Defeating the Death Spiral

Death spirals. Bank runs. Negative reflexivity.

Similar concepts, different contexts. When confidence erodes and everyone rushes for the exit, escaping with whatever value they can get.

It represents the looming fate of tokens issued onchain. A gravitational pull to 0. More often than not, a token's destiny is already set the second it's deployed.

From 2020 to the present, onchain tokens have suffered from the same problems. Poor tokenomics combined with snipers and short-term extractors. A team member, investors or snipers dumping, wiping out all the positive momentum and leaving the rest to hold the bag. It's never been easy here.

It's one of the greatest fears for builders. Endlessly working and sweating for months to years, tokenomics becomes an afterthought. But the looming threat is always there: A token's price is its narrative. It will dictate the life and death of the project. A misstep in token allocations or misconfigured liquidity, and zero is inevitable.

The problem stems from the dynamics of the AMMs we have become accustomed to. Beautiful and elegant, but fundamentally flawed. A key problem is the simplistic pricing system of these pools, requiring constant maintenance to respond to market dynamics.

However, the more insidious issue lies not in the code, but in the nature of its liquidity. To understand the death spiral, we must look at the people who provide it.

Liquidity For Hire

Although the AMM is autonomous, the liquidity provider (LP) for these AMMs is, more often than not, a human, and LPing is risky business. And thus, as a rational profit-seeking entity, whether an incentivized LP or a private market maker, the one providing the service of LPing must be compensated for taking that risk.

There's a reason these LPs are often called "mercenary liquidity". As soon as the flow of incentives stops, or it's unprofitable to hold the token, there's no reason for the LP to stay.

They're not evil. They're not trying to fuck anyone over. They're just human.

Liquidity is the lifeblood of markets. Without it, a market's structure is fragile and prone to collapse. What's needed to solve these problems is a different type of liquidity provider.

History doesn't repeat, but it does rhyme

Stepping back, its good practice to look to TradFi for its many generations of learnings. Banking in the 19th and 20th centuries was going through similar problems of illiquidity. There were numerous examples of financial institutions collapsing, bank runs being a frequent occurrence.

Back then, the realization was that banks go through regular periods of illiquidity. If they could get an injection of capital when they needed it the most, they could survive the temporary downturn and bounce back.

The solution was the concept of a Central Bank. An entity with the objective of ensuring liquidity in the many banks it oversees. One that all banks can trust to protect them, with the purpose of providing the support it needs to thrive during good times, and survive during the bad.

The most interesting part of this solution though, is that the mere presence of such a backstop is often enough to prevent this negative reflexivity from starting in the first place.

A very powerful concept. What if we could do better?

What if it was possible to create a smart contract to serve the same purpose as a Central Bank, to provide that same kind of confidence for a token?

This would be a tool to fight the death spiral. An anti-reflexive engine.

A New Type Of LP

This is Baseline's ultimate directive: to support a token through shifting market conditions, at every phase of its lifecycle. Like a financial battery, it gathers value during good times, and releases it back during the bad.

As an autonomous liquidity provider, Baseline efficiently supplies its Protocol-Owned Liquidity across top-of-book bids and asks, while preserving an ever-growing floor price to be the ultimate backstop for holders, providing support where and when it's needed most.

A Central Bank for your token.

From this core mechanism, we created a pricing system superior to the standard CPMM and a lending system free from brutal liquidations. We distribute the value these generate, establishing a native yield source for each token. These primitives combine to enable resilient onchain economies that can survive and thrive.

Conclusion

We're a team of builders who have felt the pain of onchain trading for too long. We've been working on solving these issues for years. And we believe the problem isn't the builders or traders, but the fragile systems they're forced to use.

So we built a better one.

Baseline is our answer to the constant threat of zero. A stronger foundation for the next generation of onchain economies, where great projects have the support they need to achieve their full potential.

Come check us out at baseline.markets or talk with us on Discord. Learn more in our docs.