Shade Protocol - Strategy, Moat, Sustainability, & Protocol As A Service (PaaS)

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 :stuck_out_tongue:

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
    • Arbitrage

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:

  • Lending
  • Silk
  • ShadeSwap
  • Derivatives
  • Synthetics
  • Options

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.

Net Gain:

  • 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
  • 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
    • Scarcity
    • Governance
  • 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.

Net Loss:

  • 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):

  • Privacy
  • 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
  • Community
  • Integrations
  • Liquidity

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.

-Carter Woetzel


Some facts about bonds:

OlympusDAO owns $315,000,000 in TVL purely from using bonds to bootstrap the DAO. The only service OlympusDAO provided was bonds and some interesting staking ponzinomics. But now, they have real sustainability because they will earn yield on $315M worth of liquidity into perpetuity that will provide services that will continue to grow the DAO. The difference between us & Olympus is that the ShadeDAO is sitting on top of multiple key DeFi primitives we own. The opportunity here is immense, and our flywheel is actually based on multiple services that we can improve for users with all of the acquired liquidity.

Some facts about constant-product rule pools and their inefficiencies:

If pairs are chosen that users demand, than even inefficient models generate a significant amount of volume that outpaces the inefficiencies of the model.


me and my shd is already staked in my mind lol. and USDC/SILK LP? i got dry powder waiting.


I’m going to write a post that’s critical because that’s what I do :stuck_out_tongue: but I am glad you put together a very thorough outline of your thoughts, and there is a lot I agree with, but I think it’s important to focus on criticisms because that’s where the change needs to be IMO. Most of what you said I completely agree with, it’s just the finer points around dex liquidity, how we use bonds, and how we use the treasury I disagree with, so I’m writing a lot here, but it’s because I think the topic is complex and I believe a lot needs to be said to justify my point, not because I think everything you said is completely wrong. The first five seconds of this video is one of my favorite philosophies around business: Jeff Bezos In 1999 On Amazon's Plans Before The Dotcom Crash - YouTube and I think what you’ve outined around business philosophy is in perfect alignment with my philosophy, and I do have great conviction that a customer focused and utility focused business philosophy is a key to success.

So I want to focus on the topic of bootstrapping liquidity, the transition from a “bootstrap” phase to a “long term” phase, and what the goals and responsibilities for our exchange product is.

On utility, I agree broadly that utility for Silk is the most important thing, but I would like to clarify that exchange liquidity is only one form of utility. Other forms of utility are things like Silk Savings, synthetics using Silk as collateral, deposits in stability pools, etc, so liquidity is not the only route to utility. Of course liquidity is important though, I just don’t want liquidity to be framed as the only option we have so that it’s clear that we are not failing at creating utility for Silk if we don’t choose to pursue liquidity at all costs.

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.

On this point, the idea of bootstrapping liquidity and “using bonds over the long haul” are incongruent. Bootstrapping fundamentally is only about how you get from zero to one, and the strategies for “how we get initial liqudiity” are not the same as “how we keep liquidity”. As I brought up in the waffle vs bird thread, an exchange is a meeting point for willing buyers and sellers, it’s the job of those willing buyers and sellers (most specifically, the subset of those buyers known as market makers) to create liquidity. Building an exchange and providing liquidity are different business operations. So I do not agree with you that it is our responsibility to provide and guarantee liquidity, it is our responsibility to attract willing participants to provide that liquidity for us. The biggest reason for this is because a single entity cannot create sufficient liquidity across a number of pools to enable trading, and because market making is a an extremely specialized skillset.

Caterpillar makes construction equipment, but they don’t focus their business on buying land and building homes, they make the equipment that enables other people to do so. They don’t buy forests and have a timber agriculture wing to produce more lumber to create more construction activity. They don’t own oil refineries so that customers can purchase their equipment and their fuel from Caterpillar. Caterpillar makes industrial equipment, and that’s what they focus on.

