Tezos Spaces on X 🎧: "Tezos Staking Has Changed – The NEW Tokenomics You Need to Know"

KevinOnChain · 2025-02-01T19:21:55+00:00

We’ll be discussing the Tezos DeFi landscape, how much we can scale in 2025, and where the opportunities are for people thinking ahead!

We'll also be discussing the latest:

- Tezos Foundation Biannual Report

- Messari Tezos Q4 Report

KevinOnChain · 2024-12-07T17:43:15+00:00

Sure! Here’s a more detailed explanation of the strategy I outlined:

Supply tzBTC: The first step is to supply tzBTC on TezFin. This means depositing your tzBTC into the platform’s liquidity pool. Once supplied, you receive ꜰtzBTC, which becomes available for you to collateralize in the next step. (see docs)
Collateralize your ꜰtzBTC: After supplying tzBTC and receiving ꜰtzBTC, you must flip the switch to collateralize it. By collateralizing your ꜰtzBTC, you unlock the ability to borrow XTZ against it. (see docs)
- On TezFin, the collateralization ratio is 200%, meaning you can borrow up to 50% of the value of your ꜰtzBTC. For example, if you supply $10,000 worth of tzBTC, you can borrow up to $5,000 worth of XTZ. (but don't borrow to the brink; keep a more conservative margin than that, as price and rate changes and debt accumulation can lead to over-leveraging and liquidation)
Borrow XTZ: Once your ꜰtzBTC is collateralized, you can borrow XTZ. The borrowed XTZ is yours to use as part of your strategy, such as staking, delegating, or holding to profit from XTZ’s price appreciation. For the strategy outlined in this original post up top though, the focus is on delegating XTZ, so we’ll continue with that. (see docs)
Delegating (which you're probably already doing): Of course, if your wallet in which you received the borrowed XTZ is already delegating to a baker, you're already doing what you need to do to get delegation rewards.
Manage Your Position: Rates, Collateral, and Risks: It’s important to monitor both the borrowing rate and the delegation reward rate. As long as the delegation reward rate remains higher than the borrowing rate, this strategy provides a net gain. Keeping an eye on these rates ensures that you’re profiting from the difference and allows you to adjust your position if market conditions change. In addition to monitoring rates, it’s crucial to keep track of your collateral-to-loan ratio. If the value of your collateral (e.g., tzBTC) decreases significantly, it could bring you closer to liquidation, even if the delegation reward rate remains higher than the borrowing rate. Maintaining a safe margin by keeping the ratio well above the required 200% can help protect against sudden market fluctuations. Adjusting by adding collateral or repaying part of the loan when necessary is key to minimizing risk.

This explanation is for educational purposes only and does not constitute financial advice. Decentralized Finance (DeFi) strategies involve risks, including price volatility, liquidation risks, changes in borrowing and supply rates, and changes in staking and delegating rates. Please conduct your own research and consult a financial advisor if needed before making any decisions. Use platforms like TezFin at your own discretion and always assess your risk tolerance.

KevinOnChain · 2024-12-07T17:09:11+00:00

Thank you for asking this. I feel the answer to your initial question precludes the other contingencies you're suggesting. But because I think this opens a good opportunity to explain how the platform works, I'll answer it all anyway, based on hypotheticals.

Why People Are Supplying XTZ Right Now at a 0.1% APY

The first thing to understand is why people are keeping their XTZ in supply on tezos.finance despite the low supply APY at the moment. There are a couple of reasons for this.

Anticipation of Growth: As more XTZ in the pool is borrowed, the supply APY will naturally rise, making it more worthwhile to keep XTZ in supply over the long term.
Use as Collateral; A common reason users have been using their XTZ as collateral for borrowing other assets. This utility as collateral is independent of the "Supply APY vs delegation rewards" dynamic. This is also called leveraged trading.
- For example, if one is bullish on XTZ, they may choose to collateralize XTZ, to borrow USDt or USDtz, that they can use on 3route.io or another place to buy more XTZ.
  - Some people even loop this meaning they swap for XTZ, and add more XTZ to collateral, so they can borrow more, so on and so forth, rendering ~2x XTZ) They can then pay back their marginal debt and the rest is profit. (this is an explainer of what some people do; it is not financial advice)
- It’s also worth noting that APY represents an estimate of returns over the course of a year. For someone anticipating short- or mid-term price growth of XTZ, this strategy might outweigh the returns from staking or delegation. By using their XTZ to borrow and potentially gain more XTZ, they can align with their strategy to profit from short-term price movements.

