking creates a better trading experience
- Liquidity providing
Now, let’s isolate the services that do not need liquidity to function
- Silk Pay - this is straight utility
- Silk Save - as long as people are borrowing against their collateral, this pool functions in isolation
- Insurance - as long as people are interested in hedging against catastrophes, this service creates a sustainable market
This leaves the following:
The primitives above all directly require liquidity, or they seize to offer a meaningful service.
If Silk has no liquidity on any DEX, it means it is not being traded anywhere. As a result, no one will use ShadeLend because minting out Silk will be useless. There is nowhere to convert it into other assets at a reasonable rate.
Fact: there must be a baseline amount of liquidity for Silk somewhere, or else Silk and by extension ShadeLend will fail to provide a meaningful service to users and will altogether fail as a product.
Solution: we must be obsessed with providing utility, liquidity, and pairings across ShadeSwap and other DEXs for Silk or else ShadeLend will ground to a halt as it will not be providing a compelling service for users.
Recommendation: we focus exclusively on the USDC/SILK stableswap pair on ShadeSwap. This way users can go ShadeLend → Silk → USDC → Utility → SILK → Pay Loan → Unlock Collateral.
After the initial bootstrap phase of this LP pool, we must be obsessed with Shade Lend → Silk → Utility.
This means Silk needs to be listed on as many DEXs as possible, and integrated into as many DeFi products as possible, while also aiming to integrate directly into Web2 commerce. That is utility.
How do we bootstrap liquidity? My recommendation is a combination of bonds and LP emissions on exclusively USDC/SILK, with a bias towards bonds over the long haul of the protocol’s existence. Note that Shade staking will bootstrap the SILK/SHD pair, such that acquisition of SHD through SILK or USDC will be the optimal in/out route.
Let’s do a quick examination of liquidity draw:
70 SHD per week currently attracts $1.36M in liquidity on stkd-SCRT / sSCRT, a low almost delta-neutral LP experience. This campaign is coming to a close soon and has emitted ~5k SHD by the time everything was said and done. A fair price to pay to have the derivative become the 2nd most used contract in all of Secret Network while driving users to the Shade Protocol brand and products.
Note that 902,000 SHD have been earmarked for Y1 LP. We’ve used ~0.5% of year 1 LP rewards, leaving us with 99.5% of rewards ready to be used on LP or bonds. Once we turn off stkd-SCRT / sSCRT and focus solely on USDC/SILK with 2.1k SHD per day (800k SHD / 365) we would attract roughly x20 the amount of liquidity on the USDC/SILK pair as the stkd-SCRT / sSCRT pair (note, entry and exit liquidity for SHD is bootstrapped via SHD staking so we don’t need to be focused on bootstrapping that pair as much). x20 liquidity puts us at roughly $20M-$30M in TVL on the USDC/SILK stableswap pair, providing sufficient liquidity for ShadeLend & Silk to be meaningful, while also creating a compelling trading experience on ShadeSwap. If we slowly issue bonds from the treasury for USDC/SILK, we are not only building reserves for the grants, but simultaneously are also building out a liquidity floor which is directly correlated to the quality of the service that Silk can provide. The more the treasury permanently owns this stablecoin liquidity, the more the service is guaranteed into perpetuity. We never have to worry about liquidity walking away if we are the market maker providing this service.
