A brief introduction to GROWTH Tokens (gTokens)
This Medium article will provide a brief introduction to gTokens, what they are, how do they work and their goal.
What are gTokens?
gTokens are a core part of GROWTH’s ecosystem, they offer a unique value proposition since it combines the potential profits of the underlying protocol, some arbitrage profits from the minting & burning fees and profit-sharing ownership in locked LPs. In short, gTokens offer a higher yielding way of accumulating more of the token it’s backed by.
Layer 1: Choosing a good underlying protocol
gTokens take an existing great product and enhance it further, choosing a good underlying protocol is essential since it will be the backbone of that specific gToken, let’s examine how profits are generated through some existing protocols and how they would be integrated into a gToken:
It is a money market protocol, in this case we are interested in aTokens which are interest bearing tokens, the profits in this protocol come from lending and additional profits may be gathered with the upcoming implementation of credit delegation.
The risks associated with having aTokens backing gTokens would be smart contract risk (which all protocols have) and liquidity risks, however AAVE has a well designed liquidation mechanisms for loans which makes it safer.
COMPOUND is the other top money market protocol, the difference with AAVE is that there are no plans for credit delegation at the time this article was written and it offers COMP farming for holding cTokens.
COMPOUND is also well designed to handle liquidity risks and with COMP farming it yields extra returns, for any farmed tokens gTokens sell them and accumulate more of the original, so if the gToken is backed by cDAI it will sell the COMP for DAI and get more cDAI.
CURVE is different from AAVE & COMPOUND, in this case profits are made through trading fees (0.04% fee in every trade), this pools are made of tokens pegged to a value but due to the volatility nature of the market they have small fluctuations compared to its pegged value, this causes arbitrage volume to use CURVE pools. There are two types of pools available in CURVE, those from stablecoins (pegged to the $) and those pegged to BTC (renBTC and WBTC).
During short periods of time CURVE pools DO suffer from impermanent loss in terms of market price, besides the trading fees providing liquidity for this pools farms CRV which can be sold to further increase the position.
Balancer introduced an innovative concept, portfolio management with negative management fees! The way it works is by implementing the AMM model to custom % pools, this means that a pool can hold 40% BTC 40% ETH and 20% USDT, arbitragers will reallocate the portfolio accordingly when it is profitable and by doing so LP fees are accumulated too.
Balancer has two profit sources, the first one would be from LP fees and the second is from farming BAL, gTokens can leverage Balancer by either holding theoretically equal value tokens (stablecoin pools for example) or by creating diversified portfolios to back the gToken.
Yearn Finance has a wide variety of high-yielding products to choose from which makes it perfect to implement with gTokens, one of the most interesting options offered are its delegated vaults which optimize the borrowing and yield farming process.
Mooniswap also offers 1inch farming and it comes with its own setup for AMM fees, read more in Mooniswap’s whitepaper.
It can be integrated into gTokens in a similar way to CURVE or Balancer pools.
This are just a few examples of good protocols in the Ethereum DeFi space that can be used as the backbone when creating a new gToken.
Layer 2: gToken Minting and Burning fees
Having a minting & burning fee on gTokens might seem unnecessary but it is actually important because it:
- Increases the overall APY
- Builds up locked liquidity for that gToken
- Rewards a longer term mindset
Additionally the fee is small and is quickly covered by the profits earned.
Layer 3: gToken locked LPs
A portion of the minting and burning fees are used to build up a locked liquidity position in GRO/gToken pairs, most existing DeFi products will eventually be out of fashion after it reaches its peak of FOMO, since the overall returns of the protocol depend on its TVL (Total Value Locked).
In gTokens case locked LPs makes it uncorrelated, if the TVL drops the overall returns will go up rewarding those holding through long periods of time and making sure that there are always gTokens being minted and burnt.
The main volume source for locked LPs will most likely be arbitraging, the fees collected are burnt which causes a reduction in both GRO and that gToken’s circulating supply, when the supply of gTokens drops the amount backing it goes up (it’s essentially distributing the profits from the locked LP to gToken holders).
This is an introductory article, there are more layers and mechanisms that can be implemented to gTokens, more info coming soon!
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