The DeFi landscape is witnessing a revolutionary use of Uniswap V3, thanks to the innovative minds at Baseline Markets. The developers at Baseline posed an intriguing question that could potentially alter the dynamics of protocol-owned liquidity (POL): “What if the POL floor tick could purchase the entire token supply?”
In a world where liquidity and leverage are critical, Baseline offers a novel approach that promises infinite liquidity, no liquidation risk, and a market that trends upwards. This article takes a closer look at Baseline’s mechanism, how does it work and wat is its inaugural token, $YES money?
What Is Baseline and How Does It Work With Uniswap V3?
Baseline is more than just a protocol; it’s an automated liquidity manager designed to transform token launches. By leveraging Uniswap V3’s unique concept of ‘ticks,’ or liquidity ranges, Baseline introduces single-sided liquidity to effectively launch tokens, similar to an ICO.
What Constitutes Baseline’s Liquidity Structure?
Baseline’s market-making strategy is built upon a foundation of three distinct liquidity positions within a Uniswap V3 concentrated liquidity pool. These positions are:
- Floor Position: It acts as the reserve liquidity at the lower end of the order book, concentrating liquidity in a narrow price range. Its role is to defend the token’s price during sell-offs, with the lowest price it safeguards being the token’s Base Liquidity Value (BLV).
- Anchor Position: This position provides liquidity from the token’s BLV up to the current market price over a broader range. It supports liquid trading conditions and maintains the token’s health even when speculative premiums arise.
- Discovery Position: Expanding from the current market price upwards, the discovery position introduces new token liquidity into the market. It enables upward price discovery and the responsible distribution of supply.
How Is the Base Liquidity Value – BLV Calculated?
The cornerstone of Baseline’s market-making strategy is the calculation of the BLV, which hinges on two key metrics: system capacity and the token’s total floating supply.
- Capacity refers to the total tokens that can be held by the liquidity structure.
- Floating supply encompasses all tokens not within a Baseline liquidity position.
Baseline ensures that capacity surpasses floating supply before deploying liquidity to maintain solvency.
The BLV is pinpointed by determining the highest price at which liquidity can still satisfy the solvency requirement.
This is achieved by incrementally raising the liquidity at each price until capacity can no longer cover the floating supply. This process guarantees that the protocol is always in a position to buy back tokens efficiently, with minimal dormant liquidity.
What Are Liquidity Rebalances: shift() and slide()?
To explore these parameters on your own, you can visit Baseline Simulations.
Baseline employs two rebalancing strategies: shift() and slide(), to mitigate extreme market movements and maintain a stable trading environment.
When Is shift() Activated and What Does It Do?
The shift() strategy is activated when there is a significant price increase. It involves:
- Removing Anchor and Discovery Positions from the Uniswap V3 pool.
- Transferring ETH liquidity from the Anchor to the Floor Position to support a higher floor price.
- Attempting to elevate the floor price by assessing if the protocol can repurchase circulating tokens at an increased value.
- Redeploying a new Anchor Position with additional ETH liquidity.
This strategic move not only ensures the protocol’s reserves are sufficient but also aids in progressively raising the token’s value over time.
What About slide() and Its Function?
On the other hand, the slide() strategy comes into play when the token’s price drops significantly. This approach adjusts the Discovery Position closer to the market price and condenses the Anchor Position, ensuring that the liquidity remains effective and the market conditions are stabilized.
How Does Baseline Accrue Fees Without Taxing Trades?
Unlike traditional models that tax buys and sells, Baseline cleverly adjusts liquidity depth between ticks. This adjustment increases slippage during trades, which, in turn, quietly accrues fees in ETH for the protocol. It’s a cleaner, more trader-friendly approach to generating revenue.
What Are ‘Floor’ and ‘Anchor’ Ticks in Baseline’s System?
The fees gathered from trades are allocated to what are known as ‘floor’ and ‘anchor’ ticks. These serve as a protective price floor for the token, ensuring that the value doesn’t drop below a certain point. As trading continues, the floor tick increases, bolstering the lowest price the token can reach.
Buying Up the Entire Token Supply
The developers at Baseline Markets have introduced a concept that could reshape our understanding of liquidity and market stability. They’ve considered the possibility of protocol-owned liquidity — POL floor tick — which is essentially a safety net for token value and has the capacity to buy back the entire circulating supply of a token.
The ability of the POL floor tick to potentially acquire the entire supply would offer immense benefits to token holders:
- It would provide a powerful buffer against market volatility.
- Token holders could have increased confidence in the token’s value stability.
- It might minimize the potential for dramatic price drops.
How Does Baseline’s ‘Shift’ Function Contribute to Price Appreciation?
When the token price appreciates beyond a certain point, the ‘shift’ function kicks in. This rebalances the entire liquidity structure:
- The floor tick is raised, hence increasing the floor value of the token.
- Anchor ticks are reset.
- Discovery ticks, where new tokens are bought from, are shifted up as well.
This rebalancing act ensures that, as the market value of the token grows, so does its foundational liquidity.
What Happens When the Token Price Decreases?
When the token price decreases, Baseline’s ‘slide’ function is triggered. This function aims to:
- Move the floor bin up if fees have accumulated sufficiently.
- Rebalance anchor ticks and price discovery ticks downwards.
It’s crucial to note that the floor tick can only move in an upward direction.
Is Baseline’s Technology Truly ‘Up-Only’?
While Baseline does create a scenario where there’s a fair value your tokens won’t drop below, it’s not entirely ‘up-only’. The floor will ideally move up with trade activity, but if the token trades at a high premium, there’s a risk of price corrections. Please note that this is an experiment and there are no guarantees, especially in crypto.
What is YES Money?
YES is the first token of Baseline Markets, and it is a protocol that actively manages liquidity to establish defined trading ranges.
A Stablecoin
Given its structure, YES holds potential as a floating value decentralized “stablecoin,” making it an ideal asset for DeFi treasuries and trading pairs. Its design is less conducive to rapid price spikes, distinguishing it from typical memecoins.
Can You Leverage Your Position With YES?
An intriguing feature of Baseline is the ability to leverage your tokens without the risk of liquidation. By locking up YES tokens, you remove them from circulation, which allows you to borrow ETH from the floor tick. The floor tick is guaranteed never to decrease in value, ensuring a solvent position. As the floor tick rises, you can even increase your leverage.
Conclusion
Baseline’s market making strategy in Uniswap V3 is a sophisticated blend of strategic liquidity positioning and dynamic rebalancing.
The YES protocol by Baseline Markets is a testament to the innovative spirit of the DeFi community. Its unique design is prompting a reevaluation of what a memecoin can be, potentially paving the way for a new generation of stablecoins. The new tech is here, it is just not evenly distributed.
Also, many similarities between the early days of the OlympusDAO (OHM) discord where palpable confusion and curiosity is surrounded by the early stages of groundbreaking protocols and smart money finding their way to the project.
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