cVault Finance: Tokenomics for Yield Farming 2.0?

cVault ($CORE) is all the hype right now. A deflationary supply and sustainable yield farming tokenomics are among its most praised features. But with much still to be delivered, can it succeed?

cVault Finance: Tokenomics for Yield Farming 2.0?

cVault Finance (CORE) promises to have the first sustainable yield farming tokenomics. It features a fixed supply, a tax on every token transfer, high-yield vaults, and most controversially, Uniswap liquidity that is permanently locked and cannot be taken out.

Under the premise of generating liquidity for the Uniswap token launch, the team made unique and interesting choices.

Token sale

On 26 September 2020, the anonymous team successfully concluded an initial token sale. All 10,000 CORE tokens were available for sale, with no dev-share or pre-mine. During what cVault called a Liquidity Generation Event (LGE), the team collected Ether (ETH) for 7 days.

All ETH collected, together with an equal amount of valued CORE, would be added to the Uniswap CORE/ETH pair shortly after the event had ended.

All available tokens would be distributed proportionally to the ETH contributed during the LGE. The team collected a total of 3,759 ETH, which put the price of 1 CORE at 0.3759 ETH.

Price per CORE
3,759 ETH collected / 10,000 CORE issued = 0.3759 ETH ($133)

But there were two big things many didn't understand

Not actually buying CORE

As the name suggests, the LGE is a liquidity generation event. Instead of buying CORE, you would buy Uniswap liquidity provider tokens (LPs) which, would hold the underlying asset (ETH and CORE).

Liquidity locked forever

The LPs you purchased could never actually be exchanged back into the underlying asset. Liquidity added to the CORE/ETH liquidity pool can never be removed. This is prevented by the CORE smart contract and intended.

To make up for the fact that you are buying non-liquidatable LPs, cVault would provide you with LP tokens, which included your CORE and the ETH you initially contributed. The CORE part of your LPs would essentially be free.

This meant that you could not merely participate, get assets early, and market dump them as the listing went live, and it allowed CORE to go from $133 to $9600, in the following 7 days, reminding some people of the YFI run-up.

Let's assume you contributed 1 ETH. At a price of 0.3759 ETH per CORE you'd get your 1 ETH and additional 2.66 CORE inside your CORE/ETH Uniswap LP. In simple terms, you'd immediately double your money once the LGE was over and CORE launched on Uniswap, but you wouldn't be able to sell it. Instead, you'd have stake the tokens you received for perpetual profits.

Sale summary

  • ETH raised: 3,759 ETH (US$1,331,493)
  • Price per CORE: 0.3759 (US$133)
  • LPs issued: 6,131 CORE/ETH UNI-V2

What profit can I expect?

Here are the numbers at the time of writing this article.

  • 1 LP token generates 0.0067 CORE per day ($51.78)
  • 1 LP token's value is around 10 ETH ($3,468)
  • ROI is about 1.5% per day and 544% per year
  • 1 LP needs about 67 days before it has generated it's value in profits

These yields, however, are highly unstable and depend primarily on how much CORE traded on any given day, how many transactions went through the contract, and in the future, how much yield the new vaults will generate.

To expect the current yields to continue is rather unrealistic.

Tokenomics

At first glance, it might not be clear what cVault does or why you would buy the CORE token. It may seem like a pyramid or ponzi scheme. New money needs to flow in to support people that got in earlier — sounds familiar?

Well, let's look at the underlying mechanics and why cVault may be different.

The goal of cVault is to generate high, sustainable profits for its liquidity providers. Several mechanisms generate yield for people who choose to stake their acquired LPs into the cVault platform.

Current Yield Farms

Before we dive into what cVault does differently, we first have to understand the issue that current yield farms propose. We've all seen them: Sushi, Burger, Kimchi — you name it. They all have the same problem: hyper-inflationary token supplies.

New farms incentivize liquidity providers by paying them in their native token (e.g., SUSHI). Most of the tokens usually being farmed within the first 1-2 weeks during a "launch period". Unfortunately, this leads to hyperinflation and way too many tokens entering circulation.

