Author: Zuo Ye Web3

The right way to approach tokens and liquidity

I've been reflecting on token economics and the possible future of the crypto/crypto/Web3 world lately, focusing more on exploring the path of asset inflation triggered by RWA. But after careful consideration, I realized that we shouldn't directly conclude that there are no good players in DeFi.

The world is not lacking in good tokens, but it lacks discerning people who can discover them.

Use the exchange's credit to sell your own tokens

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USDS: Apple Distribution Network + Luxury Goods Allocation

To be clear from the outset, I have always believed that the demise of token economics has two causes:

Public blockchain tokens under PoS cannot have "real-world use". The remaining gas fees become virtual financial uses. Even Tempo and other L1 tokens have essentially moved towards a gasless model, an extremely cheap stablecoin gas model where sellers or companies can pay.
Most DeFi protocols do not need to issue tokens. Uniswap's token issuance is a helpless measure to deal with SushiSwap's traffic hijacking. Only Curve has created a complex Ve(3,3) bribery model, which allows the token to have economic uses beyond governance.

Unfortunately, the Curve series has failed to live up to expectations. From Convex to Supply and Yield Basis, they have been driven by a desire to make quick money, wasting two high-quality assets, $CRV and $crvUSD.

A breakthrough came recently when developing Barker.money. This required researching the financial products of various exchanges, including Sky's Spark. In Binance's spUSDT reward program, the APY was approximately 7.12%. Meanwhile, OKX's USDC on-chain financial product, which uses the same Spark pool, had an APY of only 3.56%. Further investigation of other on-chain records for this pool revealed that many exchanges were contributing liquidity: Bitget, HTX, Kraken, LBank, Bitso, Crypto.com, CoinEx…

Although the stablecoins used for deposits differ, Spark manages the liquidity behind them all. Whether it's a stablecoin or the $SPK token, Spark seems to be intentionally distributing its wealth management pools through exchanges and even all participants in the crypto market, forming its own massive liquidity distribution network.

<center>Image caption: Multiple exchange addresses</center><center>Image source: @MetaSleuth</center>

Image caption: Multiple exchange addresses

Image source: @MetaSleuth

It looks no different from a regular product that "sells tokens to attract deposits," but I accidentally discovered that DeFi protocol tokens in the PoS era can also have a second function: controlling the standard of distribution volume for distributors.

Sky/Spark stands out among on-chain DeFi. Unlike Ethena's USDe, which requires a complex hedging mechanism, sUSDS doesn't need to build its own liquidity pools everywhere like sUSDe. However, Curator and USDC that you see may be backed by Spark and $USDS.

Ultimately, USDe was limited by Binance's operational capabilities and became the biggest passive victim of 10.11. The revolving loan program it had launched in conjunction with Aave-Pendle came to an abrupt end, and it eventually became a white-label platform for interest-bearing stablecoins and a liquidity distributor for Hyperliquid—HyENA.

In contrast, the USDS way of life is very simple, so simple that it is not even worth writing about.

Promoting USDS only requires three steps: First, buy government bonds and USDC to support the peg price of USDS; second, sell your liquidity management capabilities through first-, second-, and third-tier exchanges, allowing users to deposit funds using USDT/USDC; third, control the airdrop ratio of $SPK to provide tiered liquidity control for distributors.

<center>Image caption: Binance, OKX/Spark APY comparison</center><center>Image source: @BarkerMoneyX @OKX @sparkdotfi</center>

Image caption: Binance, OKX/Spark APY comparison

Image source: @BarkerMoneyX @OKX @sparkdotfi

The $USDS entity itself does not need to extend its business externally to minimize the impact of external shocks. Even if the on-chain pool uses Spark to manage some liquidity, it cannot replace Sky/Spark's control over USDS.

Furthermore, it provides insight into the correct use of protocol tokens. $SPK should not be viewed as a governance token or an economic module that forcibly jumps the queue. $SPK is a measurement standard used to manage the APY given to users by various protocols.