Zim Integrated Shipping is a marine shipping company. They ship products over the ocean across continents. They don’t also invest in manufacturing in China so they have more products to ship on their shipping lines. They don’t buy factories and rent them to people so they have more end products to ship. They exist to provide a service to people who need shipping services. They invest in buying more boats to ship more products. They invest in staff to run their boats so they can ship more products.

An exchange is a central forum for buyers and sellers to meet up and exchange. Our job is not to spend our money to give people tokens to buy and sell. Our job is to make a product that allows people to come to Shade Swap to make their exchanges. I believe your argument is that us providing liquidity achieves that. To present my argument I’ll use an analogy I originally wrote in telegram: everyone tends to agree that helping homeless veterans is a net good to society, but nobody would agree to spend a million dollars to give one guy a pair of socks. That is the situation we find ourselves in. Using protocol funds to provide a meager amount of liquidity is spending a million dollars to buy a guy a pair of socks, because that amount of money is instead better spent on investments in the company to create a more capital efficient exchange pool, or a more marketing to attract more willing buyers and sellers, or more primitives to create more utility and “things to do on Secret” which creates more value, or novel finance products that allow the creation of more liquidity through leverage.

Note that 902,000 SHD have been earmarked for Y1 LP.

I will say that while this is true, it doesn’t have to be. That money can be chosen to be spent elsewhere, so the ROIC needs to be there compared to the alternative options (opportunity cost). I know you explore this in your post. I just want to make that point that we don’t have to be married to this. If we can find a better way to spend 902k SHD then we should spend it on the better things.

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

2.1k SHD per day is an enormous amount of SHD and that will create a huge amount of sell pressure so that yield will drop fast (this happens to literally every single defi token. throwing insane amounts of money at a pool has never created sustainable yield. not once, ever.) I also don’t really understand where the 20x number is coming from. 70 SHD per day (you said week, isn’t it per day?) is 1/30th of 2.1k SHD per day, so are you just assuming 30x more emissions is roughly going to make 20x more liquidity? From what I’ve observed the relationship between APR and liquidity is an S-curve. The first few points don’t attract much, the next few attract almost all of it, and at a certain point nobody really cares about 150% vs 250% apr because those high APRs are universally red flags anyway. Although since this is a stablecoin LP we might see more liquidity just in general, but i still don’t think the logic of “30x emissions = 20x liquidity” is sound. With a pool of $27m, 2.1k SHD per day at $10 per SHD is 283% APR, The closest pool to our would be the frax pool on eth which is currently 2.58% APR. Put a yield premium on the fact that we’re a small chain and a small protocol, maybe our equilibrium point is 10% APR. Bastion protocol on Aurora is probably the best stablecoin yield right now in defi if you accept some smart contract risk, and the yield is 5% as of writing this post in a pool of $6m, so I think it’s fair to say that the yield of our pool would eventually hit equilibrium between 2.58% and 5%, but we can be optimistic and say 10%.

If we offer extremely high APRs on a stablecoin pool, people will deposit funds, claim the tokens, sell them, dumping the price, reducing the APR, which also causes liquidity to evaporate. Equilibrium is achieved once the sell pressure from emissions equalizes with buy pressure. Equilibrium tends to be very far away from the price when emissions started. There is a reason why every single defi farm token price chart looks like this:

And the reason is because of the sell pressure I just described.

So if we’re going to emit 2.1k SHD per day for a whole year, and the equilibrium APR for decentralized stablecoin pools in defi right now is somewhere in the 2-10% range, and I’m being optimistic and saying we will settle at 10%. Well, if the number of SHD being emitted isn’t changing, how is the APR going to go from 283% to 10%? Through the price of SHD decreasing. 10% is 3.5% of 283%, so the price of SHD would have to drop to at least 3.5% of what it is right now, assuming no liquidity withdraws from the pool. Current price is $9.42, which sets our price target at $0.33.

Now you have to factor in the fact that as APR drops, liquidity will leave the pool, which will increase APR (the same number of SHD emissions are going to be shared among fewer deposits). This means the real price target is even lower, and is probably in the range of ten cents to a penny, IMO, but i don’t have any quant data to back that up. But it doesn’t really matter, right? 33 cents is bad enough.

