World: Meet ARC.
The composability of debt is here.
This isn't a regular DeFi Weekly post, this is something quite a bit more than that - so strap in!
If you’re interesting in just knowing about ARC without my story, feel free to read the game paper directly here: https://gamepaper.arcx.game/ or just watch this video
The Birth of ARC
Ever since joining the crypto space, I've always been incredibly passionate about the idea of synthetic assets and the potential impact they’d have on the ecosystem. MakerDAO is a revelation - a central bank for the Ethereum ecosystem, allowing for the permissionless borrowing of ~$ denominated debt - known as DAI. At the same time, Synthetix has shown the world the power of token-based incentive structures in order to rapidly and strategically grow a network, co-ordinating everything it needs when it needs it. Synthetix achieved this through the introduction of a 4-year inflation schedule of the native network token and then allocating the lion's share to active participants in targeted growth initiatives.
However, a major constraint with both systems is the dominance of the first collateral type they started with and being locked into it. While both currently have or are planning to add more collateral types, MakerDAO will always be ETH dominant and Synthetix will always be SNX dominant. Both projects do this for good reason - to mitigate the risk of smaller/riskier collateral types bringing down the entire system or to reinforce the value proposition of the native token. The other benefit of this design is that a pooled liquidity model creates a better user experience and positive network effects. While thinking through the problem space, what broke the “everything has to be pooled” model was the success of Uniswap v2 and Curve pools and how liquidity hasn’t fragmented as much as people thought it would be. So I thought, ”why not push this a bit further and use the same thinking for synthetic assets?”
MakerDAO for Everything
If you were to ask me "what's the one-liner for ARC", I'd respond "it's MakerDAO for everything". So what does that mean? Well, the idea is quite simple really. You have individual synthetic asset pools where you deposit a single collateral asset and you get back a single output asset.
Input ERC20 → Get back ERC20-USD
The thinking around this model is that you can actually create a universe of debt from every token that exists while fine-tuning the risk parameters around each one and not creating compounding risk in a global system. So for example, the first asset in the system is LINKUSD - a Chainlink collateralized synthetic US dollar. Oh, and yes, it is powered by Chainlink oracles. Read the gamepaper for more details around oracles and assets - https://gamepaper.arcx.game/ :)
Ultimately, anyone will be able to bring a price-feed available on-chain with some valuable collateral and create a synthetic asset. If we look back in crypto history, decentralized exchanges like IDEX/EtherDelta were permission-less but still had gatekeepers listing tokens. ARC aims to do what Uniswap/Balancer have done to decentralized exchanges - let anyone create debt based on their own parameters. Of course, there are many attack vectors with such a proposition, but if you create permissionless technology you can always add trust elements on-top to keep users safe. To read more about the use cases and details checkout the game paper directly at: https://gamepaper.arcx.game/
Challenges of Bringing ARC to Market
While the product has an interesting spin to it, so does the token distribution mechanism itself. While I was working on ARC as a side-project, I saw the way Andre released YFI and got very excited when I saw the possibilities of what a community governed protocol could achieve. I personally spent a lot of time in the governance forums and keeping up with proposals, something I hadn't done for any other project. What caught me off guard was the caliber of talent that was also participating in the YFI governance forums.
If you take the simple notion that the people behind a project make it a success or failure, then you want to optimize around attracting the highest caliber of talent AND community members to your project. Most DeFi projects' community consists of the founders, investors and team members - everyone else is there to maybe hope the token price goes up without exerting much of their own labour. It's clear that over time community governed protocols accrue benefits that aren't available to their more "centralized" counter-parts because everyone feels like they could get in at the ground floor of the project and won't be dumped on later.
Given this information, my first instinct was to code up the smart contracts + front-end and release without audits. However, given the time I've spent building in this space - smart contract hacks are devastating for everyone involved and are very hard to recover from once things go wrong. I didn't want to set back the future of ARC simply because I didn't have audits and all the operational expenses with creating something for the long-term rather than short-term and speculative. However, raising a $2m round and giving up 10-20% of the network for early investors with an additional 20-30% to the team also didn't seem in the right direction when designing a community governed protocol, given close to half of the supply would be dominated by insiders and create sell pressure from the get-go. In my mind the current two approaches seemed like:
A community-governed protocol but where the incentive for the founder or a future team to continue is very limited. Andre had spent close to $100k of his own capital to get YFI off the ground and has very little stake in YFI as an owner. The treasury will always have $500k but the caliber of full-time team members will be limited as they can't participate in the upside of YFI.
A venture capital backed protocol which gives access to early capital but at the expense of leaving the community out. Founders and team members are well incentivized but then everyone feels like they're making 2-3 VCs rich. At the same time, not all VCs are bad and certain ones can increase the chances of a network getting the crucial things it needs.
