One Article to Understand Tapioca DAO: The Cross-Chain Lending Market Built on LayerZero
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One Article to Understand Tapioca DAO: The Cross-Chain Lending Market Built on LayerZero
Tapioca DAO will allow users to borrow and lend across more than 12 EVM and non-EVM blockchains.
Navigating Web3 tides with focused insightsAuthor: Tapioca DAO
Compiled by: TechFlow
Tapioca DAO will enable users to borrow and lend across more than 12 EVM and non-EVM blockchains.
Its core products are Singularity and Yield Box:
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Singularity is an isolated risk lending market (based on Sushiswap's Kashi product).
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Yield Box (BentoBox V2) is a permissionless token vault.
It will also offer the ability to mint "usd0", a decentralized, overcollateralized omnichain stablecoin.
Tapioca will leverage LayerZero’s technology to achieve cross-chain composability without relying on cross-chain bridges.
Core Products
Singularity
Licensed from BoringCrypto to Tapioca, Singularity was created to provide composable lending markets across various networks, aiming to solve fragmented liquidity issues.
Markets in Singularity are isolated, allowing higher-risk assets to be used as collateral, with elastic interest rates designed to boost utilization. For example, if ETH borrowing utilization is low, the rate will decrease until optimal usage levels are reached. Users can also use leverage of up to 5x.
Big Bang (usd0)
Big Bang allows users to mint an omnichain stablecoin called usd0. There is no borrowing cap, but there is a debt ceiling. The collateral planned for minting usd0 includes native gas tokens (or their staked derivatives), such as ETH, MATIC, AVAX, wstETH, rETH, stMATIC, and sAVAX.
Minting usd0 with ETH carries a fixed rate of 0.5%, making ETH the preferred collateral. Other collateral types will have a debt ratio relative to ETH and variable interest rates. For instance, if AVAX has a 1:2 debt ratio against ETH (assuming ETH issues $100 million), AVAX’s potential debt would be capped at $50 million. AVAX’s rate will vary between 0.5% and 3% based on utilization. If all $50 million of AVAX debt is drawn, the rate will rise to the maximum of 3%.
Each interest rate parameter in Big Bang markets can be set through governance. Tapioca also offers a feature called Peg Protection Mode. This mechanism doubles the interest rate on risky collateral in designated markets every 72 hours, up to a maximum of 10%, or until deactivated. It is designed to incentivize borrowers to repay debts and reduce risk exposure.
usd0 also supports Flash mints at a fee of 0.001%. Similar to Aave’s flash loans, this function can enhance market efficiency and arbitrage opportunities for usd0.
Yield Box
Yield Box is a token vault product where users deposit tokens to earn yield. It provides risk-isolated strategies and supports NFTs and Rebase tokens. It automatically rebalances funds across multiple chains (e.g., Aave lending on Ethereum mainnet, Arbitrum, or Optimism). Initially, only low-risk strategies will be available. However, Tapioca plans to introduce medium- and high-risk strategies in the future.
TAP Token
TAP is a freely tradable token obtainable only through the DAO Share Options program or on public markets, with a maximum supply of 100 million distributed as follows:
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15% allocated to the team, locked for 12 months and linearly unlocked over 36 months;
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11% allocated to investors;
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5% allocated to the Liquidity Bootstrapping Pool (LBP);
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2.5% reserved for airdrops;
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66.5% allocated to the DAO.
DAO Share Options Program (oTAP)
The DAO Share Options program is the mechanism Tapioca uses to incentivize liquidity and sustainable protocol growth. It leverages American-style call options (called 'oTAP').
A simplified working example: Users deposit liquidity into the lending market and receive a receipt token called 'tOLP'. They can lock this receipt (representing their liquidity) for a chosen duration. Based on Tapioca’s AML (Average Magnitude Locked—explained later) formula, a discount factor is applied to the receipt, valid throughout the lock-up period.
At the end of each epoch (approximately one week), users receive oTAP options with a specified strike price. Users have the right, but not the obligation, to purchase TAP at this strike price. The price is determined by the formula: Strike Price = Spot Price - X%, where X% equals the discount factor.
Each oTAP option has a one-week validity and can be exercised at any time. Any unexercised oTAP expires worthless. The number of oTAP issued depends on the user’s percentage share in the market, which may dynamically change across epochs. The discount is fixed based on the Average Magnitude Locked (AML) formula, ranging from 5% to 50%.
This system benefits both users and the protocol. Users can choose to buy TAP at a discount and sell for profit, or lock TAP into twTAP (which offers additional benefits). The protocol, acting as an off-market seller of TAP via the DAO, gains protocol-owned liquidity.