Sounds extreme? It’s not. Pick a farm token and go look at the price chart, they all go to zero, and this is why.

But I think the conclusion from all of that is simple - if the equilibrium of our APR is somewhere in the 5-10% range, just set the initial emissions to target 5-10% APR. Sure, it won’t attract as much liquidity as 284% APR initially, but it doesn’t really matter because when you frame it against the ratio of how much we spend vs how much liquidity we attract. A 10% APR on a stablecoin LP is phenomenal in these market conditions, and almost all of the liquidity that would be willing to invest in a stablecoin LP will take 10% APR because those are market-leading rates and they don’t sound ridiculous. I actually feel like high APRs will turn people away because they’re a red flag.

I also think we should play with that number. Maybe we start with a 10% target, and we gradually move down toward 5% and we see how it impacts liquidity. IF we can get $10m of liquidity with 5% vs $13m of liquidity with 10%, I’d say just set the rate at 5%. Stableswaps are capital efficient and we’re getting 30% more liquidity for 100% more money - not worth it.

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.

I like this idea, but I just want to emphasize that the focus needs to be selling bonds to raise capital for funding biz dev/marketing/protocol dev. The fact that we can take that money and LP with it is a side effect. I think it’s important to emphasize it in this way because we don’t want to be trapped thinking we can’t withdraw that money from the pool, because that money was never supposed to be earmarked for LPing anyway.

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.

I think while this is technically true it’s not feasible. Stablecoin liquidity especially wants to be in the range of billions of dollars of TVL. The protocol can’t own even a small fraction of that, not at this stage of its life. We need to attract that liquidity through market participation (making the protocol worth using, making Silk an attractive currency to hold and use, etc), not pay for it out of our own pocket. That does mean we still have a problem to solve around “how do we keep liquidity from leaving”, but, well, that’s the business of an exchange, and I think the things that will make us grow are the things that will keep liquidity around. As market participation increases and utility increases, liquidity will increase.

Because I believe we should be obsessed with the quality of service that the protocol can guarantee users

I totally agree, I just think we should be careful where we draw the line of “what services we are guaranteeing”. We can guarantee an easy to use product, we can guarantee a product that integrates nicely into the rest of your financial activity by having it all in one place, we can guarantee a product that is safe and secure, we can guarantee a product that will see active development, growth, and innovation to improve over time, and I think all of those guarantees are appropriate for an engineering organization to honor. Guaranteeing that there will be tokens on the exchange for you to sell though? We can’t guarantee that. Under this thought process, consider the other pools. Okay, if we invest heavily in USDC/SILK (which is a good idea), what about the other pools? MANA liquidity is going to be low. sOSMO liquidity will be low, etc. What about all those other tokens? Should we guarantee them too? I think the answer is no, of course, but then that extends to USDC/SILK. Why should we guarantee that? One thing I like to think about is this: if USDC/SILK is an attractive LP option for us, it’s an attractive LP option for the market, too, so the market will fill that gap. Our job is to make USDC/SILK attractive (by making Silk attractive). Since there are other ways to make Silk attractive that aren’t LPing that have lower capital requirements and better ROICs, we should focus on spending money on those things and let the market fill in the liquidity gap, IMO.

Liquidity providers are a dependency we shouldn’t want to be reliant on over the long haul.

I’ve said it a few times but I do not agree with this. A financial system is dependent on its participants. That’s just a reality. LPers are market participants. There is no way around this. The reason is because 1. we can’t secure enough liquidity to eliminate dependency on LPers and 2. with no participants there is no market, so that liquidity would be meaningless anyway.

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.

I just think we need to be cognizant of the balance. Being long term focused is good, but completely ignoring the short term means you don’t survive until the long term, and I think if we are not ice-cold and incredibly stingy when it comes to how we spend our seed and early stage capital, we will not survive to live out the 5-10 year vision.

To be clear I agree with you that emissions are unsustainable - they’re a bootstrapping mechanism. We need ways to make liquidity providing attractive, and there are ways of doing that.

