Why Cycle?

We’ll cover some key concepts and build a value proposition for Cycle

Providing Liquidity for a token pair
Most DeFi users are familiar with this. The proper ratio of tokens are supplied to a token pair and LP tokens are minted in return. Then you sit back and watch the swap fees roll in. Simple enough right?

Not quite. When providing liquidity you will face impermanent loss risk. If the relative value of the two tokens drift far apart compared to your supply time, it would have been a better deal to just hold those tokens. This is quite complicated and well described elsewhere if you are interested in reading more. Hopefully when the relative value returns to your baseline and swap fees collect, it will have been worth it.

Can we do better than just holding our LP?

Liquidity Mining and Yield Farming
These topics cover a wide range of possibilities. There are more than a few ways a protocol can issue farming/mining rewards. We’ll use a more specific case:

Consider some token pair in a swap protocol. The core team decides they need a way to incentivize participants to supply liquidity beyond the offer of swap fees. They decide to issue their core protocol token as a reward for depositing an LP token from one their token pairs. This should bring in more liquidity and attract traders to these more liquid pairs, an all around boost to the ecosystem.

This sounds like a great deal for liquidity providers. Now you can collect swap fees and reward tokens, helping to offset impermanent loss.

You are free to do with these reward tokens as you please. Sell, hold or supply them back as liquidity. If you convert them into more LP tokens, you can increase your deposit and further increase the rate of reward collection. This sounds enticing, but could involve having to run many transactions, getting expensive over time.

It would be nice if there were a way to simplify this and make it cheaper…

Yield Optimizer
Take the strategy mentioned above. Reward tokens are sold, either partially or entirely. The result is then used to provide more liquidity to this incentivized pair. The received LP tokens are then deposited, adding to your current position. Now at this point, rewards will start accumulating at a slightly faster rate.

Right away we can see that this will require claiming rewards, 1 or 2 swaps, providing liquidity and finally a deposit. We’re looking at 4 or 5 transactions to compound your LP position. Even on a less expensive blockchain, this will add up over time and cut into your profits. Not to mention how frustrating it would be to frequently repeat this.

This is exactly what motivated the development of the yield optimizer. The yield optimizer allows you to deposit your LP tokens into a vault, at which time you are minted shares to track your position. The deposited LP tokens are combined with other participants LP tokens and collectively deposited into a liquidity mining program or yield farm. Then once every so often a process to compound the collectively earned rewards into the aggregate deposit can be called. When this process is called, your shares will become worth more LP tokens.

This outlines the same process we described before, except it is totally hands off from your end. All you have to do is deposit and check in on your position periodically. The real magic here is that the cost of this compounding operation will be combined for all participants into a single, fee reduced transaction. A portion of the rewards will be used to cover the cost of this operation, guaranteeing it being called at a regular frequency.

This sounds like an appealing option. Better than just holding LP. Better than farming rewards and compounding your position manually. So what downside are we dealing with?

We’re still taking an LP position, and still betting on the success of the two underlying tokens. It’s often the case that a vault is built on a high APR farm and the LP token being compounded is partially represented by a token experiencing high inflation and steady downward price pressure. This leads to the value drift mentioned above, driving impermanent loss.

We have a good thing with yield optimizers and vaults, but it would be nice if we could have this auto-compounding effect and mitigate these issues.

Cycle Protocol
Let’s consider how farming rewards help to offset impermanent loss for liquidity providers. If we could issue reward based revenue to vault shareholders, then perhaps a similar offsetting effect can be achieved.

This is what the Cycle Protocol does.

Depositing into a Cycle vault will provide a share based position, then those shares are deposited into a staking contract where CYCLE token rewards begin accumulating.

CYCLE token rewards will be continuously distributed to all vault depositors. You will be able to maintain your position, have your LP compound and farm rewards with no maintenance required.

Does this solve some of the above mentioned issues?

While not a definitive solution, the vault reward farming goes a long way toward easing some of the potential issues caused by value drift and impermanent loss.

How these effects apply to your position can be difficult to understand and calculate. The vault interface will always provide you with an accurate data feed on the state of your position. The LP amount, AVAX equivalent and current USD value of your shares is provided. The intention is not to obscure the risks of taking a vault position but instead you can see in real time the performance using multiple metrics.

While the CYCLE token does function as a reward token in this capacity, it will more importantly represent a share of protocol ownership. The rate of reward distribution to all participants will initially follow a fixed model and then will be determined through voting on proposals. The scope of governance is already clear and the method is beginning to emerge. More on governance will be announced in the coming months.

In summary, Cycle allows you to take a vault position and have a separate revenue stream that is easy to liquidate or if you choose, expand your ownership of the protocol. As of the time of writing, 88% of the minted supply is yet to be released and will only be released to protocol participants, hopefully achieving a very fair distribution.

Related posts:

From across the lake, Past the black winter trees, Faint sounds of a flute.. “Past the black winter” is published by Think. in ThINK.

A leaf falls as the bike drives by, the rider concentrates on the mechanics of executing the passage of the corner.

Git is a Distributed Version Control System so you no need to worry about the server going down if you are working on a project and collaborating with others you all can come to the git and make…