Greetings fellow Apes & Degens
If you’ve been keeping up with us at Blocmates then you may have seen that we’ve extensively covered Maia DAO and their ecosystem of products. A product made by Maia DAO is Hermes, a Solidly fork. Although we’ve covered Hermes and Hermes V2, we haven’t gone into the finer details of how to use the protocol and how everything works.
Hermes, especially with the V2 upgrades, has done a lot. There are a lot of things to talk about so in the interest of not making this a 30-page essay we will break it down into a couple of parts.
To start with, today we’ll look at three key elements of the new and improved Hermes protocol.
· Revamped Tokenomics
· The new gauge system
So let’s get into it.
Revamped Tokenomics – b(3,3)
As I mentioned earlier, Hermes is a solidly fork, so the initial tokenomics featured vote-locking HERMES to get the veHERMES NFTs. The longer you locked HERMES for, the more veHERMES you got and this veHERMES gave you voting power in addition to boosted rewards. The standard vote-locking procedure that’s used industry-wide.
The issue was that for people looking to maximize their potential rewards, especially large holders of veHERMES, they would have to manually claim, re-lock, and re-adjust their positions every week. Now imagine manually doing this for large positions where people have thousands of veHERMES and are managing multiple NFTs, it can become tedious, to say the least.
Therefore, bHERMES was introduced. It assumes that the active and larger users of the protocol are continually trying to maximize their rewards. This is because under prior conditions, to maximize voting power and rewards a user would have to re-lock their position for the max-lock every week. Therefore, the assumption made is that constantly locking tokens is the same as burning the underlying tokens since they will never be unlocked.
Therefore, the shift to bHERMES is simply automating this process of maximizing voting power and rewards. Rather than using the ERC-721 standard, bHERMES uses the ERC-4626 standard. So your locked (or burned) HERMES is converted to a one-way ERC-4626 standard and you receive your bHERMES balance with dilution protection. Now users can passively earn max rewards in perpetuity.
The added benefit of bHERMES is the three utility tokens attached to it. Acquiring one bHERMES token entitles the user to one ERC_20 bHERMES-boost, one bHEMRES-Gauge, and one bHERMES-Votes. This tri-token system enables maximum composability. Users can now execute and experiment with a variety of different strategies and aggregators. When any of these utility tokens are delegated or in use, the underlying bHERMES become non-transferrable.
This transition to bHERMES however is just one aspect of the revamped tokenomics. Including bHERMES, there are actually three tokens which give apes like us exposure to Hermes in different forms.
The first is of course the HERMES token itself. In case you do not want to lock your tokens in perpetuity, you can simply hold HERMES which will not only have constant buying pressure but a lot of the supply will be burned by users looking to maximize their rewards.
The second token is bHERMES which, as you know, gives you voting power and boosted rewards allowing you to collect fees in perpetuity.
The third token is the MAIA token. MAIA has shifted away from the model of token emissions for rewards to paying rewards from revenue. A major source of this revenue is voting in Hermes. The Maia DAO naturally owns a sizeable amount of HERMES which they have locked to vote on gauges to earn bribes and fees. Those who stake their Maia will get exposure to this source of revenue and earn rewards in proportion to their stake.
The Yield and Liquidity Marketplace – The newest innovation in liquidity renting solutions
The second element is the new gauge system.
With Hermes V1, the gauge system was a fairly basic, yet powerful incentive system akin to the one used by the likes of Curve Finance. Traders swap on the pools and pay fees, the LPs deepen liquidity on these pools and earn the fees paid, voters vote on pools to determine where more emissions from the gauged should be directed, protocols bribe the voters to incentivise a higher direction of emissions towards their pool.
Each gauge represents one pool and at the time of writing, there are around 50 gauges on the Hermes protocol with around 12 getting a significant amount of votes and only two of them actively receiving bribes.
There are two main changes that have been made to the gauge system. Customizability & Improved efficiency.
Hermes V2 takes the battle-tested incentive system we saw in action in V1 and takes it one step further with Custom Gauges. The premise is to allow for the creation of gauges that can earn revenue from sources other than AMM trading fees. Introducing the Yield and Liquidity Marketplace where there is one token to rule them all, bHERMES. Potential custom gauges that can be created include:
· Money Market gauges – this is where users can trade their lending yield on their deposited assets
· Yearn vaults – Creating gauges for single token deposits such as yUSDT
· vlCVX – a gauge system to earn revenue from bribes
There are many more possibilities so you can let your imagination run wild.
There are two caveats to take note of with regard to these gauges. For one, they have to pass through governance and to create a governance proposal one has to own bHERMES. Once the proposal is made it will be scored and risk assessed after which the community can take a vote. The other thing is that they will also be subject to an audit. If they pass the audit then they can be integrated.
Now let’s look at how efficiency is improved.
When talking about improved efficiency, it is primarily in reference to creating a cost-efficient bribe environment.
In reality, understanding the incremental improvements of the bribe’s cost-efficiency comes down to some very technical formulas. If you are interested in the technical modelling then you can check this article here (LINK: Incentives Efficiency: Bribes in a Concentrated Liquidity Environment | by Maia DAO | Medium) but I will do my best to simplify it for you here.