  1. Building capital efficient pools. This actually isn’t hard, we already have two proven models (Uniswap v3 and curve v2) that work. We can literally just do no thinking at all and copy them, and we will improve usability. In this regard, just consider spending some of that emissiosn and bond money on funding the development of a concentrated liquidity AMM, and you will get a better return on invested capital and have something really attractive and marketable. Capital efficient pools provide better usability (much deeper depth for a given amount of liquidity) and better yield for LPers, so they accomplish all the same things as emissions and POL without the protocol taking on the risk of LPing (which is again, in my opinion, outside of its responsibilities.)

  2. Leveraged LPing. Again, something that already exists, we just need to build it. If I remember correctly, you can take a 3x levereaged position in a volatile/stablecoin pair and you won’t be liquidated unless there are a 97% drawdown in the volatile token. Obviously 3x leverage means a higher beta position, so there is some additional risk, but not really risk of liquidiation. In the case of a stablecoin pair, that “safe” leverage number can be 10x or 20x, depending on LTV requirements. This lets smaller players create more liquidity, earn more yield, and also leveraged yield farming allows you to take different market positions (e.g. delta neutral positions on multiple leveraged yield farms on different pairs), and when there are more market conditions that are favorable to LPing because there are more ways to structure an LP position beyond the simple “no-drift” setup, there are more LP participants.

  3. General Silk utility. Between #2 and this point, I think there is a compelling argument for all shadeswap pairs to be paired with Silk (pairing everything with Silk increases its utility and emphasizes its position as a currency, much like equity trades on brokerages are denominated in local fiat e.g. USD on robinhood). As Silk utility increases, volume of Silk activity increases. Silk minting and burning activity increases, which generates revenue in the form of fees, which can be earmarked for revenue sharing with LPers. If we spend our money on making Silk a better currency, we will naturally create more Silk liquidity because participating in the Silk ecosystem gets you more trading fees.

In conclusion I think the simplest way to describe my point is that we should view liquidity on the exchange as a side effect. It’s something that happens when we do our job well. When we make and do things that make Silk valuable, we will attract more liquidity.

  • Privacy
  • 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
  • Community
  • Integrations
  • Liquidity

Despite my extremely long post expressing criticism, like I said in my first paragraph I agree almost entirely with everything you’ve laid out, and I even agree that liquidity is our moat. I just don’t agree with the specific mechanism of attracting that liquidity that you laid out. I don’t want to come off as too adversarial :slight_smile:

I also think the way this is framed as a holistic strategy is important, and I don’t think any of the alternative suggestions I’ve made in this post conflict with the holistic strategy.

In summary my suggestions are:

  1. Bootstrap liquidity with targeted emissions on only a USDC/SILK Stableswap pair (as you’ve said)
  2. Target 10% APR emissions with SHD
  3. Play with the emissions and see how low we can go without losing too much liquidity, maybe targetting a floor of 5%. IMO the target ratio should be 1.5:1 (e.g. if we spend 100% more to get 75% more liquidity, its worth it. anything less, it’s not worth it.)
  4. Pair all shadeswap LPs against Silk, making Silk feel more like a currency that you can bring to our exchange and purchase other things with.

That is the bootstrap phase. To transition beyond this phase and reduce reliance on emissions:

  1. Focus on creating capital efficiency for non-stable pairs by using curve V2 or concentrated liquidity pools
  2. Build leveraged yield farming - building the product, educating users, focusing on usability as the user stories for leveraged yield farming are complex.
  3. Explore other novel uses of Silk. I’ve brought up integrations with tokenized real estate to you and to others in the community before, and i won’t use this post to shill my idea further :stuck_out_tongue: but just in general, “ways of doing things in web3 that you cant do anywhere else” bring a new demographic of user, improve the legitimacy of the protocol and of the space, and create real value. That value can be in the form of Silk utility (e.g. using Silk to purchase assets), it can be in novel revenue sources (e.g. low risk assets appropriate for a protocol treasury to speculate on, such as tokenized US bonds, if such a thing were to exist), or it could even just be in exposure to a new demographic.