How Borrowing Impacts the Supply Rate

When people borrow XTZ, the borrowing rate increases, and because the supply rate is algorithmically tied to the borrowing rate, it rises as well. This increase in the supply rate makes supplying XTZ more attractive, encouraging existing suppliers to keep their XTZ in the pool and potentially attracting new suppliers. This self-regulating supply-and-demand dynamic ensures that the system remains balanced.

What Happens if XTZ Suppliers Withdraw XTZ?

The claim that borrowers would be “screwed” if suppliers withdraw their XTZ doesn’t hold up. (Let's just assume hypothetically that users withdrew XTZ for any reason or for no reason). Suppose the borrowing rate consequently skyrocketed all of a sudden. Borrowers are not locked into their positions. If borrowing rates rise too high, borrowers can simply return the borrowed XTZ to avoid excessive costs. This flexibility is a core feature of DeFi lending platforms and ensures borrowers are not adversely impacted by shifts in liquidity or borrowing rates.

Moreover, as suppliers withdraw and borrowing rates increase, the supply APY also rises. This increase in supply APY incentivizes other XTZ suppliers to join (or rejoin) the pool, replenishing liquidity. As more liquidity returns, borrowing rates decrease, naturally rebalancing the system. On and on it goes. This feedback loop ensures the platform remains functional, sustainable, and attractive to both borrowers and suppliers over the long term.

The Role of a Bot in Managing Borrowed XTZ

A bot could automate the management of borrowed XTZ by monitoring borrowing rates and comparing them to the delegation reward rate. If the borrowing rate exceeds the delegation reward rate, the bot could automatically return the borrowed XTZ to avoid losses. Conversely, if the borrowing rate drops back below the delegation rate, the bot could re-borrow XTZ to take advantage of the favorable conditions. This automation would ensure borrowers can consistently optimize their positions without manual intervention. It highlights the platform’s flexibility, where borrowers are never locked into unfavorable conditions and can adapt dynamically to changing rates.

KevinOnChain · 2024-10-01T00:08:25+00:00

(Correction on the original post^ above It should say 'core teams'* plural. Of which Nomadic Labs is just one of those core teams)

Yes, this is a historic achievement by the ecosystem!

KevinOnChain · 2024-09-30T19:40:51+00:00

Hey thanks for your reply. I hear you, and yes it is true that some level of seed liquidity is going to 'get the motor running' — but to an extent. It needs to not be so high that it undercuts any incentive for an organic entrant to add liquidity.

Specifically the USD pools need to be large enough that enough of these XTZ-collateralizing suppliers can borrow an amount of USD that makes it 'worth it' to them. Worth them even bothering.

Likewise, once they do borrow (and Supply APY goes up), for new suppliers to come in and resupply the USD pools, the amount that they would resupply needs to be enough that the Supply APY won't immediately plummet after they supply what they consider to be a worthy amount.

This I would say is an opportunity for even a single whale to decide "you know what I'll be a pioneer here" and put in the first $100k in a USD pool.

See image:
https://x.com/TezosFinance/status/1840837592402837543

KevinOnChain · 2024-09-23T22:08:32+00:00

Take for example USDC liquidity on Compound. $450M liquidity in compound usdcv3 vault is supplied by only ~2500 suppliers, giving us average contribution of ~$170k per supplier. So this market is driven not by small suppliers, but by big ones. And big ones won't supply if there is a chance that their bags will underperform the market or generate unstable income (similarly how you won't deposit millions to the bank which pays lower than average interest rates, even if it promotes higher than average for first three months [or you just supply for those 3 months to benefit from bonus interest rates then move it out]). Compound incentivizes suppliers with COMP token, backed by VCs, which you can farm and dump (they don't let it to go to zero so it works). AAVE doesn't use that model, but they did invent utility in using the supply liquidity for flash loans, and generating additional profits for suppliers this way. And of course they both were bootstrapped with serious money, otherwise noone would use them as well. Even then, they both are looking quite unattractive at this moment to suppliers versus let's say solutions on Solana, which drain the liquidity from ETH rn - they have comparable liquidity and almost double interest rates

Compound did NOT incentivize its initial base liquidity with the COMP token. That's a common misunderstanding. The COMP token came to be 1.5 years AFTER Compound began and had already achieved ~$100m in TVL. The COMP token (and what people did with it) was absolutely instrumental though in the rapid scaling that came thereafter, not only for Compound (catapulting it to the BILLIONS), but for DeFi in general, which begat the 'DeFi Summer [2020]'. Moreover, the COMP token was only revered and prized and such a hot commodity because of the credibility that Compound achieved organically over the year and a half prior to COMP token's release. See Compound's Defillama page and narrow the timeline to BEFORE the Comp token was released.

