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The Tomb Fork Saga : Chapter 1
How Tomb Finance is feeding on the Fantom Network
I first posted this article on Medium on 26/01/2022. One year after, I publish here a slightly "remastered" version of it on StoryPress. Funny how things have changed in just a year.
Tomb is a parasite. It feeds on its host, the Fantom Network. I’ll explain here the tokenomics behind TOMB finance and how it reaps FTM of its upward momentum by applying sell pressure on it.
The Fantom Network has some very strong fundamentals. It’s a cheap, fast and reliable blockchain (ok Fantom Network runs on a DAG, so technically, it is not exactly a blockchain, but this detail isn’t important here). Fantom has a fast growing ecosystem, and value is flocking to it by the billions. So why its native token, FTM, is staying so low?
The place of the Fantom Network in the cryptosphere
According to Defi LLama, the Fantom Network is the fourth blockchain by TLV. The Total Value Locked is the sum of all the value that is invested inside all the different applications of the corresponding blockchain.
Fantom Blockchain on DeFi Llama
With more than 14 billion dollars locked in its applications, Fantom is in front of Avalanche, Polygon and Solana. It is just behind Binance Smart Chain, Terra and of course, Ethereum.
Many people consider that the market capitalisation of a blockchain should roughly be equal to the TLV of its applications (which are often named protocols). Applying this logic, Binance Smart Chain and Solana are over valued. Ethereum is also over valued a little, and the others are correctly value … except for one: Fantom.
Fantom Mcap/TLV ratio is around 0.37. So, many people see it as the most under-valued blockchain in this list. In their logic, its native token, that is currently at around 2$, should be around 6$. So they dive in and buy FTM, hoping it will appreciate to its fair value.
So the question is: why is FTM so low? why is it not going more on the upside?
Well, the problem is that FTM has a nasty vampire on its neck: Tomb Finance.
What is Tomb Finance?
Tomb Finance is a DeFi protocol that emits an algorithmic stablecoin: the TOMB. Stablecoins are usually digital versions of fiat money like USD, or gold for the PAXG stablecoin. You give real dollars to some entity and in returns, it gives you a blockchain version of these dollars. Most of stablecoins (USDT, USDC, ...) are backed by real money or assets, that way.
In this epoch of very volatile cryptocurrencies, stablecoins are a safe harbour when you can moor your wealth when the market is getting too rough.
Algorithmic stablecoins, on the other side, are not backed by, but pegged to another asset (usually USD too). An algorithm, in a way or another, incentivise people to sell the stablecoin when it is over peg (its value is above the one of its target asset on the open market), or buy it when it is under peg. So what is TOMB pegged to? Well, TOMB is pegged to … FTM!!!
Yes, the goal of TOMB is to have the same value as FTM.
Well, what’s the point then?
On Tomb Finance website, you can read their logic: FTM is limited in supply, which is a shame because it hinders its growth. By printing TOMB, Tomb Finance is allowing our poor world to go beyond FTM’s limited supply.
Well, if you are not curious, you can just stop here. You have already understood that by printing funny FTMs, Tomb is diluting it. The more TOMB printed, the less FTM has its own value.
TOMB is not liberating the Fantom users from FTM’s limited supply, but it is diluting its value. Crypto currencies rise in value because they are scarce. What is wonderfull is that Tomb Finance claims that it is for the good of the ecosystem.
Now, if you are curious, you might want to understand how they do it. What is the nasty mechanics that inflates TOMB supply at the expense of FTM’s value. This is smart and tricky. Let’s dive in.
Miles Deutscher teaching insane APYs
TOMB’s tokenomics
Please take a deep breath Alice, there are 4 steps to that funky ladder.
First step: contribute to the TOMB-FTM liquidity pool, on SpookySwap
SpookySwap is a decentralised exchange. It’s a bit like traditional Binance or CoinBase, but it runs on the Fantom Network. It has a nice community, funny graphics, and it only works because some people provide liquidity to it. Traders still pay 0.2% fees, but these fees are re-distributed to the people who provided liquidity. You could call it an exchange for the traders, by the traders.
