2.2 Temple AMM & Tokenomics Update (2/2)
Welcome to a new type of liquidity pool.
Temple AMM to incentivise treasury growth and price stabilisation.
If you haven’t seen Part 1: Refresher on Temple Economics, please take a read as it is important background reading.
In this article, we will explore:
- Introduction to Temple AMM
- Three Modes of AMM
- Temple Growth aka the soft dynamic ceiling
- Temple Devotion aka buy the dip game
- Threshold Price Dynamics
- Where this is all headed
Introduction to the Temple AMM
Part 1 covered what we’re solving for: highest return possible with maximum price stability and treasury growth.
It’s easy to design a protocol that offers high returns, high volatility, and high risk.
What’s difficult is designing highly efficient price stability and rapid treasury growth. Without causing price distortions and perverse incentives.
We want the price to grow, but not so fast that it causes a pump and dump. We want to incentivise minting on protocol, but not by big discounts that leak value and dilute holders. We want to provide price support in weak market conditions, but not in a way that puts Treasury funds at risk.
It is by reflecting deeply on these considerations that we came to the design of the Temple AMM.
We believe it is a contribution to defi innovation in price stability and treasury growth.
Three Modes of AMM
At its core, our AMM contains a constant product liquidity pool. Our AMM started life as a fork of the Uniswap v2 pair and routing contracts so we could isolate complexity to the mechanics we were introducing. Next phase, we will rebuild the core under a new design inspired by Paradigm’s TWAMM mechanics.
The magic comes in the way we integrate protocol functions with the liquidity pool itself.
Normally, 100% of a buy and sell order interacts with the AMM, with slippage causing the price to rise and fall respectively. Exactly what you see in Sushi or Uniswap v2 pools.
The Temple AMM is slightly more complex. It operates in three modes:
- Temple Growth is Engaged, slippage is reduced for the Templar, and a portion of every buy grows the Treasury
- Temple Devotion is Engaged, buy the dip game is online, and any buy-stake-and-lock earns Faith and Bonus APY
- Nothing is Engaged, where it operates exactly like a standard AMM
The engaged mode depends on where the TEMPLE price is relative to the Threshold Price and Intrinsic Value:
Let’s explore each in turn.
Temple Growth aka soft dynamic ceiling
Originally we had a very crude way to divert buy pressure into protocol minting: A hard ceiling on price. When the AMM went above this hard ceiling, people would instead buy on protocol. Ie, excess buy pressure was diverted to the Treasury.
It was basic but effective.
Temple Growth mode on the Temple AMM is similar, just better.
This mode engages when the TEMPLE price is above the Threshold Price.
Once engaged, a portion of every buy order transacts with the protocol instead of the AMM. I.e., Temple mints the TEMPLE and Treasury accepts the FRAX.
On top of driving Treasury growth, the user receives a lower average price paid because slippage is reduced from what it would have been if the entire buy order was directed to the AMM. Everyone wins.
The further the price rises, the greater the proportion of each buy will transact with the Treasury. This provides a reduction of upside volatility, as the higher the price gets, the harder it is to make the price rise.
The following diagram represents this concept of increasing protocol minting:
As the price rises, the proportion of each buy directly minted from the protocol rises linearly.
The function is a linear interpolation including four variables that can be set by policy. These four variables are: starting & ending point as a multiple of Intrinsic Value, and the starting & ending proportion of buy pressure diverted to protocol minting.
Initially, these variables will be set to 0% diverted to protocol minting at or below 3x IV, and 80% diverted to protocol minting at or above 30x IV.
However when selling above the Threshold Price, or when buying or selling below the Threshold Price, 100% of the trade is made with the AMM.
There is one exception to this rule: If the price falls to Intrinsic Value, Temple Defend will activate and the protocol will take 100% of sell pressure to stop the price falling any further.
The consequence of this system is that Temple Growth is engaged when the market is stable or strong. Temple Growth diverts excess buy pressure into Treasury, to slow price growth and grow Treasury instead.
