Fair Launch Project: HYPE

Perpetual Farming with Liquidity Locks & Taxes

What Is HYPE?

New DeFi projects can struggle to attract liquidity, which usually means they are forced to resort to the inflation of their token as a way to support incentivised pools. HYPE aims to help solve this dilemma.

Hype is a liquidity locking protocol, made by BuildDAO, which creates and maintains liquidity for new ERC20 currency pairs on decentralized exchanges such as Uniswap and Balancer.

It does so by incentivising liquidity providers with rewards that are funded through a 1% transfer tax, and a 20% LP withdrawal tax on the token pair in question. These taxes ensure a perpetual supply of yield incentives are available to bootstrap new liquidity pools, without resorting to uncapped inflationary emission schedules.

In short, HYPE is a protocol that harnesses and taxes speculative trading (and opportunistic liquidity farming behaviours) in order to provide permanent liquidity for the DeFi community.

In economics jargon, HYPE uses a Pigovian tax on negative externalities that is redirected to the funding of public goods (in this case, ensuring the long-term stability of liquidity for the long-tail of illiquid currency pairs).

How Does HYPE Liquidity Mining Work?

Fig 1. HYPE tax scheme

As in other liquidity mining projects, users contribute funds to a 50/50 HYPE/X Uniswap liquidity pool, then stakes their LP receipt tokens (UNIV2_LP tokens) at https://hypeup.finance.

In the HYPE protocol, all HYPE transactions are taxed 1%, and all liquidity provider (LP) withdrawals from designated liquidity pools are taxed 20%. Any time someone sells or sends HYPE, a 1% tax revenue is generated. Any time someone removes their liquidity from a HYPE/X pool, 20% of the withdrawal is taxed for redistribution (40% of the HYPE in the 50/50 pair).

From these tax revenues:

• 75% is redistributed back to liquidity providers in each respective HYPE/X pool
• 6.25% converted to BUILD and sent to BUILD DAO treasury (a community of builders),
• 6.25% gets distributed to the BUILD/ETH liquidity providers, and the remaining
• 12.5% goes towards incentivising the next HYPE/X liquidity pool, chosen by community vote.

Figure 2 (below) outlines these tax revenue flows. The APY boost to new HYPE/X pools bootstraps and grows the TVL of locked liquidity, resulting in a new source of tax revenues for HYPE and BUILD stakeholders.

Fig 2. HYPE revenue allocations

In V2 of HYPE, liquidity providers will be able to commit to a fixed period to provide liquidity (up to 100 days) after which, there is no penalty tax for withdrawing. Doing so also unlocks a reward multiplier on their yield.

When Does HYPE Accrue Value?

HYPE accrues value through feedback loops of recycled liquidity which compounds farming yields, and reinforces the depth in liquidity pools. Each pool produces tax revenue streams which are used to bootstrap yet another new liquidity pool, creating new streams of tax revenues, and the cycle repeats. The feedback loops work as follows (see Fig. 3):

1. As transaction volumes increases, more tax revenues are generated;
2. Boosting yields, which attracts more LPs.
3. As LPs move out of pools, more tax revenues are generated to create new pools;
4. As more pools are created and successfully seeded, more streams of revenue begin to flow;
5. As more pools are added, and as prices between currency pairs diverge, more triangular arbitrage opportunities are created, incentivising arbitrage bots to contribute yet even more transaction volumes and tax revenues for HYPE and BUILD stakeholders.

Fig 3. Feedback loops in the HYPE protocol. (editable link)

This all happens because HYPE acts as a medium of exchange between all HYPE/X pools. A pair such as HYPE/ETH and HYPE/wBTC will enforce HYPE price stability through triangular arbitrage. The act of arbitrage itself creates more HYPE transfers, resulting in more HYPE taxes that get directed back towards supporting HYPE yields.

These feedback loops and value accrual mechanisms serve to reinforce a price floor for the HYPE token, and BUILD stakeholders.

External Links

• Revenue statistics from recent HYPE pools
• Discord
• Twitter
• Telegram
• BUILD DAO Home Site
• https://hypeup.finance — HYPE app
• https://stake.letsbuild.finance/ — Build LP Staking

A Path Towards Perpetual Farming

Can a temporary spike in transaction volumes and farming yields in a HYPE liquidity pool, cause a permanent increase in TVL? Can a temporary boost in APYs cause a permanent increase in transaction volume and money velocity, thereby creating steady streams of revenue? Such a phenomenon is known as “hysteresis”.

Wiki: Economic systems can exhibit hysteresis. For example, export performance is subject to strong hysteresis effects: because of the fixed transportation costs it may take a big push to start a country’s exports, but once the transition is made, not much may be required to keep them going.

When some negative shock reduces employment in a company or industry, fewer employed workers then remain. As usually the employed workers have the power to set wages, their reduced number incentivises them to bargain for even higher wages when the economy again gets better instead of letting the wage be at the equilibrium wage level, where the supply and demand of workers would match. This causes hysteresis: the unemployment becomes permanently higher after negative shocks.

Fig 4. Drawing an analogy to the rain cycle, HYPE is a hurricane of liquidity.

Article 2. Mitigating the “Adverse Selection” Problem for AMM LPs with withdrawal transfer taxes

HYPE addresses some of the primary issues with AMMs in “Liquidity Provision by Automated Market Makers”: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3674178,

The issues are mostly to do with “adverse selection”, which is where the uninformed liquidity providers are systematically exposed to only the “bad” trades, known as toxic order flow.

Practical concerns:

1. Early LP exiters have negative externalities on lagging liquidity providers.
2. Large LP exiters have large negative effects on the rest of the pool when they exit (as they are effectively large volumes of “toxic order flow”)

Fig x. The lifecycle of a typical farm

The game of farming then becomes a game of musical chairs….before the high APY phase ends, which large LP will withdraw liquidity and take profits first?

The negative effects are multi-faceted:

1. Withdrawal of large amounts of liquidity increases price impact
2. Subsequent large blocks of sales have larger price impact
3. Price expectations drop sharply, causing a cascade of fear as more and more LPs rush for the exit.
4. Traders catching falling knives learn that the sell-off is unexpectedly large, due to these cascading effects.

Observe PICKLE prices and liquidity TVL around the time of the first halving in Fig Y. A drop from $70 to $13 in a matter of hours.

The same game can be found in many other farms, including Harvest, Barnbridge, CORE and even HYPE itself, etc.

Fig Y. Pickle prices around APY halving events.