Providing liquidity to the FTM-TOMB pair on SpookySwap
Contributing to the TOMB-FTM liquidity pool means that you put an equal amount of TOMB and FTM, let’s say 100 each, in a pool. People will be able to use that pool to trade on the TOMB-FTM pair, and you’ll get a fair share of their trading fees, proportional to the amount of liquidity you brought to the pool. Of course, when you start that journey into the rabbit hole, you don’t have any TOMB, so you’ll first start by selling 100 FTM to get 100 TOMB. It can be 10 or 10 000, you swap as much as you like.
In exchange for the liquidity that you gave, you get LP (Liquidity Provider) tokens, that you can redeem when you want, to get back the original liquidity you provided, plus your share of the trading fees that are constantly accumulating in the trading pool.
101% APR … crazy !!!
Second step: stake your LP tokens to Tomb Finance
You are a good lad. You started the whole engine, by providing liquidity. To reward you, in what they call the cemetery, Tomb Finance takes your LP Tokens, which serve as proof that you participated in their operation to free the world of FTM’s scarcity. As a reward for your felony, they give you another token called TSHARE, regularly, as long as you keep lending them (the terminology is staking) your TOMB-FTM LP tokens in the cemetery.
Third step: I have TSHARE tokens, now what? Well, just “stake” again!!
Now you got you TSHARE tokens from the cemetery, you can go to what they call the masonry to stake them again. What for? Well, the masonry is Tomb Finance’s money printer. When the price of TOMB is above the price of FTM, they print more TOMB. As more TOMB tokens are printed, their value lowers, the price of TOMB goes down a little and gets back to the price of FTM.
372% APR … insane !!!!
One thing is important to stress here: the price of TOMB does not go down because many people want to sell their TOMB (to buy FTM for example, which would put an upward pressure on FTM). No, it goes down, because there are more of them, so their value is diluted.
Up to now, you are a 3 times winner:
- you provided liquidity to the TOMB-FTM pool, so you are earning trading fees (and you deserve them. Providing liquidity really helps the whole ecosystem).
- you are “staking” your LP tokens, so you get TSHARE
- you are “staking” your TSHARE, so, when, and only when, the price of TOMB is above the price of FTM, you get some more TOMB.
Fourth step: win, even when you could loose
You get TOMB tokens when the price of TOMB is overpeg, but what if the price of TOMB is below?
Well, Tomb Finance has you covered. First, the masonry stops. No more funny FTM money printing. Because that would depreciate TOMB tokens even more. But Tomb Finance lets you buy TBOND tokens.
Pay one TOMB and get one TBOND in exchange. Tomb Finance burns the TOMB you just gave them, so the total amount of TOMB in circulation lowers. So the price of TOMB will rise up, until 1 TOMB is equal again to 1 FTM. At that moment, you can redeem the TBOND back for one TOMB in what they call the pit.
The Pit
You may have converted your TOMB to TBOND during a hard time when a TOMB was only worth 0.8 FTM, but it does not matter, because you will sell back your TBOND to get a TOMB when it is back to 1 FTM.
This TBOND token is where the real trick is. When the price of TOMB goes below 1 FTM, and at least you had a chance to loose money, you can swap it for something that you will be able to redeem in the future when the price of TOMB will get back to 1 FTM.
But will TOMB get back to 1 FTM? Yes of course. Because when you buy TBOND, Tomb Finance destroys the TOMB you used to buy TBOND. So the supply of TOMB falls, and the value rises.
Insane returns
When you combine this whole machinery, you get returns that are completely insane. Just take any video from YouTube that talks about Tomb Finance, they’ll show you that, by compounding what you earn, you get APYs that can go beyond 400%. So you can ask yourself: where is the catch?