Now time to talk about weaker market conditions.
Temple Devotion aka buy the dip game
Ultimately, reducing downside volatility is about increasing buy pressure at certain levels.
Temple already supports price at Intrinsic Value through Temple Defend, however this is a very conservative level because even if all you did was stay staked, you would end up with your proportion of the staking pool, and all of those tokens could be converted at a minimum of Intrinsic Value with no price risk.
So in reality, the ‘absolute minimum value from a Temple token’ is substantially higher than Intrinsic Value. If the market understands this, Temple Defend is unlikely to get any action.
Instead, we must turn our attention to providing price support at far higher levels. Levels that represent reasonable prices for a claim on future protocol growth.
We can think about this in two ways:
- Protocol could buy from the AMM directly, boosting price higher
- Protocol could incentivise users to buy from the AMM, boosting price higher
Incentivising is superior to buying directly for many reasons:
- Protocol can incentivise in TEMPLE rather than buy in FRAX, which is more efficient for Treasury
- Protocol only needs to pay an incentive to ‘tip someone over the edge to buy’ rather than pay for the full order itself, further increasing efficiency
- Incentives cannot be ‘broken by the market’ because they are paid when users buy rather than when users sell
- Buying directly at a price above Intrinsic Value would reduce Intrinsic Value
Efficiency here is the magic. The more efficient we can be, the more buy pressure and therefore price stability we can deliver.
But this is not all. Temple Devotion aka the buy the dip game allows us to introduce a new concept to the protocol: Faith rewards for behaviours that support the protocol.
Temple has already been about thoughtful community incentives. This was the core of our Fire Ritual and Opening Ceremony design. Step by step, we will continue deepening the incentive structure for our DAO, defi mechanics, and metaverse rituals.
Earn FAITH through Devotion
Faith is a measure of your standing within the Temple community. It is a non-transferable on-chain metric that grows with devotional acts. It can be both gained and lost.
Having more Faith means that you will receive a higher Bonus APY. It is measured relatively to your bag size, so both whales and small players experience the same dynamics fairly.
Faith will also unlock avatar development, metaverse ritual storylines (like the Opening Ceremony), and be used to elevate both yourself and others in the community.
Within the DAO, those with high Faith are in high standing. They are proven to have acted with devotion to the Temple. Those with Faith are able to provide Blessings to others. Blessings form a community driven reputation score, and those with the most Faith (alignment to the protocol) have the most say in who is most worthy.
But first thing first: Earning Faith and receiving Bonus APY.
When Temple Devotion is engaged, and you buy-stake-and-lock, you will receive Faith and Bonus APY. Here’s how it works:
- Faith accumulates in proportion to the Temple bought. 100 Temple = 1 Faith.
- Faith is reduced by unstaking your TEMPLE tokens and joining the exit queue. Faith reduces by the same proportion that your OGTEMPLE reduced by.
- Bonus APY is a function of your Faith and Locked Temple. It is designed to be independent of your bag size: small bags and whales are treated equally.
- When you buy stake and lock, the new OGTEMPLE you receive will be locked for two weeks. This length of time is a policy setting.
- Any other OGTEMPLE you own that has not yet been claimed will be re-locked, and you will also earn Bonus APY on this TEMPLE..
We will be calibrating this system over the next few months and we expect some tweaks to be needed to reach maximum efficiency.
The end result is that we have a highly efficient system for providing a degree of price stability on the downside, while laying the foundations for a broader system of incentivisation for positive community behaviour.
Threshold Price Dynamics
So far we have learnt about Temple Growth, Temple Devotion, and Normal AMM mode.
What decides which mode the AMM is in?
The mode depends on where the TEMPLE price is relative to the Threshold Price.
But, one last trick: The Threshold Price is not static. It moves too.
The Threshold Price moves up if TEMPLE price is strong or stable. It does this by rising with TEMPLE whenever TEMPLE is above the Threshold Price.