Exchanges with high credit ratings, such as Binance, will supply more $SPK to boost APY, but the cap can be set to avoid liquidity rebalancing attacks like those on the US Dollar Exchange. If Curator actively integrates or the exchange has a low credit rating, the $SPK reward will be reduced or even eliminated, allowing direct U-in and U-out transactions.

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Sky is essentially selling liquidity in USDS, while Spark is essentially selling liquidity management.

It's important to understand that $USDS needs to spend money to move government bonds onto the blockchain, and it has even proactively claimed financial difficulties by distributing $500 million in government bond interest to sUSDS holders. However, don't forget that the issuance of $SPK has no cost whatsoever .

Selling yourself as an asset is always more profitable than selling other people's assets. Spark uses government bonds to create demand for $SPK.

In Spark, $SPK becomes a tool for interest rate control , and it is not afraid of users mining, withdrawing, or selling it. Even if the user's participation cost is very low, it cannot be as low as 0.

The price of $SPK cannot be too high, otherwise the cost of supporting the price would be too high. Furthermore, with its relatively low price and large supply, coupled with the fact that the liquidity of $USDS is basically controlled by Sky/Spark, it is basically unprofitable for market makers to hoard $SPK.

USDS sits comfortably at home, remotely controlling on-chain Vaults and exchange-traded financial products.

Spark reinvented the way liquidity is organized, establishing a tight distribution network in the order of $USDS -> Spark -> CEX/Vault. The token front-end is outsourced to USDC/USDT, and the sales front-end is outsourced to exchanges, which also actively "allocate" and distribute the worthless $SPK.

Serving all on-chain liquidity

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Aside from government bonds and stablecoins, RWA is better suited to bonds.

Binance's most remarkable achievement is that it developed the BNB brand from its distribution channels. This is the fundamental reason why it surpassed exchanges like OKX and why BNB Chain was able to retain funds after years of "copying" other exchanges.

This is similar to Huawei's evolution from shipping, assembling, and OEM manufacturing to its own 5G chip and mobile phone brand. In a sense, it has gained bargaining power against strong brands.

Regarding the adjustment of APY interest rate based on $SPK, the amount of $SPK that each exchange can obtain within each activity cycle is fixed. For example, if Binance has too many participants, the APY will decrease.

At this time, although smaller exchanges have fewer participants and less SPK, their APY is relatively stable. This allows for flexible adjustments to the competitive landscape between large and small exchanges, preventing a single channel from dominating the market.

The competition among wealth management products reveals a clearer picture of the exchange landscape than the trading itself. Brands, unwilling to be consumed by a single channel, will be motivated to maintain a multi-tiered distributor network.

Apple, Huawei, and luxury goods rely on different levels of stores to divide sales areas, which is based on the physical stratification of the population. Stablecoins, on-chain Vaults, and exchanges rely on different APY and sales volume to divide levels, which is based on the supply quota of protocol tokens.

Compared to Curve's clumsiness and Aave's internal conflicts, Sky is laying out the entire on-chain liquidity. Stablecoins based on government bond arbitrage are just the beginning, while RWA and various bonds are already being quietly developed.

Image caption: Sky Ecosystem layout. Image source: @SkyEcosystem.

Image caption: Sky Ecosystem Layout

Image source: @SkyEcosystem

Since MakerDAO was renamed, Sky has become the most successful Ethereum DeFi protocol. Compared to the centralized Aave, Sky is more "decentralized" and you may not even be aware of its existence.

Under the sky, it is divided into multiple sub-DAOs (also known as Stars).

Spark, also known as Sky's first star, builds core liquidity around USDS. After users deposit funds (USDT/USDC/ETH/PYUSD) on the front end, Spark manages their yield strategy in a unified manner.
Grove, the second star, manages Sky's organization and RWA business, but most importantly, it's the product of Steakhouse Financial, which in turn is Morpho's biggest curator.

This can be further extended to Morpho's CEX business development path, such as Coinbase's USDC vault, which is essentially Steakhouse in daily operation.

Grove itself is also an important tool for Sky to deploy RWA bonds. For example, Sky invested $1 billion in Grove to allocate JAAA's CLO products (Collateralized Loan Obligation).