You are feeding on FTM, and such, parasiting the whole Fantom ecosystem
Let’s imagine everything is well balanced: 1 TOMB = 1 FTM = 2$. You’ve just watched some YouTube videos explaining the crazy returns you will get with Tomb Finance, so you first sell FTM to get TOMB. (first sell pressure on FTM, and buy pressure on TOMB)
Under-peg periods
Now the price of FTM rises, let’s say from 2$ to 2.5$, because people realise how under-valued this fast and cheap Fantom Network is. 1 TOMB is suddenly equal 0.8 FTM. TOMB is under-peg, so you sell all your TOMB for TBOND, because you know that in the future, you will sell back the TBOND when the TOMB will get back to the peg (so you sell a 2$ TOMB, for a TBOND that you will redeem when the TOMB will be at 2.5$).
Want more? Of course, you realise that you can even sell your FTM for TOMB, because at current price, for 4 FTM, you get 5 TOMB, that you swap for 5 TBOND, that you will redeem for 5 TOMB when they will worth 5 FTM again.
When TOMB is under-peg, in general that is when FTM has just risen on the open market, this system puts a big sell pressure on FTM. FTM will eventually lose some of its value, but the gains will be pocketed by the TOMB zombies.
Over-peg periods
Now the price of FTM falls back to 2$. 1 TOMB is still worth 2.5$, but now 1.25 FTM. TOMB is over-peg. You just wait for the masonry to do its money printing. Of course, when you own a currency that is being printed like crazy, you usually loose in value, but not in this game. As you have TSHARE, the masonry prints TOMB and gives them to you. So, eventually, your 4 TOMB will be worth only 2$ each, … but you will have 5, by the time TOMB gets back to its peg.
Can Tomb “stakers” loose?
From a higher perspective, you realise that TOMB traders have the ultimate advantage against any other traders: they know the future. They know that TOMB will get back to the peg, thanks to the clever Tomb Finance machinery. When the future is given to you on a silver plate, you, as a trader, can only win.
Does it really matter?
Can this really have an influence on FTM’s price? Let’s try to figure this out.
The emission of rewards for staking for the Fantom Network was around 250 million FTM for the whole of 2021. That’s more than a 17% increase in FTM supply over 12 months. This obviously dilutes the value of each already existing FTM, but it is justified as there rewards are distributed to stakers. I mean, real stakers, people who are actively participating in the proof-of-stake consensus algorythm that is securing the Fantom blockchain. Not pseudo-stakers who put their tokens in a pit which helps no-one, does nothing, apart from feeding on any FTM price move.
On the TOMB side, emission of TOMB seems to have started around July, but really got significant from October. So, in roughly 3 months, 170 million funny FTM were printed, making an annualised rate of 680 million pseudo-FTM. Are we talking about a yearly increase of 46% of FTM + pseudo-FTM money supply here?
Still wondering why FTM has not been pumping up more these last three months?
A new kind of parasite
From an evolutionary perspective, Tomb Finance is a fascinating beast. It’s a new kind of protocol. A parasite protocol that feeds on its host blockchain.
Its yields are insane, yet, it is in no way a ponzi scheme like some other protocols (I will write an article on Wonderland, if I have enough … TIME). It cleverly takes advantage of any FTM price move by a smart set up of tokens. Freezing the temporary losses with TBOND, and quietly inflating its money supply as a way of pocketing the gains.
All of this, disguised as being for the good of the community.
I would be very surprised if it wasn’t spreading. Fantom Network already has a variant called 2omb token. Will it spread to other blockchains? In a few weeks, are we going to have a wave of new algorithmic stablecoins peged to all the other blockchains native tokens? … for the good of the community.
This adventure started as a single article about Tomb Finance and Fantom (You’ve just read it) but ended up as a trip into degenerated decentralised finance (Degen DeFi). If you want to follow Le Zèbre, in his investigations in a land of yield addicts and leverage dealers, and learn how he got his hands dirty, please the next episode: Get ready for Vampcoins
Edit 03/02/2022: Loiynes has written some very good counter arguments against my vampcoin theory. A very good read.