I.e., Threshold Price = TEMPLE price x 0.98 if the price is increasing
However, when the price is weaker, the Threshold slowly decreases. It does this by decaying slowly over time whenever the TEMPLE price is below the Threshold.
I.e., Threshold Price will initially be set to decay by ~10% per day linearly whenever the TEMPLE price is below it. This rate is a policy setting that will be calibrated over time.
What does this mean?
We want to encourage the price to be above the Threshold frequently, because that is when Temple Growth is engaged.
At times the price will drop below the Threshold Price. If it stays there, Temple Devotion will engage and help drive it back up.
However at the same time, the Threshold is decaying down towards the price. One way or another, they will meet in time.
Once the price rises above the Threshold, the Threshold rises with it.
This system is somewhat self-balancing and will achieve a substantial amount of price stability without pegging to a specific and arbitrary target like a devaluing fiat currency.
This is the primary objective.
However, the system is also carefully designed to avoid arbitrage opportunities that would disrupt it. The specific way the Threshold Price moves is designed to eliminate the windows for bots to profit.
The final factor that impacts price stability is the scale of the liquidity pool.
For this reason, TempleDAO will maintain a very large protocol owned liquidity pool.
Initial deployment will be funded with FRAX from Treasury and TEMPLE tokens that have been specifically harvested and put aside for the liquidity pool.
The funding of this liquidity pool has been carefully calibrated to allow maximum liquidity depth without putting the Intrinsic Value concept at risk. An upcoming note will outline the logic behind the unusual depth of liquidity.
We take our price stability mission seriously. We will have the deepest liquidity pool on launch of any protocol, as far as we are aware.
A good start. We intend to deepen the liquidity pool further.
Safe Harvest automation
We have one more beautiful nuance to add before we close out this giga article.
When Temple Growth is Engaged, and some buy pressure is diverted to Treasury, it doesn’t immediately get sent to Treasury.
Instead, it gets pooled in a holding contract. Multiple times a week, an upgraded version of Safe Harvest will run and complete the following actions:
- Send a specific percentage of the FRAX to Treasury (policy setting)
- Run Safe Harvest on Treasury to mint additional TEMPLE while allowing Intrinsic Value to rise
- Distribute the freshly minted TEMPLE into its respective pools: staking rewards, LP pool, bonus rewards pool, and DAO pool
- Combine TEMPLE from the LP pool with the remainder of FRAX from the holding contract and add liquidity to the Temple AMM
In this way, we fund the growth of our liquidity pool. The policy settings will be calibrated over time to strike the optimal balance between treasury growth and liquidity pool depth.
In time, we have plans to add a further feature to this Safe Harvest automation, where a portion of FRAX is also put aside to buy risky yet strategic assets. In this way, we can grow treasury value exposure to non-stable coins, without impacting Intrinsic Value.
And finally, this upgraded design slows down the Safe Harvest process. This is possible because TEMPLE price is no longer directly linked to Intrinsic Value, like it was during the Opening Ceremony, so Intrinsic Value does not need to be kept up to date in real-time.
This change opens the door to cross-chain expansion. We have designs for a multi-chain Temple AMM deployment that would allow all key parameters to be kept in sync. This change is the first step towards that future release.
Where this is all headed
Wow, we made it.
As you can see, we have been cooking. This is a big release for TempleDAO.
But it’s not all we’ve been up to. The next few articles will explore the massive upgrades to the Organisation of the Community/Team, the seeds of the Templeverse sprouting, and the future roadmap in defi.
We will be publishing more details on mechanics such as the liquidity pool, exit queue, and Faith / Bonus APY over the next few weeks.
Oh and you probably want to check out our AMM design just for the culture. Mystery Enclave.. Legit. The Templeverse is growing.
Highest possible return, with maximum price stability and treasury growth.
That’s the core and that’s what we’re releasing this weekend.
Then we keep building.