And to emphasize what I think we should not do:

  1. Do not sell bonds to acquire funds with the sole purpose of LPing.
  2. Do not set extremely high emissions thinking that it will attract more liquidity.
  3. Do not rush into development of new things. We have a lot going on right now and not a lot has shipped, so I think even if we agree that “building other things” is the right move, let’s be deliberate about how we kickstart that development.

Hi guys,

First of all thanks Carter for the extremely detailed post. I agree with most of the points made on the importance of liquidity and the key of utility for silk. But i have to agree with ChristianA on most points. Ofcourse, liquidity bootstrapping is essential to a protocols succes. But i think the assumptions in your post of the attracted liquidity are speculative and unsustainable in the long run.

High apr’s are a double edged sword. On one side, a high apr attracts lots of liquidity. On the other side an high apr attracts temporary farmers that dump token prices and have no incentive (yet) to hold the token long term and support the protocol. I feel like a high apr would attract the wrong crowd and dilute/inflate supply held by protocol supporters and long term investors. We do not want to lose those people… This community is what gives silk/shade its value proposotion. Focus of the protocol should be aimed at attracting liquidity with low emisions and should ‘grip’ long term investors with its utility. Not a high apr.

One key risk we should not allow ourselves to forget is the risk of fregmentation. Having as much as possible liquidity on every dex will spread the word quickly about silk and shade but will increase the risk of fregmentation and attack vectors. UST’s growth is the prime example. It spreaded quickly to major blockchains and dexes, but liquidity was fragmented due to infrastructure and non ibc bridges. Ust held its peg quite well on-chain. External dexes and blockchains where the issue. We all know this resulted in the death of LUNA & UST.

Key points:

• protocol focus must aim at minemyzing fragmentation.

• protocol should aim to incentive long term holders and protocol supporters instead of high apr’s for farmers. (The fastest way to sufficient liquidity is not always the best way.)

• protocol should aim to “grip” new investors with utility and no high apr’s

• grown up defi and sustainability should always be the mission

Cheers guys…

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Theres a lot in here and im on mobile so i will make a quick bullet point:

  1. This is really good post and appreciate you making this Carter. Definitely appreciate this user experience centric approach.

  2. I agree with Christian that rather than set a fix amount of Shade emmisions and just put it out we should test to see where the right equilibrium is for cost per liquidity.

  3. I agree with you both on the first pair being USDC/SILK focused. This will add a lot of utility for SILK. Especially since OSMO is focusing on deep USDC pools. It aligns us and gives users a way to go from SILK to any Cosmos asset.

  4. I disagree with characterization that because you create a market place you cannot participant in it. Amazon Basics is the perfect example or any supermarket you walk inside. A lot of the examples provided were really about peoole not vertically integrating. This obviously does occur in many places. The robber barrons showed in history the power of it.

  5. I believe a healthy mix on focus of SILK and SHD is important for the health of the protocol overall. I recognize the value of SILK but designing everything around it is a mistake. Maybe a 50/50 mix is the right approach. Meaning half of our protocol owned liquidity goes toward increasing SILK utility and half of it goes toward SHD (aligning its value to blue chip crypto for upside). By this I would like to see SHD paired with apex crypto assets from our protocol owned liquidity. I dont view this as unnecessary risk as tying SHD to BTC for example will allow our market cap to track that coin. We need to be very selective about the non assets the protocol owns. I would say only a handful exist. We would never want to LP and own ALL assets but we should take safe bets and try to own deep liquidity.

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thanks carter, you are right about to take time , evmos was the last exemple that a fail launch is a very bad thing.
High staking apr/apy are not red flag in all case , to stay on evmos example, there is only 15% of liquidity staked, cause of low airdrop is claimed to… its also a way to reward early birds , supporter , and push people to lock token for security and against speculation. cause those early generalmy are holders the redflag is only to keep high apr in duration.

