How to use LUSD on Tokemak

In this post, I’ll provide a step-by-step guide on how to use LUSD on Tokemak. Before we get started, here’s some background information:

On 12/22/21, an LUSD Pair Reactor went live on Tokemak! This allows LUSD holders to provide IL-free, single-sided liquidity. Original announcement here.

Quick Disclaimer: This tutorial is not a recommendation and interacting with DeFi protocols can be risky. Please do your own research and use your best judgement.

The Current State of Liquidity in DeFi

From Tokemak’s documentation:

“The current state of DeFi is comprised of fragmented, unpredictable, and expensively sourced liquidity. Builders of new projects bear massive costs pursuing liquidity solutions through incentivized "pool 2's," which can dry up when the incentives are exhausted. Providing 50/50 paired liquidity is expensive for an individual, and has the looming risk of impermanent loss. Traditional market making solutions are opaque for native DeFi builders, highly centralized, and expensive. Finally, reliance upon whales to provide liquidity results in a perpetual state of uncertainty.

Insufficient liquidity results in poor pricing and volatility. This negatively impacts projects/DAOs seeking deep liquidity for their tokens, exchanges looking to offer the best possible pricing, and the individual, hoping to avoid slippage due to the price impact of their trade. Additionally, protocols interacting with other projects' tokens require reliable liquidity.”

In other words, having deep and consistent liquidity in DeFi is a crucial component for projects and their users to find success — it just so happens that this comes with an expensive, recurring cost. Tokemak aims to solve this issue.

What is Tokemak?

Tokemak is a liquidity-provisioning protocol that aims to create sustainable liquidity for DeFi. To achieve this, orchestration is required among the following:

Liquidity Directors (LDs): Users that stake TOKE and allocate votes towards specific Pair and/or Token Reactors in order to earn yield and control the liquidity.
Liquidity Providers (LPs): Users that deposit single-assets into Pair Reactors and/or Token Reactors.
Pair Reactors: Pooled deposits of stablecoins (e.g. LUSD, FEI, FRAX) or ETH that will be utilized as “base-assets” to pair with other assets in Token Reactors.

When LDs stake TOKE to specific Pair Reactors, they gain voting power over balancing and determining the depth of reserve for those Pair Reactor assets needed for optimal liquidity deployment. They also act as collateralization in the event that LPs deposits are not whole (not $ value, but token amounts).

Token Reactors: Pooled deposits of assets (e.g. SUSHI, SNX, OHM) that will be utilized as “quote-assets” when paired with assets in Pair Reactors.

When LDs stake TOKE to specific Token Reactors, they gain voting power and control of where the liquidity is directed (e.g. Uniswap, Sushiswap, Curve).

At time of writing, voting on liquidity direction is live, but liquidity deployment is set to launch at a later stage. Once liquidity deployment finally goes live, assets in Token Reactors will only be paired with ETH to ensure that the system is monitored before using the stablecoin Pair Reactors.

Mechanisms in Action

Now that the key components of Tokemak have been explained, let’s cover an example of how they work together:

LPs provide single-sided liquidity into the Pair Reactors (e.g. the ETH Pair Reactor) and Token Reactors (e.g. the AAVE Token Reactor).
LDs use their staked TOKE to vote on where the liquidity is directed. Eventually, LDs will also have the ability to control which Pair Reactor assets are paired with Token Reactor assets.
The system determines the amount to be deployed according to the quantity of the asset held in the reserve (and the TOKE staked to the specific reactor).
Liquidity is drawn out of Tokemak and deployed onto an exchange (e.g. AAVE-ETH deployed on Uniswap).

Once liquidity is deployed and fees are earned, a portion of the returns will contribute towards Tokemak’s Protocol Controlled Assets (PCA). At some point, the PCA could become large enough relative to the overall DeFi ecosystem, causing a Singularity Event. This is when Tokemak has acquired enough PCA to operate self-sustainably and without the need of external LPs.

Tutorial

Now that you understand the basics, let’s dive into how you can actually use your LUSD within the Tokemak system.

Acquiring LUSD

To obtain LUSD, users can borrow LUSD against ETH as collateral (guide on this here) or they can buy LUSD off of decentralized exchanges such as Curve.

Note: Borrowing LUSD against ETH using Liquity is likely to be the most attractive option if you wish to maintain ETH exposure.

Landing on Tokemak’s UI

Once you’re on the main UI, you’ll notice information such as the APRs displayed, different pool and Reactor categories, and more. These are self explanatory, but I want to cover “Cycles” in the top left-hand corner:

If you deposit assets as an LP or stake TOKE as an LD mid-Cycle, you’ll begin to earn TOKE at the start of the next Cycle.
When liquidity deployment begins, your deposit will not be deployed as liquidity until the start of the next Cycle.
If you want to withdraw, you must first “request” to withdraw and wait until the start of the next Cycle.
Although rewards will be paid out at the beginning of each Cycle, TOKE rewards are only claimable weekly around 1:00-2:00 PM UTC on Fridays.

Depositing into the LUSD Pair Reactor

Next, you’ll need to scroll down to find the LUSD Pair Reactor as displayed below:

All that’s left to do is click “Deposit LUSD”, confirm the transactions, and your deposit will start earning TOKE rewards when the next Cycle begins!

Liquidity Directing

If you decide to become a Liquidity Director, you’ll need to stake your earned and/or purchased TOKE in the pool displayed below:

Once TOKE is staked, you’ll gain access to voting on any Pair or Token Reactors.
As mentioned previously, LDs who want to vote on Pair Reactors won’t be able to control which pairings are selected yet, but you can still earn the APR. If you want a more granular experience, voting for a Token Reactor might be the best route for now since this provides an additional option to vote for exchanges.

By clicking “Pro Mode” above a Token Reactor, the DEX options will appear and be available for your selection.

What’s next?

And that’s it! You’re now a liquidity provider and liquidity director using Tokemak! This tutorial should’ve covered everything you need to get started. To learn more about their protocol, check out their resources here:

Liquity Resources:

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