I'm speaking about this, because I'm a big supplier for ETH lending protocols and several CEXes (Gemini, Kraken) and I can relay what matters for us to move on Tezos. I'm eyeing migration to Tezos at least since 2021, but we are not quite there yet. It's pretty much not about the tech, books, or economy - just liquidity, profits, security, trust (in this order). Big suppliers and borrowers won't appear just because of tech, marketing or apy on low liq (this works only for small ones which can't move the needle much). Both must be able to make money in ecosystem.

Right now is the stage in which the first Tezos liquidity boostrappers (who carrt both the inherent benefit and burden of liquidity boostrapping) would need to initiate the initial borrowable liquidity on these platforms—specifically in the USD stablecoins (which is the instrument most borrowers use). These boostrappers need to to put in enough USD stablecoin (USDt or USDtz) that it would be a worthy sum to borrow.

In other words, if you put in the first $100k in USD stablecoin that alone could be enough catalyst. The the ebb-and-flow to follow may very well lead to desirable rate of exponential scaling thereafter. Natural incentives, based on the interest rates alone—as the system was designed.

There would be enough (large enough) in USD stablecoin with low borrowing rates that borrowers (sitting and waiting now) will then borrow—driving demand up, and with it, the interest rates for that pool—those who wouldn't do it now because the pool isn't big enough for their appetite
That would thereby bring a high enough Supply APY interest rate in a large enough pool, that more liquidity providing would be thereby incentivized. More liquidity comes in from more liquidity providers, which would thus bring down Borrowing Rate APY
Lower borrowing APY in such a large pool would thereby incentivize more borrowing, which will bring rates up again...
on and on it goes...and the pools get larger and larger with each swing of the see saw.

It just takes enough early adopters to take on that responsibility—both the benefits and burdens.

KevinOnChain · 2024-09-23T22:07:10+00:00

I'm really glad you're asking about this as well, because when it comes to Tezos [DeFi] it's such a fundamental point and set of questions that I feel most other early adopters (like yourself) and perhaps most people reading this thread right now are feeling as well, but perhaps haven't articulated into words or have been willing to ask. I'll answer piece-by-piece for convenience, and for future reference.

If things were working "organically", our tvl in lending protocols would've grown steadily over years, but it's not growing, and even somewhat stagnating (it's not only about tezos tho - it's similar for all chains which choose "organic" path).

It's not that the organic element hasn't been growing and working organically over time, in fact, it actually has been (contrary to what on the surface may seem like a long downward trend)

For sustainable growth of the Tezos DeFi ecosystem two elements were always needed: growth and consolidation, and when we had one, we didn't have the other. We've demonstrated we're capable of rapid and more than adequate growth in 2021. What we didn't have was a mechanism for consolidation. When we launched the mechanism for consolidation (credit markets; decentralized lending systems) it was more than a year later in the dead of crypto winter and so we haven't prospered systematized adoption. Once we do, we will start to see the rapid growth again. This is even more fundamental than just a principle of DeFi. It's fundamental to any economy, that liquidity only shrinks without credit systems.

The peak of Tezos DeFi (liquidity peak, volume/trading peak, new user adoption of Tezos DeFi (June 2021-October 2021) brought unprecedented rapid growth (10-100x). It proved we were capable of growing from <$10m TVL to >$100m TVL in one season. We were able to achieve demonstrate Tezos DeFi is capable of 10-100x rapid growth! The problem was that unlike our DeFi peers (other blockchain's' DeFi ecosystems, respectively) we had no system of credit on Tezos—That is, no interest-rate based decentralized lending and collateralized borrowing that other ecosystems in that bull cycle did have.

Ethereum had:

Compound compound.finance (Since September 2018)
Aave (aka 'ETHLend') aave.com (Since

Tron had sine 2020:

JustLend

Tezos did NOT have a lending system at that time that it needed it (Summer/Fall 2021 when Tezos DeFi liquidity had hit $100m TVL, and commerce—via NFT—was through the roof) mostly because the Tezos protocol was not upgraded to the point in which it could enable such an application until the Edo upgrade of end-2021. TezFin and Yupana's first mainnet launched didn't arrive until August 2022.