What it comes down to is capital utilization. With Hermes V2 leveraging the Uniswap V3 architecture for both volatile and stable pairs, they can achieve a much greater capital utilization ratio when compared to V1. This greater utilization means that a protocol can generate much more volume per unit of bribes.
We know that protocols essentially rent liquidity from LPs, the issue is that they have to keep the incentives to pay out high otherwise the LPs will leave, but if these high incentives are not generating sufficient liquidity then it becomes an unsustainable expense leading to an eventual collapse of the protocol.
The Hermes V2 gauges essentially make renting liquidity much cheaper. Let’s look at an example.
Let’s say that the vAMM (AMM for uncorrelated assets) has $10M in TVL and pays 52% APR per year. This means $3.25M is required in bribes each year to generate $6.5M in emissions. This translates to $50,000 per week to generate $100,000 of emissions per week. Conversely, for the same pools with the same depth in Hermes V2, only $6,360 of bribes are required per year to maintain the 52% APR. A whopping 87% is saved for the same emissions.
If we take a look at the sAMM (AMM for correlated assets) the story is the same. A pool with a $100M TVL giving a 13% APR would need $6.5M in bribes to generate $13M in emissions per year. This means a cost of $125,000 per week to generate $250,000 per week. Under V2, only $4,600 would be required per year to generate the 13% APR, a whopping 96% cost reduction.
With such an improvement in cost-efficiency, it is inevitable that protocols would much rather use Hermes to pay bribes and incentivize their pools which would attract more LPs to the protocol and more prospective voters to lock their tokens. This in turn would increase liquidity and volume, which improves the execution environment to further attract more traders which then kicks off a flywheel of growth and adoption for the protocol.
What is TALOS?
TALOS stands for Transparent Automated Liquidity Optimization Strategies. The entire purpose of TALOS is to improve the LP experience on Uniswap V3. As you may know, Uniswap V3 introduced the novel concept of concentrated liquidity. While it is a more efficient mechanism, efficiency comes with its drawbacks. The main one is the difficulty of managing an LP position.
This means passive LPs hoping to earn their passive returns are driven out of the market. Being a profitable Uni V3 LP requires active management and skill.
To take away the complexities from these passive LPs, protocols such as Arrakis, Popsicle Finance, and Bunni popped up. These pool-together solutions were good and ended up gaining a lot of market share within Uni V3, Arrakis was 20% of the TVL at one point for example. But, the issue is that none of them are as permissionless in position creation as TALOS. TALOS provides a platform as well as the tooling to allow anyone to create liquidity management strategies.
TALOS changes things by making their strategies a fungible wrapper of Uni V3 position NFTs. Their two types of strategies are Vanilla & Staked with the main difference being the vanilla positions earn the fees while the staked positions earn the emission incentives. So TALOS becomes a pool together of concentrated liquidity LPs giving users and DAOs a better option for LP’ing on Uni V3.
Now let’s get into the strategies and position management parameters for TALOS.
Strategy templates can be made by anyone and are typically rebalancing and re-ranging strategies. The first strategy template for TALOS is fairly basic. It holds a single Uni V3 NFT that anyone can create for any pool. When the price deviates a pre-defined number of ticks from the centre of the position, anybody can call for the rebalance function which will reset the ratio to 50/50.
This is of course just one basic template. In general, these templates are highly versatile and customizable. They can be used for a wide variety of use cases such as supporting multiple Uni V3 NFTs, hedge options, treasury solutions, multiple rebalancing ratios, fixed expiry dates, and so on.
When it comes to position management there are a few things to keep in mind.
To start with, initializing positions. For the first iteration of these templates, all pools will be initialised at a 50/50 ratio when triggered but as mentioned above, future templates will allow for more customizability allowing you to have different initialization ratios.
The other aspect is the two crucial contracts. The optimizer and the manager. The optimizer is responsible for managing all the important information regarding the position. It’ll contain information such as what the range of positions will be when initialized, rebalanced, or re-ranged.
As the name suggests, the Manager contract has everything to do with incrementally managing the positions. This means it can do things like rebalancing or re-ranging a position when it’s X% away from the position’s boundary. Anyone can call this function if the conditions are met and even a chainlink keeper can be set up to do this. If a person is interested in manually managing positions then this can become an EOA.
Finally, there is the boost aggregator which is responsible for boosting the rewards of TALOS positions. This can also be used for regular Uni V3 NFTs. They essentially stake positions in Hermes’ Uniswap V3 stake to earn boosted rewards. To avoid gaming of rewards, only the first staked positions will earn rewards from the pool.
Hot Take – TALOS and Hermes V2 will become a layer where those who wish to incentivise liquidity for their assets on Uni v3 will be able to do so through bribing bHERMES voters. Just as we see with Curve, Convex and the whole voting ecosystem, we will see a decentralised way of creating Uniswap v3 voting and bribing through TALOS and Hermes.
This is just one slice of the giant and well-layered pie that is Hermes. In future parts, we will discuss more elements of this impressive protocol and how you can go about using it to maximize your returns. This is one you will want to keep an eye on.