Designing a Better Distribution
After a few weeks of deliberating on the key factors to optimize I settled on the following:
Raising the least amount of money needed for an audit and runway for myself + a small team for 6-12 months to be heads down shipping. This includes getting the right mix of backers across the ecosystem to help guide me through the ups and downs of executing a project.
Ensuring that ARC can be owned by the community in the long-term and that the correct incentives are in place to let people get in at the ground floor.
Contributors can capture more of the upside of ARC tokens so if it does work out then the project can self-fund itself and get the right team members to ensure this is a future DeFi primitive for years to come.
So where did I finally end up at? After speaking to those with the most expertise and experience of the above I converged on the following model:
ARC tokens can only be earned by using the protocol itself - aka yield farming. No pre-mine ensures that no one has an advantage before launch. Inflation will be used as a strategic tool to grow the network for whatever it needs.
1/3 of all tokens minted in real-time go to the ARC DAO over the course of 4 years. This provides an incentive for future team members, investors and myself. At the end of 4 years the community can decide whether to remove this percentage or change allocations within it.
The remaining 2/3 will be owned by the community, ensuring that insiders are always a minority and the network won't be at risk of being insider dominated compared to other protocols. Control of the protocol will remain at the hands of the team and myself to begin with but certain decisions will be open to community governance. This is intentional since I'd like ARC to iterate fast and I can use my expertise in the short-term as the founder to get to a stable place. My long term goal is to be a silent, occasional voice in the community with Vitalik my inspiration here.
To bootstrap the network, a small percentage of future issuance was sold from the ARC DAO allocation. This means that the backers only get tokens when the DAO gets tokens (when users farm tokens).
As of now, 5.41% of the future issuance (for 4 years) was sold in a community round for $406,000. There's a total of 29 backers from all parts of the ecosystem with the average check size being $13k and the maximum at $40k.
In addition, 1% of the future issuance (for 4 years) is allocated to $KERMAN holders. I'll be writing a post on my Medium about the details soon.
The remaining 26.92% will be held by the ARC DAO.
The ARC Game
Okay so now that we've got all the hard-hitting details out of the way, there's still one more aspect of ARC left to discuss. ARC isn’t just a protocol, it's also a game. If there's one thing we're seeing gain traction within DeFi, it’s the gamification of active network participation as incredibly powerful tools for coordination. The "Save YAMs" progress bar we saw a few weeks ago was a good hint at what this might look like but no one has really attempted to take this game concept the full way - until now.
The objective of the game is simple, people have to coordinate together to create a new asset class. The ARCx moderators will set "levels" for the network based on whatever is needed for growth and players of this game achieve the objectives. Play the game well with fellow players and the value of ARC tokens will grow. A purely illustrative example of levels might be:
Level one = creating $1m worth of LINKUSD
Level two = scaling to $10m worth of LINKUSD
Level three = adding RENBTC as collateral and creating $1m worth of RENBTCUSD
Level four = scaling RENBTCUSD to $100m worth
Higher levels of the game will become increasingly more meta: the community will be the game-master. Here's a sneak peek of how it'll look:
The 10 Year Vision
It’s hard for people to think 2 years ahead in crypto, but 10 years is what it truly takes for something to reach its final end state. ARC enables the original vision of Bitcoin as a P2P digital cash, by unlocking its store of value property through the creation of a stable debt medium of exchange, all powered by Ethereum.
ARC’s final network proposition is creating an entire universe of issuable debt.
I can see a world where trillions of dollars of collateral specific stablecoins/debt could be issued by the year 2030. Ultimately any crypto asset you own, you’ll never have to sell since you can just issue debt against it and pay for your bills. My end goal is that the core team becomes a relic of the network and the community is running ARC with a high degree of sophistication and momentum.
As we see increasingly more valuable collateral types come onto the Ethereum network, the addressable market of debt creation could be very, very large.
Currently, the contracts are being audited by Quantstamp, post-audit we'll be doing a gradually phased rollout with circuit breakers limiting how much money the system can hold. Once we're confident that the system works as intended, it'll be yield farming time. All of this will be happening very shortly so stay tuned.
I’m also excited to build a very small, remote, lean team of core contributors who will help me build out ARC. If you’re a brilliant DeFi mind, I’d love to have you alongside this journey. I’m primarily looking for the following:
Full-stack developer (aka experienced engineers who don’t mind working on new stacks)
Smart contract engineer (doesn’t have to be full-time, part-time or contract basis is okay)
Operations role (someone to help out with all the nitty gritty tasks and stakeholder communications)
Closing up though, I'm incredibly excited to have the opportunity to do this full-time and want to thank each and everyone of you who’ll be alongside this journey with me. I hope that this creates a new wave of projects which find the right balance between community-owned and productive investor incentives.
Kerman of ARC!
Get involved in the Discord: https://discord.gg/gyvbm9
Stay up to date over at: https://blog.arcx.game/