Typical farm cycle

  1. Everybody jumps into the pools
  2. The price rises in speculation of being listed on Binance & co
  3. The token does/doesn't get listed and dumps either way
  4. Farmers move on to the next farm
  5. The project dies

The token usually is offered under a promise of "governance" in the future. But governance for something that won't exist in a few weeks isn't valuable. This is how yield farming has been for a while now.

It's a game of chicken, where fear replaced greed. The greedier you are, the more money you stand to make or lose. The faith of every token is the same. Get in quick, get out quicker than most others. This is neither sustainable nor profitable for many.

cVault to the rescue?

This is where cVault and their tokenomics come into play.

CORE is a non-inflationary cryptocurrency that is designed to execute profit-generating strategies autonomously with a completely decentralized approach. (Source)

To the best of my knowledge, cVault is the first yield farm that farms it's native token. Instead of issuing an unlimited supply of a hyper-inflationary token, it introduces farming mechanisms that sustain itself.

The process that drives the growth is a clever-designed buyback mechanism. cVault uses fees it collects to buy its native CORE token and redistribute most of it to its staking liquidity providers.

Here's how the protocol collects those fees.

Art by @cryptomemez

Uniswap Liquidity

Uniswap takes a 0.3% fee from every trade you do on their protocol. This fee is not for them but their liquidity providers. cVault acts as an enormous provider of liquidity and therefore generates massive amounts of revenue.

All of those fees go towards market-buying CORE.

Within the first day, CORE was able to generate over $500,000 value in fees, which will benefit its CORE-Stakers, the developer fund and the project, while TVL was exceeding $11,000,000. (Source)

Additionally, liquidity added to the CORE-ETH liquidity pool can never be removed. It can be traded, but the underlying assets (CORE/ETH) can not be withdrawn once it's added to the pool.

In theory, this will only ever allow adding more liquidity to the pair, keeping it very liquid and easy to trade, which in return should encourage high volume. High volume leads to higher fees, which leads to higher buybacks.

Transaction Tax

Another mechanism to collect fees for its native token buyback is a transaction tax. Every CORE-token transaction needs to be approved by the CORE token contract. Every time tokens are transferred, 1% of that them is redirected to cVault.

Each transfer of the CORE token (and therefore trade on Uniswap) has a 1% fee attached to it. This fee goes directly to the farmers. (Source)

Those fees, too (minus the dev-share), go towards market-buying CORE.

Vaults

While this feature is still outstanding, the team has teased that vaults are underway. Not much is known, except that 5% of the yield they will generate will also be used to market-buy CORE.

Moderators (not developers) said that there might be a 1% dev-share added to vault yields, but that this is not decided yet. Unfortunately, even though I tried several times, the developers declined to answer my question.

All of this potentially leads to a constant buying pressure of CORE, which would increase the expected APY for LP holders and make CORE an attractive asset to traders, further contributing to the cycle.

cVault Interface v1.21 as of 4 October 2020

Takeaways

While there is no official roadmap, a few things have been teased on Twitter and Telegram. Among the most anticipated are Vaults, which are expected in the next 30 days (Source).

The team also just launched a help center as well as "Liquidity Zap", which allows you to convert CORE you hold into CORE/ETH LPs without the need of first converting into ETH.

Coming soon

  • Vaults
  • Governance voting for LP holders
  • LP trading directly inside the cVault

While all this is good news, we have to remember that CORE is still a very experimental token and protocol. Right now, APYs are high as the volume is phenomenal and prices are rising almost every day.

Volume will, rather sooner than later, subside. What type of APY LP holders can expect then is unknown. Drastically lower volume will turn into fewer and less impactful CORE market buys. This may or may not be alleviated with the introduction of Vaults, that will share 5% of their yield for this very purpose.

Other concerns

  • Only about 20% of all CORE are in LPs
  • Audit is still outstanding, but scheduled to be here soon
  • At least one of the developers seems fairly immature at times, picking fights and showing signs of arrogance. That is often followed by a fall.

Final thoughts

There is no doubt in my mind that the team as a collective is very professional and experienced. They have shown this many times in the past week. But the hype around CORE is not sustainable.

Let's remember that this is very experimental, but let's also understand and give CORE the chance it deserves. It may as well hold the next generation of yield farming at it's core.

Let me know what you think on Telegram.

— Robin