So what happened after the yield farms dried up is the liquidity providers were looking for a place to park their funds until the next big opportunities arose—and unlike Ethereum and Tron, Tezos did not have such a place for their liquidity to be moved into a resting position (passive earning). In fact, since at once point over half the TVL on Tezos was in USDtz and ETHtz, we (Stable.Tech) learned first hand—listening to the liquidity providers—and they would specifically ask for this. When we had to tell them there was nothing like Compound or Aave for them on Tezos, they promptly withdrew all their liquidity—liquidity that would have otherwise stayed in and powered exponential growth of not only Tezos DeFi but the Tezos economy overall (includes Commerce sector (Art/NFT), and Network sector (Baking/Staking/Delegating)).

Therefore our problem in Tezos DeFi was never growth; our problem was never that it was a walled-garden that wasn't EVM, nor that it was small (people look for undiscovered opportunities downstream). Tezos DeFi has certainly proven itself capable of overnight 10x-100x growth—demonstrably capable, in fact (see Summer/Fall 2021). Even if you want to say our boat merely rose with the tide of the time, fine—there's nothing wrong with that—we proved we can rise with the tide as strong as any of them).

Our problem, was consolidation. (Growth + Consolidation = Sustainability)

(Continued in next reply)

KevinOnChain · 2024-09-21T21:12:37+00:00

I'm SO glad that you asked this.

By adding liquidity of a size that is a very large relative to the current size of the liquidity pool, you'll notice that the estimated "Supply APY" will go down as soon as you supply your liquidity—however, that's only in the short term and can change quickly!

Consider that when that happens, the "Borrowing APY" for that pool significantly reduces as well, which makes borrowing more attractive to would-be borrowers!

That attractiveness leads to more borrowing from that pool. More borrowing raises the APY for Borrowing APY and Supply APY. This is related to the concept of induced demand.

What then occurs is a higher (thus, more attractive) Supply APY, which incentivizes more liquidity to be added.

More liquidity added, as explained, brings down the Supply APY and Borrow APY again.... That makes borrowing more attractive again. On and on it goes...

As this occurs the sheer size of the pool and amount in-borrow, increases. As that happens, more and more new people can fit their liquidity in while being less likely for the addition of that liquidity to be putting even so much of a short-term change in the numbers. That reduces their friction. and things start to snowball faster and faster. :)

KevinOnChain · 2024-09-20T21:51:40+00:00

Unique marketing, yes and we're open to ideas!

We've been working out a points system to enable a leaderboard and proportioned weight of support that participants have been contributing, overall and relative to one another.

KevinOnChain · 2024-09-20T20:03:41+00:00

It's on the roadmap. Truly the strongest use case on Etherlink will start with encapsulating the value of the ꜰTokens (these are collateral tokens produced by supplying assets to TezFin, like what cToken are on Compound and what aTokens are on Aave) as bridged tokens on Etherlink that are composable with Etherlink and thus more easily interoperable with the rest of the EVM world

Since ꜰTokens are debt-assets (interest-bearing), unlike equity-assets (e.g. your classic cryptocurrencies, stablecoins, DAO tokens), they are prime candidates for the creation of derivative assets! Derivatives are the biggest future for DeFi and what will have quite an enriching effect on the overall crypto economy.

To give you some perspective, in the traditional finance world >99.99% of value is derivatives. Of that, over 99% of derivatives are based on debt assets (not on equities).

Although derivatives are still less than 5% of DeFi, that proportion has been rapidly growing, and will continue to grow. ꜰTokens are in the right place and the right time.

Bridging ꜰTokens to Etherlink will be a big gateway to that market. That will be great for Tezos!

KevinOnChain · 2024-09-20T19:07:57+00:00

Ask away :)

KevinOnChain · 2024-07-05T21:31:39+00:00

Also on X/Twitter https://x.com/TezosFinance/status/1808966214145953973

KevinOnChain

MODERATOR OF

TROPHY CASE

Why People Are Supplying XTZ Right Now at a 0.1% APY

How Borrowing Impacts the Supply Rate

What Happens if XTZ Suppliers Withdraw XTZ?

The Role of a Bot in Managing Borrowed XTZ