This is quite different from DeFi protocols that simply open up institutional deposit services. Grove aims to become a source of liquidity for institutional DeFi , much like USDS holds a position in the stablecoin Vault.

On-chaining of RWA, whether for tokenized stocks or tokenized bonds, presents a serious liquidity mismatch problem. However, there are no major obstacles in terms of on-chain technology and custody services for the stock and bond markets.

The biggest shortage is initial liquidity, or a mechanism to trigger asset price inflation. Note that this does not mean that US stocks lack trading volume on blockchain, but rather that tokenized assets can be reissued .

For example, BTCFi cannot be established because large investors lack the motivation to move BTC into DeFi. WBTC is sufficient to meet the daily cross-chain participation needs, but if Babylon is used for on-chain surfing, the rate of return needs to be extremely high for it to be feasible.

The most successful BTCFi is the micro-strategy model based on purchasing Bitcoin to issue its own interest-bearing bonds, but DAT obviously does not have this versatility.

RWA's situation is similar. For example, Galaxy's CLO products, after obtaining ratings and custody, are simply presented as a type of yield product. Users don't have a strong demand for "proxy buying." If high-yield incentives are used, UST, xUSD, and others are waiting for you. Grove needs to create a "my bonds are as safe as US Treasuries" model, or offer tiered discounts based on US Treasuries, before it can be integrated into the existing DeFi operating system, such as serving as reserves, or creating fixed-income products based on it.

Providers that only handle the process of putting RWA assets on the blockchain are essentially offering SaaS products, which are destined to not fetch good prices.

If Sky were to further extend this strategy and shift more of its assets to US Treasury bonds , its arbitrage opportunities would increase even further. Essentially, it is leveraging the positions held by its holders to increase its own leverage. Users should remain calm about this, as there is nothing they can do about it.

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If you want a certain product to serve as a liquidity exit scenario, you must first inject sufficient liquidity into it, and then support the sale of your own assets.

This approach or methodology represents the most mature distribution ecosystem in the cryptocurrency world. Time is the true leverage for building the Sky brand, using years of security to guarantee future security .

Referring to Sky's gameplay, it also answered a question I've had for many years.

Before this, I couldn't understand why Sun would create $USDD. Even if he wanted to participate in interest-bearing scenarios, wouldn't it be more direct to use $USDT? Or to rephrase the question, why would Sun raise funds from small retail investors? If he has money, why doesn't he do asset management instead of insisting on creating 2C products?

But now I'm guessing that the significance of $USDD lies in brand segmentation and liquidity barriers.

Even though $USDD is limited by Sun Ge's reputation and the actual amount of funds raised is limited, compared to the high cost of Yi Lihua's fundraising, retail investors are capped at 20%, leaving Sun Ge with huge room to maneuver for wealth management, trading, and speculation.
Secondly, even if $USDD collapses or experiences a liquidity crisis, Sun still has $TRX as cash flow generated by $USDT Gas to support repayments, which can be made slowly or not at all, making it extremely costly for retail investors to seek redress.
The reason why $USDT cannot be used is not only because it is a Tether product, but also because people are willing to believe the narrative that "Sun can make money continuously with USDT".

It's all the same. We are willing to believe that Sky has the ability to maintain its business balance with the safe returns from US Treasury bonds. Therefore, it is irrelevant for its subsidiary DAO to participate in the subprime bond business. Even if Grove's RWA business were to fail, it would only indirectly affect Sky. For example, the limit is $1 billion, while Sky has a scale of $10 billion.

Conclusion

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People prefer to lend money to wealthy people who don't lack money.

Understanding the current state of DeFi, tokens, and DAOs has become an overly complex game of reasoning, but the fundamental logic still revolves around tokens. Beyond governance, bribery, and speculative activities, Spark's APY control tool offers a fresh perspective.

Of course, there may be more sophisticated ways to play, but the essence remains the same: "sell yourself as an asset," rather than helping others sell assets.

Spark launched its second-month SPK buyback program, with 414,000 USDS already transferred to the buyback address.

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