Permafrost: Un-Rug-Pullable Liquidity

Wherein We Stable the Rug to the Floor

by Foundrya month ago

What’s a Rugpull?

Here’s the scenario: A new ShitCoinJr (SCJ) just popped onto the DeFi map, and is attracting attention. The premine holders put large portions of ETH and their premined SCJ into AMM liquidity provision, along with ETH. Users can now trade between ETH and SCJ with little slippage. Hooray!

Hype increases, and new users trade ETH for SCJ via the liquidity pool. This increases the price of SCJ, but more significantly, the amount of ETH in the pool increases while SCJ is drained.

Then disaster strikes: the original premine holders, who are now the major liquidity providers, remove their liquidity, reclaiming all the ETH (a lot more now) and SCJ (a lot less now) from the pool. The liquidity that the users depended on has been removed “from under their feet” (hence “rugpull”), and they can no longer exit without tanking the price.

Something analogous to a bank run occurs, an acceleration of the typical dump after a pump. The pump probably felt quite healthy, with the benefit of all that premine liquidity. But now the liquidity is gone, so the dump is magnitudes more aggressive and devastating. The ETH is no longer “in the bank”, and everyone knows it.

SCJ liquidity is now gone and the price has tanked. The premine holders have made a tidy ETH profit, and the investors are left with the now-worthless SCJ. DeFi moves on: “another rugpull”.

Ouch.

The Reasonable Solution: Locked Liquidity

Fortunately, there’s a pretty simple solution: time-locked liquidity.

When you provide liquidity to an AMM, you get a specific “liquidity token” to represent your ownership of the liquidity (In the scenario above, this is what the SCJ premine holders first received, then later redeemed, to begin then finish the rugpull). As a standard ERC20 token, this liquidity token can be put into a time-locked contract, whose logic is simple: the owner can’t remove them for some predetermined time, say a year. Alternatively, or in addition, the contract might specify a max rate at which they can be withdrawn, such as only 5% of the total each month.

This has the effect of trustlessly guaranteeing that the liquidity will remain available — that it can’t be rugpulled — for some amount of time. And yet in the long term, the premine is still eventually returned to its original holders, maintaining the incentive and reward for the premine-holders to do whatever work they committed to in the beginning.

We expect this solution to become a de-facto standard, such that any project refusing to do time-locked liquidity will immediately face extreme suspicion (unless they have no premine at all, as with YFI).

The Extreme Solution: Frozen Liquidity

A few months into the Foundry sale, we at Team Toast are facing liquidity issues: anyone wanting to enter or exit FRY faces extreme slippage. Locked liquidity was a promising idea, but because we’re a bunch of pansies that are afraid of the SEC, we didn’t want to personally provide it: it might be misconstrued as providing securities.

Eventually, because we have an undying fascination with burning tokens, we asked: what if the liquidity tokens were actually locked away *forever — *burned, in other words.

Well, the liquidity would never be removed — the rug would never be pulled. In a fun inversion of terms, burning liquidity tokens results in frozen liquidity. That’s pretty neat!

But Team Toast and other FRY holders won’t want to do that personally, because obviously to burn your liquidity tokens is to revoke all ownership of the ETH and FRY you supplied to liquidity. Thinking about burning tokens can be fun; actually doing so usually isn’t!

But armed with the FRY minting key, maybe we could incentivize others to do it for us. So we’re trying a little experiment: the Permafrost Sale.

The Permafrost Experiment

We’ve deployed the Permafrost Sale, which opens on 2020.10.12 (this Monday) at noon UTC. This will be a slightly modified version of our still-running 19-month-long main FRY sale, so check that out if you want a preview.

Like the main sale, the permafrost sale is minting FRY for those who participate. But instead of accepting DAI, it accepts ETHFRY liquidity from this balancer pool; and instead of sending the received token to the treasury, it immediately burns it (freezing the liquidity). It’s also much shorter, with only 4 buckets lasting 42 hours each, ending exactly 1 week after it starts. In total it will mint an additional 900k FRY.

The same price-discovery mechanism of the main FRY sale will operate here. If you’re the only one to hear about this, you’re in luck: you can bring any small tidbit of the appropriate ETHFRY liquidity to the sale, and claim the whole bucket’s supply of 225k FRY.

But you probably won’t be the only one to hear about it. Other degens will calculate costs and gamble on future bucket participation and the price of FRY, and some will make a profit play. The bucket will accumulate more participants, and eventually a stable ETHFRY price will be found for FRY. Weird, huh?

Note: as with the main FRY sale, entering tokens into a bucket is irreversible, even if many others enter after you, diluting the amount of FRY you’ll be able to claim. Once a bucket ends, no one else can enter, and you’ll be able to claim your FRY, proportional to the liquidity you deposited vs the total received for that bucket. If you put in 10% of the liquidity that the bucket received in total, you’ll be able to claim 22.5k FRY — 10% of the bucket’s supply.

We sincerely recommend staying back and watching how bucket 1 goes first, then getting into the later buckets based on that data.

This Should Be Fun

Both our main sale and this experiment operate as one-way valves, consuming a token in exchange for minted FRY. But where the main sale consumes DAI and accumulates it in the Foundry treasury for the purposes of building Foundry, the permafrost sale consumes liquidity tokens and burns them, accumulating permanent ETH/FRY liquidity.

We also expect this novel experiment to generate some engagement from the DeFi space, enough to drive up the price of FRY. This would further increase the amount of liquidity degens will throw into the permafrost sale to get FRY. And on top of that, getting that liquidity necessarily involves buying FRY, directly or indirectly — putting further upward pressure on the price of FRY. This results in more trustlessly, permanetly locked liquidity, further increasing project confidence.

In short, we expect a very intense positive feedback loop occurring as a result of this experiment, simultaneously pumping the FRY price (which may or may not last) and increasing ETH/FRY liquidity (which will last forever). The increase in FRY price will also indirectly attract DAI to our main sale, further increasing Foundry’s Treasury.

Lots of wins here. We’re very excited.

If we get what we want from this experiment, we may launch a longer-term permafrost sale to gain even more permanent liquidity. At the very least, it should prove a fascinating experiment in tokenomics and further inform the evolving discussion on how a young project can quickly and ethically garner investment in the age of DeFi while protecting the investors.

Leading up to Monday, any interested degens can visit the permafrost countdown page to prepare themselves with the right liquidity tokens, and as always we invite anyone to read more about Foundry and FRY or join our Telegram!

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Permafrost: Un-Rug-Pullable Liquidity

a month ago
wherein we staple the rug to the floor