Tomb forks: flaws and improvements
As you might have read in my previous article Tomb Forks REX, there has been almost 500 tomb forks so far, and the least we can say is that their success rate is quite low.
After so many failures, it seems important to take a step back and do some critical thinking on the topic of Tomb forks, if we want to avoid another 500 failures.
In this article, I'll explain the main flaw of most of tomb forks, why bonds are currently counter productive and the way they should be improved, the negative aspects of genesis pools, why time limited LP incentives are an absolute garante the system will crash in the end (even most Tomb Forks crashed well before LP incentives ran out) ...
The primal flaw
The first and most important problem with Tomb forks, also referred as algorithmic stable coins pegged to FTM, is that they have no utility. A TOMB is supposed to be worth 1 FTM, but appart from that, it has no usage. There is nothing special you can do with it, and especially nothing more than what you would do with one FTM.
FTM is a utility token, because you need it to pay for all your transactions on Fantom. Having an FTM is useful, because you need it to use the Fantom blockchain.
Tomb (or Tomb2, Tomb3, Magik, Platinum, Draco, Scarab, and all the 226 other Tomb forks on Fantom) have only two uses:
- swap them for FTM at their current price (usually much lower than what originally intended, as almost of these forks are well below peg)
- use them to provide liquidity to the TOMB/FTM liquidity pool, so that you get LP tokens that you can then stake in the cemetery to get TSHARE.
So, if you keep your TOMB, all there is to do with them is providing liquidity and getting yield in the form of TSHARE by staking the LP tokens you got when you provided liquidity.
Solution for primal flaw
In term for any of those silly tokens to keep any kind of long term value, you need to give them some utility. Make them the only way to buy some special NFTs, or make them necessary to pay for any kind of service, or make them necessary to play some online game, whatever that comes to your imagination. They have to have some utility.
Otherwise, they are just speculation tokens.
Beyond that initial flaw, there are some more specific features that are badly designed.
Bonds are useless too
When the base token is under peg, it is possible to swap them for bond tokens. The exchanged base tokens are then burnt. The rationale behind that is that, buy lowering the supply of base tokens, you would increase their value (applying quantitative theory of money, invented by Nicolas Copernicus).
When the base token eventually comes back to peg, if it ever does, the bond holders can then redeem their bonds for base tokens at a premium.
This does not work. I hope almost 481 failed Tomb forks is enough to convince you that the bond mechanic does not help in any way. Actually, it builds up some kind of debt (because bonds are debt that the protocol accumulates) and this destroys the confidence on the protocol.
Moreover, when the base token re-pegs, the protocol starts to reimburse the debt it has accumulated before giving reward to share holders. This debt phase is frustrating and depressing for all share holders. It's counter productive.
Solution for bonds
Just ditch them. They add a layer of complexity to the protocol, and they've never helped any Tomb fork to reclaim peg.
If you really want to keep bonds, then change the timing. Instead of building debt during bad times, build up savings during happy times. When the base token is over peg, a rain of base tokens fall in share holders' pockets. How about saving 10% of that printed money to build up some little treasury? When the base token sadly falls under peg, you can still allow base token holders to swap their under-valued tokens for bonds, and immediately redeem these bonds for base tokens from the treasury savings.
Example : base token is at 0.5 FTM. Allow base holders to swap 1 token for 1 bond (burn the base token they gave). They can now swap their bond immediately for 2 base tokens. This will lower the base token supply, until the treasury savings are empty, but base token holders will be compensated for their base token to go down in price, and you won't have that depressing debt creeping up.
Less bad debt, more confidence.
Of course, when the treasury savings are empty, the game ends. Bond owners will have to wait for the next re-peg.
Genesis pools are the usual way to kick start a tomb fork, by attracting liquidity to the protocol.
The problem is many genesis pools have just ended up in a big rug pull. Of course, if your token has no utility, genesis pools are often necessary to start the whole machinery. But they could be easily avoided.
Simply start by putting some small liquidity in both base/FTM and share/FTM liquidity pools that you created. Then simply allow people to earn their first share tokens either by buying them from the share/FTM pool, or by providing liquidity to the base/FTM liquidity pool and staking their LP tokens to the cemetery.
This is a simple way to start, without the complexity and hasard of genesis pools. Many Tomb forks failed just because they messed up during their genesis. Avoid that complexity. Just go in normal mode right from the start.
Time limited LP incentives
Although NONE of the current 481 Tomb forks have reached that point, the fact that LP incentives are limited in time are an absolute garante that the system will crash in the end.
Usually, base/FTM and share/FTM liquidity providers are incentivised to provide liquidity because they get rewards in the shape of share by staking their LP tokens in the cemetery. The problem is that the cemetery will only distribute a limited quantity of shares.
When the cemetery runs out of shares to distribute, what do you think will happen?
Liquidity providers will break their LP, because there is no more incentive to provide liquidity to the pools. An enormous amount of base tokens will be released in the open market. What do you think a lot of the former liquidity providers will do with their base tokens? They will just sell them, and the base token price will just crash.
Incentives limited in time are an absolute garante of a crash when they end. IMHO, this single flaw is enough to put regular Tomb forks into the ponzi category.
Solution to time limited LP incentives
Two things need to be done:
1. Decreasing cemetery
First, don't stop the cemetery abruptly. Your protocol won't handle the shock. Make the cemetery rewards slowly decrease. For example, if the initial cemetery rewards are 10 000 shares, start with distributing 10 shares per epoch, then once the cemetery has less than 9 000 shares, only give 9 shares per epoch as rewards, ... and so on, until the cemetery only gives 1 share per epoch once it has under 1 000 shares left.
At the end of its life, rewards given by the cemetery will be quite low and some liquidity providers will have already gone elsewhere. The end of the cemetery won't be that big of a shock for the protocol.
2. Ever lasting incentives for liquidity providers
You absolutely need to give some incentives to liquidity providers that will last for ever.
Imagine there will only be 100 000 shares in circulation. Create a smart contract that will hold 10% of them. Then, make this smart contract stake its shares to the masonry. Then allow people to stake their LP tokens to this smart contract. During over-peg epochs, the smart contract will earn base tokens. Make this smart contract give these tokens to LP token stakers.
Liquidity providers will be fairly rewarded for their support of the protocol for ever, with a percentage of all minted base tokens.
Ok, this is at the expense of share holders that stake their shares at the masonry, but this is a price they have to pay to enjoy a long lasting protocol.
. . . . .
That's it for this story. As we've seen, Tomb forks have some major design flaws that contributed to the 481 failures we've experienced so far. My advice is first and foremost not to create any tomb fork any more, if the base token has no utility. Then:
- ditch bonds
- avoid genesis pools
- garante long term incentives to liquidity providers
In my following article, I'll explain how we could look at Tomb forks from a completely different angle. Because Tomb forks have, indeed, some very interesting token mechanics that could be applied for many web3 projects. StorryPress is actually one of them.
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