I do agree that vertical integration is extremely powerful and something we should strive for, but even vertical integration is something done incrementally. Amazon started by building an excellent customer experience for buying books online. Then they expanded to building an excellent customer experience for buying toys and electronics online. Then when they had the capital (attracted by their steady growth, clear business niche, real revenue from real products, and of course, dotcom hype) they expanded into distribution centers and shipping logistics (vertical integration) - the thing is that it’s already very hard to create an excellent product, and it’s very hard to master the logistics business. They got one right before they expanded, because in order to expand from being an internet company to a shipping company, they had to build a whole shipping division, hire logistics experts, hire warehousing experts, buy equipment, etc. That required money. And every dollar they would spend on building a logistics department was a dollar they couldn’t spend on building their primary offering, which was an online store.

We should do the same thing - once we get product and marketing right, then we can spend the resources on vertical integrations like market making on our own market place. If amazon tried to spend their seed money on building a global shipping empire to sell anything that you could imagine without establish PMF, without attracting initial customers, without perfecting their products, they would not be where they are today, and that’s pretty clear in a whole lot of case studies - i don’t actually know of any case studies where broadly vertically integrating at inception has worked, and if there are any i’m certain they’re outliers. You just can’t do everything at once, and as it is, we’re already doing more than we probably should at once.

I recognize the value of SILK but designing everything around it is a mistake.

I’d like to hear more of why you think this. I don’t think it makes sense to try to artifically create SHD value by forcing it to be used as one side of a pair on shadeswap. SHD is equity, it’s not really normal to expect people to treat equity as a unit of account. And the value of SHD should come from… its value, not from the fact that it’s forced to be locked in LPs. By increasing demand for silk (by using it as a currency, as designed) we generate revenue through loan interest, borrowing fees, minting fees, etc, and that revenue is what creates the value that ultimately drives the price of SHD. That does mean that we might see $10 SHD instead of $30 SHD but, whatever, who cares? A steady SHD price that is the product of steadying increaing cash flows that come from intelligent investments in ourselves as a protocol is a much greater form of value than a rise in price because people were forced to buy it to LP.

There is also the fact that a two sided volatile token pair is less safe (volatility wise), and therefore allows for less leverage in a leveraged yield farming position, and leveraged yield farming is one of the ways we can magnify our liquidity, so I think we hurt liquidity by quite a bit by 1. making leveraged yield farming less attractive (due to higher risk), 2. reducing the maximum leverage as a result, and 3. using an equity that not everyone wants to hold as one side of the LP vs using a currency that is built to be a unit of account as one side of the LP.

I think we protect the value of SHD by being stingy with it. It’s equity, after all, and I’m totally fine with the primary way of getting SHD being either 1. small purchases in a fairly low liquidity swap pool or 2. large purchase through bonds sold at a premium to spot price. Don’t want to buy it? Don’t really care, we’re building a financial system, not a free money printer. Long term shareholder interests and custoemr interests are completely aligned, so all we need to focus on is building good products, generating revenue, and using that revenue to expand-- and yes, that includes vertical integration, when we can afford it.


I will revisit this after work. I am glad to see a bit for on the suggested alternatives in the meantime.

I essentially view Silk as one component of the offering of Shade, not the offering itself. I think its important but not more important than Shade. Their relation in my mind is essentially a risk on and risk off option in a circular economic system.

Silk is the store of value. Silk is the unit of account. Silk is tied to a basket of fiat currency and commodities so people feel alright about maintaining their purchasing power or diversifying risk across nations.

Shade is the governance token of the whole system. Shade has claims on revenue generated from the economic functions of all offerings (of which silk is one). Shade value is tied to those two benefits as well as the basket of protocol owned liquidity.

I think to be most successful we need to create a closed loop where people arent forced to really ever leave Shade to participate in DeFi, but really mainstream crypto in general. If i feel bearish on crypto I can sell Shade to Silk for a safe store of value. If I feel bullish on crypto I can sell my Silk for Shade.

Shade protocol owned liquidity if executed properly (meaning its core holdings consist of holding things like btc/eth/atom/xmr) will essentially act as owning a type of index fund of the broad crypto market. The inclusion of any asset in protocol owned liquidity should be highly scrutinized and make sense on a number of levels (not doing anything too cute).