- Silk adoption increases as market makers coming into the game need to acquire Silk in order to liquidity provide SILK/USDC pair
- Silk as a service becomes meaningful because there is compelling liquidity
- ShadeLend becomes adopted because Silk is useful
- Lending fees to ShadeDAO
- Liquidation fees to ShadeDAO
- Silk Savings sees success on multiple fronts
- More people use ShadeLend = more liquidations = more yield for Silk Savings = more reason for people to own Silk in order to participate in this yield based on people using the ShadeLend service = more interest fees from Silk being created = more protocol revenue
- Protocol arbitrage on all of the activity generated
- Arbitrage between SILK/USDC & OSMO/USDC pool (2nd largest pool on Osmosis)
- Arbers adopt Silk
- Will garner attention from large Cosmo whales
- Arbitrage between SILK/USDC & OSMO/USDC pool (2nd largest pool on Osmosis)
- Additional Silk Pay adoption from new users coming to the website
- Relatively close to delta neutral position obtained by the treasury while it creates a floor of “owned liquidity” for Silk
- Onboard users into being able to acquire SHD through USDC which is accessible by many centralized exchanges (USDC → SILK → SHD)
- ShadeSwap trading fees
- Shade staking becomes more popular as some % of LP providers will use their earned yield to earn additional yield - good news here is that staked SHD does the following:
- LP on the SILK/SHD
- Protocol arb
- Shade Protocol brand grows stronger as users begin to establish the habit of doing their DeFi activities on Shade Protocol
You’ll note here that this is a holistic flywheel - all of these are based on providing a quality service to users.
- SHD token emissions
- Significant sell pressure on SHD from those that choose to not stake
As you can see here, these conversations tied to “…how to bootstrap” and “…all emissions are bad…” or “…do we even need a DEX…?”…have a huge number of implications in terms of the flywheel that is generated. But one thing is for sure…
Fact: we need significant stablecoin liquidity out of the gates, or else none of the above flywheels get kicked off and Shade Protocol is dead on arrival.
That is the level of urgency here.
So why the obsession with bonds? Because I believe we should be obsessed with the quality of service that the protocol can guarantee users, and so much of the user experience is based on liquidity. Liquidity providers are a dependency we shouldn’t want to be reliant on over the long haul. We should assume the LPers (because they are brutally mercenary) will all walk and that all that will be left is protocol owned liquidity and market making.
In the event LPs walk or emission go to zero, would there still be a compelling service provided to users that can ensure the flywheel of growth and the quality of the service can continue?
We should strive for that answer to be “yes” or else we are not a truly sustainable protocol. That is the brutal truth. Without liquidity, we have no quality services.
Finally, I fundamentally believe that if you zoom out over the course of 5-10 years the protocol will generate more yield and provide more of a service with protocol owned assets than what value that is extracted from liquidity providers in return for emissions. If you look at bonds and protocol as a market maker on a short term basis, of course it isn’t as compelling. But are you here for the decade long vision, or the year long vision? I’m here for the decade long strategy, and that strategy involves a slow but steady accumulation of liquidity because the greatest service we must guarantee to provide users for all of the Shade Protocol primitives to succeed is liquidity.
The only way to guarantee that service is to own the liquidity.
Returning to holistic strategy. Simply put, Shade Protocol’s moat in my mind are as follows (and has been penciled into a notebook for over a year, giving away the intimate trade secrets here):
- Multiple DeFi primitives interacting in permissioned ways
- ShadeDAO asset utilisation permissions
- Unified UI/UX of multiple DeFi primitives
- Sustainable revenue based on providing a service that users care about
Privacy cannot be magically added to transparent protocols.
It is extremely difficult to build primitives and treasuries that directly integrate into each other without having the vision from day one.
Sustainable revenue is not a trivial task in Web3.
Community cannot be forked.
Integrations cannot be forked.
Liquidity begets liquidity, and can be a significant moat.
Some extra differentiators that are not necessarily moat:
- Staking that providers a service beyond scarcity
- Protocol owned arbitrage
- Interoperability inherited from Secret Network
A holistic strategy will emphasize growing all of the pieces of the Shade Protocol moat, but the most important of all of them all is sustainable liquidity. Without it, we fail. And in order to acquire it, we must give something up. Let’s pick the combination that makes the most sense for this stage of the protocol, with a clear strategy to migrate towards a long term strategy not entirely dependent on external market makers.
I believe in a future where Silk is so demanded that Silk pairs will be demanded or desired on other DEXs. That is what sustainable adoption looks like in Web3. In parallel, beginning the process of Silk integration into commerce & the world of DeFi.
But we don’t reach that adoption without liquidity as the building block of all of this.
Put users first, it is the key piece of the puzzle we must never lose track of amidst economic discussions.