New Curve, New Era

Throughout the years, despite the many mechanisms conceived to "fix tokenomics", nothing has stuck as a permanent solution. Heaven, Believe, Boop, Bonk, and the slew of launchpads that came before them (and after) all focus on modifying the extrinsic conditions and incentives around the liquidity pool while leaving the underlying economics of the swap untouched: the constant product curve, x*y=k.

We're not saying the math is fundamentally broken, but once you dive into the details of what the equation is trying to do and why, the culprit becomes obvious.

Constant-product liquidity was designed to approximate traditional market making: harvest fees from volatility, stay balanced, treat all flow symmetrically. That works fine between two external assets like ETH/BTC. It doesn't work when the pool is deployed by a project for its own token, where the goal is capital formation and long-term value, not extracting spread.

If the objectives are different, the behavior should be too.

The Tragedy of Heaven DEX

Heaven/$LIGHT stood out to us because it was clear from their communications that they were thoughtful, well-intentioned, long-term players. The team still posts about Heaven developments in Telegram to this day. But no one checks Telegram. They look at the chart, and it tells a different story.

In their team retrospective, they correctly identified what led to their demise: improved trading tooling, sharper adversarial flow, and the curve quickly becoming "uninhabitable." But they blame external factors around the liquidity pool. It's a classic case of addressing the symptoms while ignoring the root cause. No one showed up just to ruin Heaven's party. The curve didn't decide to suddenly become uninhabitable, it was behaving exactly as intended.

Show me the incentive, and I'll show you the outcome

There's nothing in the x*y=k equation that provides context for the total token supply. By definition, constant product pools have no idea how many tokens they will need to buy, and no idea what the underlying valuations of the assets in their pools actually are. The vast majority of on-chain trading is being facilitated by pools that are completely oblivious to the markets they provide liquidity for. They blindly buy and sell based on what's available in their own reserves, unaware of how those trades are impacting the broader market as a result.

To illustrate why this matters: say you are launching a token with 1M total supply. You pair 100K tokens with 50K USDC into a liquidity pool and lock the LP. Sounds good, right?

k = 100,000 × 50,000 = 5,000,000,000
x' = 1,000,000 tokens
y' = k / x' = 5,000 USDC

That $45,000 is permanently inaccessible to anyone actually trading the token. Not locked away for later, mathematically unreachable, forever. The more it grows, the more inefficient it becomes.

At the extreme, these losses extend to absurd amounts.

Remember $SLERF?

Yeah, "oh fuck."

When the dev accidentally burned the LP, the liquidity was so thick that the unused capital today amounts to around 75,000 SOL, over $11 million of completely wasted capital. The pool was working exactly as designed.

Heaven knew about the wasted capital problem and modified their curve to fix it. Yet they still failed, because the philosophy never changed. Liquidity was still designed to harvest volatility, not accumulate value. While the bots and snipers certainly don't help, they are just the consequence of an easily exploitable system.

Until the fundamental assumptions about the liquidity curve change, nothing will change.

The Baseline Way

The premise of Baseline's liquidity curve starts with a simple question: what if we've been looking at the liquidity pool the wrong way?

Whether the pool acknowledges it or not, every pool accumulates an average cost basis based on the aggregate swaps flowing through it. It builds a running profit and loss based on the total volume of units bought and sold and the average prices at which they are executed. And since the pool is the counterparty for every trade, its position is the inverse of all the traders on average. When the pool has a large unrealized gain, all traders are on average down. When the pool is sitting on a large unrealized loss, traders are on average up.

This begs the question: if the pool only makes money when traders lose, should the objective of the liquidity even be making money in the first place?

How would things look if liquidity pools were designed to lose as much money as possible over a sustained time horizon, in order to subsidize the maximum unrealized PnL possible for all holders?

While it sounds ridiculous, the critical detail is in how it loses money. If a pool loses money by setting arbitrarily high prices, the first sellers would drain all the liquidity, leaving everyone else empty handed. Instead, the pool needs to be strategically unprofitable: first making a profit from trading spreads in the short term, then channeling those profits back into upward price appreciation by buying tokens at higher and higher prices, indefinitely.

This is the driving philosophy behind Baseline's curve. We set out to build a liquidity system that is more costly to short-term traders, in order to utilize that extra capital to generate better long-term outcomes for everyone else. Better aligned incentives, more intelligent liquidity accumulation, better overall price performance. We've changed the core rules, and entirely new game theory follows from that.

Never Going Back

Once upon a time, there lived a young frog at the bottom of a well. He'd been there his whole life, quite comfortable, looking up at a very small patch of sky. His cousin came to visit from the outside and asked why he'd never left. "The sky is so small," said the frog. "There's nothing out there for me." His cousin pleaded until he finally climbed up. At the midway point, the sky broadened. He grew fascinated and nervous. At the top, he was speechless. Trees, meadows, a beautiful pond. "I never knew how much beauty existed outside of the well."

We got into crypto because of what we knew it could be: a way to rebuild the global economy from the ground up and provide a better means for economic mobility for humanity, and the endless wealth opportunities that arise as a result. Call us naive, but we never lost the vision. We've gotten a glimpse of the world beyond, and damn is it beautiful.

After years of building, failing, and persisting, we feel like we've finally created something that can help us all see it too.

And once we leave the well, we're never going back.