The twAML mechanism (time-weighted Average Magnitude Locked) is carefully designed so the protocol can adjust incentives when needed. For example, during periods of protocol decline (e.g., fewer users providing liquidity or locking TAP), AML can be adjusted to offer greater oTAP discounts or reward more twTAP for shorter lock durations.
Conversely, during peak periods, the opposite can occur (reducing oTAP discounts or decreasing twTAP rewards from locking).
What Is twTAP?
twTAP stands for "time-weighted TAP." It is obtained by locking TAP. Users who lock receive rewards paid in tETH (more details on tETH below) each epoch.
The protocol distributes 100% of its revenue and 50% of Arrakis vault earnings to twTAP stakers.
twTAP is also used for governance and influences oTAP incentive allocations through voting.
Similar to the discount factor mentioned above, the amount of twTAP distributed is based on the twAML mechanism. As more twTAP becomes locked, it will require either more TAP or longer lock times to earn the same amount of twTAP as before.
usd0 – Omnichain Stablecoin
usd0 is a decentralized CDP pegged to $1.00. usd0 supports full cross-blockchain composability without bridges, slippage, or waiting times. It is minted exclusively within Big Bang Markets, and the protocol owns and manages liquidity on Uniswap V3.
Tapioca uses variable borrowing fees to encourage arbitrageurs to maintain the peg. For example, if usd0 rises to $1.02, the borrowing fee is set to 0%. If it drops to $0.98, the fee becomes 1%. When usd0 = $1.00, the target minting fee is set at 0.5%. Loan-to-value ratios (LTV) for each collateral type are shown below.
tETH and tAssets – OFT20 Standard
All Tapioca assets are liquid omnichain wrapped assets built on Layer Zero’s OFT20 standard. They are 1:1 backed assets that can freely move across chains via burn-and-mint mechanisms.
tETH is a wrapped version of ETH on Arbitrum, Ethereum Mainnet, and Optimism. Users can wrap ETH on any of these chains and receive tETH, which can be easily transferred and used as collateral in Tapioca markets.
Various other tAssets are also planned, including tGLP, Dopex LP, Sushi SLP, Arrakis LP, rETH, stMatic, etc., all without bridge fees or transfer costs.
Revenue Streams
Tapioca has four revenue streams:
1. Initial Liquidity Bootstrapping Pool (LBP)
5 million TAP (5% of total supply) is tentatively scheduled to be sold on March 23, 2023. The starting price is set at $3.52, with a final floor price of $0.88—four times lower. The final price will be determined by open market supply and demand dynamics and could fall below $0.88 or exceed $3.52. Proceeds will fund initial liquidity and assist in price discovery.
2. DAO Share Options
The DAO sells TAP to users, and proceeds are used to deepen protocol-owned liquidity.
3. Protocol Fees
- Borrowing fee = 0.5%
- Interest = 0.5% (variable, except for ETH/USD0 market)
- Liquidation = 10%
- Performance fee = 15%
- Flashmint = 0.001%
4. Arrakis Vault
Tapioca DAO is using Arrakis to manage protocol-owned liquidity on Uniswap V3. 50% of earned fees go to the twTAP account.
oTAP Airdrop
An airdrop of 2.5 million TAP (2.5% of supply) will be distributed in the form of oTAP. Of this, 1.5 million will go to participants in the Liquidity Bootstrapping Pool (LBP). The earlier a user participates in the LBP, the higher the discount on their oTAP call options.
The airdrop allocation ratio is 10:3, meaning if a user purchases 10,000 TAP in the LBP, they will receive 3,000 oTAP via airdrop. The strike price is based on the final LBP price and the applicable discount factor. oTAP options have a 72-hour validity period.
Discount factor tiers:
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[User buys TAP at starting price $3.52]: 50%
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$3.51 – $3.00: 33%
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$2.99 – $2.50: 25%
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$2.50 – $2.00: 10%
Any TAP purchased below $2.00 does not qualify for the oTAP airdrop.
The remaining oTAP will be distributed at various discounts to Discord members (OG and below) and Pearl Club NFT holders, who served as beta testers.
Summary
Tapioca DAO is building one of the most interesting projects to date—an omnichain money market that enables fully composable operations across multiple blockchains, without hassle, slippage, or risks associated with bridging assets. It features carefully designed tokenomics that accumulate value for holders in a sustainable manner. The scope of this project is vast, but the team’s demonstrated attention to detail convinces me they have a strong chance of success.
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