Tokemak: Protocol Analysis

Sid Sanghvi
4 min readJul 25, 2022


Authored by the Genesis Block Podcast. Visit the Genesis Block Newsletter for the full version of this article.

Photo by Kilian Karger on Unsplash


Within the Web3 value stack, Tokemak sits within the broader realm of DeFi, and can be described as a decentralised market maker. It also holds a unique place in the Metagovernance space — which refers to holding one DAO’s token in order to influence decisions in another DAO(s), a concept popularised by the Curve Wars. At a high level, Tokemak enables holders of the TOKE token to apportion liquidity to a variety of different exchanges — but there’s a lot more detail around how Tokemak works that we’ll cover.

It is built on Ethereum, but is planning on being a multi-chain protocol, which is encouraging if you believe in a multi-chain future; a protocol built across blockchains, which provides liquidity across chains and exchanges, has a much larger addressable market. Moreover, Tokemak has raised $4 million from the likes of Framework Ventures, Electric Capital, Coinbase Ventures, North Island Ventures, Delphi Ventures, and ConsenSys. These are all reputable VC firms, which grants some level of comfort and although the funding is on the lower side, as we’ll see, the team has managed to do quite a lot with the investment.

Tokemak sees liquidity as the most critical infrastructure of the token ecosystem, since without deep liquidity, it is difficult for any token to survive — indeed, a lot of DeFi projects we’ve seen have been variations on trying to bootstrap enough liquidity to their own ecosystems. Tokemak’s long-term goal, therefore, is to become the primary decentralised liquidity provider across the Web3 ecosystem by providing Liquidity-as-a-Service to all types of Web3 projects.

How Does Tokemak Work?

The traditional way of providing liquidity is by adding liquidity to a ‘pool’ that consists of two equally balanced assets. In Tokemak’s spin on this model, each asset supported by Tokemak has its own ‘Token Reactor’. A liquidity provider (LP) deposits tokens into the token reactor, and a liquidity director (LD) stakes TOKE and is able to vote on which exchanges that liquidity is allocated to. Moreover, as TOKE holders, LDs have a pro-rata claim on the treasury of protocol-controlled assets (PCA).

Let’s say run through an example.

  • Assume you hold ETH, CRV, and FRAX. You, as a liquidity provider, deposit the ETH into the ETH Token Reactor, CRV into the CRV reactor, and FRAX into the FRAX reactor. In return, you obtain:

1) A liquid derivative of the deposited asset — a tAsset, a bearer asset that represents a tokenised claim on the underlying asset. So, you get tETH, tFRAX, and tCRV.

2) TOKE rewards.

  • Then, assume I hold 100 TOKE. I stake that TOKE and obtain 100 votes. I choose to allocate 30 votes to ETH, 50 votes to CRV, and 20 votes to FRAX.
  • I can then choose to allocate the TOKE I have staked to each reactor to particular exchanges. The liquidity is directed towards a particular exchange in one-week cycles. My voting power in each reactor is proportional to my share of the total TOKE staked to the reactor. Let’s see how I could allocate my votes:

30 ETH votes: I allocate 15 votes to Uniswap and 15 votes to SushiSwap.

20 FRAX votes: I allocate 10 votes to Paraswap and 10 votes to Curve.

50 CRV votes: I allocate 20 votes to Balancer and 30 votes to Thorswap.

The below diagram may be helpful:

Created by the Genesis Block team

The defining feature of Tokemak is its single-sided liquidity. Instead of needing to balance two separate assets and go through the complexities of interacting with a DEX, Tokemak makes it easy for LPs to deposit a single asset and, at the same time, be protected from impermanent loss (IL), which is instead borne by LDs. LPs are protected from IL since they do not have to pair their asset with another asset, i.e., they get out what they put in. Since LDs must stake TOKE, they are exposed to the price volatility of two assets (TOKE and the reactor asset), and thus have to bear IL.

All reactors are intended to be balanced, i.e., the ratio between the LP deposits and the TOKE staked by LDs is meant to be as close to 1:1 as possible. To incentivise this, the protocol adjusts the interest rate paid out to LPs and LDs in the following manner; when:

The value of assets within a reactor > value of TOKE staked, the protocol increases the interest rate paid to LDs to incentivise more TOKE deposits;

The value of assets within a reactor < value of TOKE staked, the protocol increases the interest rate paid to LPs to incentivise more asset deposits.

The last piece of the puzzle is the Pricers, who provide real-time pricing information for any protocol that does not use an Automated Market Maker (AMM). Pricers set buy and sell order prices in this case, and use a separate pool of Tokemak assets to maintain the asset’s market.

All fees generated from providing liquidity on DEXs are retained by the Tokemak treasury.

Authored by the Genesis Block Podcast. Visit the Genesis Block Newsletter for the full version of this article.



Sid Sanghvi