When we talk about LPing SHD to these assets its more than just creating a supply sink for SHD (which is important). With protocol owned liquidity were adding a second mechanic to how we tie our price to these assets. Traditionally just having a LP with the other asset will help you move in tandem, but in this scenario Shade also has claims to the other asset by owning the LP itself.

Best case scenario SHD price appreciates against it and we get more of the other apex asset (making our dex better and our protocol owned liquidity stronger). Worst case scenario SHD price depreciates against it and we essentially conducted an automated buy back.

To me Shade is a token which will have exposure to hard currencies, other stable coins, premiere L1 blockchains but also economic ownership of a full defi suite. So at that point Shade becomes an index token for crypto itself. This is really how I see the relation between the two tokens in the long run.

I propose we start this vision with a simple SAA of the apex tokens and stables we want to see. Then we can rebalance as the portfolio drifts to take advantage of the volatility of the market. Forcing us to sell in pumps to acquire more stables, and buy back in bears to get the crypto asset agains. This ratio can be carved up so 50% of all value is in other stables, while also giving us the crypto upside. I do not view this as running a hedge fund. I view this as a simple 60/40 like strategy which any economic advisor would tell a local grandmother about how to get started investing. If we chose the assets which are most safe and dont get cute then this feels like an acceptable amount of risk for the reward.

With all this being said I agree the first steps are fragile and we need to be careful we have the funding needed to continue building these products before we go gung ho on this strategy. One big advantage we have over traditional companies is that smart contracts and blockchains create effecienct scaling on demand if built robustly. I am on board with making the first bond USDC and keeping a low risk protocol owned balance to begin this journey, but i just dont want to lose focus on the long run that Shade is the other side of the coin.

I don’t agree with you that SHD should be viewed as an index token of the broader crypto market. I think what you described is an ETF and that is not part of our mission statement. I think we can build a synthetic that acts as a crypto ETF, or we could use bonds to build a managed ETF portfolio like you’re describing and then sell bonds that are essentially redeemable for the underlying - generating cash flow for the protocol, and giving users who want to be part of SHD and get broad exposure to crypto a way to do that. Put a small “management fee” like a real ETF on there and, well, there’s your use case satisfied without forcing us to pigeon-hole our equity into also acting as a currency.

I agree with you that it’s not really playing hedgefund to have a simple portfolio with a balancing strategy, even if those assets are LPs, but it is asset management. Are we an asset management protocol, or are we a defi protocol? It’s just not even in the purview of the protocol. I could pitch my vertical farming busines to Tim Cook and he might love it, and the numbers might even make sense, but Apple’s just not a vertical farming business, so we probably won’t be seeing the iFarm any time soon.

Asset management is obviously at least slightly adjacent to what we’re doing, and i think we can and should do it. It just doesn’t need to be tied to SHD. It should be treated as a separate product, because it is fundamentally a completely separate product. To your point about vertical integration, I think products like this are prime candidates for some of the first vertical integrations we pursue. But just from a business perspective, I think we need to prioritize one mission at a time, and right now that mission excludes asset management, but maybe in six months we’ll have a nice solid base of products with decent revenue and we can start investing in new verticals.

but i just dont want to lose focus on the long run that Shade is the other side of the coin.

I do agree with you about this, but personally, I would rather have the value of Shade come from cash flows from the products that it is investing in building, not from speculation. If users want to speculate, they are welcome to buy tokens of their choice. If users want to join an organization that is trying to build decentralized finance products and share the cash flows, they can buy SHD.

I am biased because I don’t want to buy and own a token that is both equity in a revenue generating business and a crypto ETF, and if we force ourselves to tie the value of SHD to a basket of high beta assets in its treasury, we don’t have a choice. But I assume there are others who fall into this camp and would agree, “if i wanted a portfolio of crypto index tokens, i would go buy those tokens.”

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totally agree with Christian here. let silk be our currency and shade be our equity. It seems very unintuitive to link shade to the performance of other projects.

Interesting reading everyone’s views. Personally I think the way these economic decisions truly will affect Shade long term is still a little outside of my grasp. (The downside of only having tech education haha)

But when I read the white paper, what brought me here is what I think is Shade’s true product, and that is Privacy. Privacy is what sets Shade and Silk apart from the others. Both are needed to make this happen, and the sub products built by shade create new value for users by giving them privacy when they didn’t have that before.

Having sustainable liquidity seems necessary to me, how we make that happen im not sure. But I do believe that if we have products that can easily bring Privacy to the masses that liquidity will come from that.

Having large purchases coming through bonds vs through a liquidity pool does seem like it would help with the issues, if I’m understanding that correctly?

This feels like a steep regression from the vision laid out in the whitepaper to a slightly differentiated maker dao. Under this frame of reference SILK shouldnt exist because users should choose their currency it feels like there is no need for the DAO at all. Would you be against a 5% exposure to BTC? At what percent of the protocol funds being allocated to any other volatile asset is too much?

I think both sides of the equation are valuable. Driving real cash flows through usage, and investments. Both can help strengthen the other. Focusing on either one completely is incorrect.

what is your purpose for exposure to bitcoin?

why do we need to pair their success or failures with ours in the form of a shd bound LP when an alternative is available?

our stable medium is protection from the storm. Have confidence in your products and let them stand on their own merit.

my guess is your aim is to ride the bull wave out of the next market by LPing with other projects. Is that the case?

Well if we’re going to use the original whitepaper as our guiding principles, which I think is fine, the treasury is supposed to be managed by a governance entity which isn’t entirely incongruent with what I’ve been saying. If we had a specialized team of people who were qualified asset managers to manage our treasury, then sure, it might make sense to have a treasury allocation to the treasury management team who would be responsible for managing those assets. Right now we don’t really have a treasury management entity, or event really a governance entity, so we don’t have the mechanisms in place that are necessary to fulfill the vision of the whitepaper. The reason I am against doing it now is because we do not have the expertise to manage the treasury actively, we only have expertise on how to operate an engineering organization, as well as some generally good understanding of macroeconomics. When we can afford to fund full time asset managers, I will be in favor of asset management activity.

So it’s basically coming down to individuals making asset management decisions. What amount of exposure to BTC is too much for me? Honestly, for me? Zero. I don’t believe it is a good investment at this stage of the protocol’s life. An organization with limited runway should not be spending its very limited capital on holding high beta assets. There will be no protocol if the expenses of the protocol cannot be covered, so right now our primary focus needs to be on helping the development of the protcol become self funded. Once we have our breathing room, we should talk more about how we leverage our power as a protocol to pursue a paradigm shift in the global financial system - a perfectly fine lofty goal which i have no problem with, but let’s not pretend like we’re going to take on the entire fiat economy with a couple million dollars of VC money.

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Right now the price of SHD is purely a function of the ratio of SHD:SCRT and the price of SCRT. When SCRT price goes up, SHD does. Vice versa as well. Owning some protocol owned liquidity of apex assets and tying it to SHD in a LP will make our protocol price track with them. Without being a centralized exchange we have to choose some horse to tie ourselves too.

why? because our products don’t have a market?

It has nothing to do with the product. Every token is tied to other tokens. That’s how the market operates until everything is priced in one currency. In traditional stock markets you need to buy a stock individually with a currency and maybe if one security pumps people will buy others in the sector. In crypto, due to dexes and things not being priced in one common currency the market moves in cascading ways.

BTC Pumps
ETH Pumps (because it has a lot of BTC/ETH pools)
UNI Pumps (or some other token tied to ETH)

Right now we have a few hundred thousand dollars of SCRT/SHD liquidity so we’re at an interesting point where we can determine which asset we want to be tied to (priced in). It has nothing to do with product it’s just something I think we should consider.

think very carefully about your assumptions here. how do you think 99% of crypto will be weeded out? It is precisely BECAUSE they are tied to each other that they will fall. :smiley: