Tapio's testnet campaign was a success: they observed over 80,000 unique participants, nearly 3,000,000 completed tasks, and over 1,000,000 transactions. The campaign was divided into two phases and included the Tapio decentralized application, as well as integrations with protocols such as Maverick and Gravita. They see their community growing and recognizing the benefits of Tapio within the LSTfi space.
This testnet campaign provided them with a safe environment to test their assumptions and ideas and identify unexpected aspects and problems with the application. It has been extremely helpful due to the participation of the entire community.
One of the key elements of the Tapio protocol is the tapETH model itself. During the test network, they identified several areas that could be improved. Let's look at why and how the team is improving the protocol and overall product offering.
How did the old/current tapETH token work?
The concept of tapETH is unique in that it not only functions as an "ETH stablecoin" (with a 1:1 value), but also accumulates rewards generated by the underlying Liquid Staking Tokens (LSTs), as well as swap/redemption fees from trading and arbitrage LSTs and tapETH. This concept allowed it to be both a functional Liquidity Pool (LP) token and a very useful independent asset that can be used in DeFi.
The team decided to use this model for two reasons:
tapETH linked to ETH
Linking to ETH has greatly simplified the user experience from both the holder and trader perspective. Holding and betting on tapETH is the same as holding and betting on ETH, and at the same time receive rewards and commissions for the bet, and the user could immediately see how much tapETH and, accordingly, ETH he has (thanks to the ratio of 1 :1).
The arbitrage opportunities for tapETH were also much more obvious since it was always pegged to ETH and users could effortlessly determine whether it was trading at a discount or premium and act accordingly.
Compatible with UX and DeFi
Since this peg was evaluated from a UX perspective, the most obvious solution was to use it as a rebasing token - similar to Lido's stETH, where token balances in wallets are updated daily to reflect the increase in staking reward received from the beacon chain.
However, the dilemma in this case, of course, was the difficulty of integrating the asset into DeFi - due to the added complexity associated not only with the typical volatility of the asset's value, but also with the volatility of the token balance when the reward changes every day.
tapETH's pegging to ETH, the ability to manually earn rewards, and the immutability of tapETH's initial value (as well as regular ETH) meant that it could be staked in DeFi applications such as liquidity pools or yield farms without changing the token balance and maintaining a 1:1 ratio with price of the ETH asset.
Claiming rewards manually meant that a user could either sit on their tapETH and receive rewards whenever it was convenient for them (since rewards were paid every block rather than once a day), but also DeFi protocols could claim rewards on behalf of tapETH users/stakers in your protocol.
However, thanks to the testnet, the team realized that there were ways to improve tapETH:
Approval of rewards for users:
While separating rewards and tokens provided some benefits in terms of peg/token balance, it became clear that users found the process to be quite time-consuming and gas-intensive. Having to frequently go back to the dApp and optimize requirements based on gas fees was not very convenient.
Combined with the fact that most users valued capital efficiency and that they would use it primarily in subsequent applications, the reward requirement was an unfortunate aspect of the product design that effectively created zero net positive for tapETH holders.
Reward Claim for Protocols:
This leads to the second key side of the Tapio ecosystem: applications that have integrated and supported tapETH within their platform. In the initial phase, many of our launch partners and potential integrators were actually able to use their "Reward Claim Boilerplate API" to claim rewards on behalf of their top-up or tapETH users, thus getting the best of both worlds.
The problem, however, was that this was only possible due to their deep connections with these protocols, which were often also trying to fight their own battles and trying to use new and innovative products and technologies in the market.
Once they began to develop partnerships with larger teams and protocols, it became clear that the amount of time and resources (both developers and others) to implement such a unique mechanism as tapETH rewards would require too many resources without significant market validation in in the form TVL/Volume/Holders.
Cross-chain strategy:
When developing tapETH, the developers paid special attention to Ethereum, since it is where the vast majority of ETH and LST liquidity is concentrated, but they did not forget about the second-layer protocols: the use of tapETH is very important, and as second-layer solutions grow and spread, such as Base, Optimism and Arbitrum, they will take them into account more and more.
However, there was uncertainty in the roadmap and product design regarding how the team would implement cross-chain rewards for tapETH. In discussions with protocols such as the Wormhole Foundation, they looked at this issue and cross-chain messaging became one of the options. This means that storing tapETH on any chain will allow users to seamlessly claim rewards from the Ethereum Mainnet. Another solution would be to limit the number of reward claims to Ethereum Mainnet only, or limit the time to receive rewards on alt chains to once a day or once every few days.
Regardless of what the team considered, each of these options would be complex both to implement and from a user perspective. In addition, there is even greater complexity in integrating tapETH into dApps on other chains. While these challenges weren't ones the team couldn't overcome and solve, they would make life difficult across the board, and so their cross-chain ambitions were relegated to a lower priority.
Updated tapETH token model:
Thanks to valuable feedback from the community as well as protocols, the team decided that it would be best to rework the tapETH model into a two-token model with a tapETH rebase and a wtapETH reward.
tapETH - rebasing token:
The requirement functionality, while a good idea, was a hindrance to the UX, and to fix this, the team is turning the base tapETH (which you get when adding liquidity to Tapio) into a rebasing token, similar to stETH in Lido.
As a rebasing token, users will have a simple experience when earning rewards as the balance of tapETH tokens in the user's wallet will be automatically updated, meaning that you no longer need to visit the Tapio dApp multiple times, and that tapETH maintains a 1:1 ratio with ETH, giving ample opportunities for arbitrage.
tapETH will be recalculated daily (though may be more frequently) and the token balance will increase to reflect the reward for staking the base LST on Tapio, as well as commissions generated by the protocol - and can be exchanged for ETH and/or at any time or LST.
However, the key point is that tapETH will only be available on the Ethereum Mainnet.
Receiving rewards using old tapETH:
Go to Tapio Finance dApp.
Go to the Claim Reward page.
Click the "Claim" button to perform the operation.
Pay the gas fee.
tapETH rewards will be sent to the user's wallet.
Receiving rewards using new tapETH:
The tapETH balance in the user's wallet automatically increases without user intervention.
wtapETH - token with interest rate/reward:
To address the issue that rebasing tokens are sometimes incompatible with DeFi protocols, they are introducing wtapETH, which uses the “cToken” model. wtapETH uses an exchange rate (relative to ETH) to determine value, similar to wstETH or rETH. It is acquired by wrapping regular tapETH inside a Tapio dApp. When wrapped in wtapETH, the token is no longer rebased, but simply increases in value according to the exchange rate calculated by the protocol itself.
This wtapETH can then be used within DeFi without any additional effort from the Tapio team or partners, and can also be integrated by anyone without having to delve into their development documentation. Moreover, this means that wtapETH can be used cross-chain without having to do anything special regarding the rewards, since they are natively “built in” to the token itself.
The interest rate model works through an exchange rate that is constantly determined and changed by Tapio itself; this is also reflected in the "wrap" and "unwrap" function: At first tapETH will wrap to get 1 wtapETH, but as the wtapETH exchange rate rises (relative to tapETH) the ratio will change - for example, if the exchange rate is 1.1, then for wrapping and receiving 1 wtapETH you will need 1.1 tapETH, which, of course, is reflected in the reverse flow (unwrapping).
As a result, arbitrageurs can take advantage of the mispricing by either buying wtapETH at a discount and spinning (which will most likely incur a fee) to get more tapETH, and then either selling it or simply exchanging it for ETH/LSTs; This is what allows the exchange rate on the DEX, as well as the rest of DeFi, to be kept at the rate specified by Tapio (or close to it).
This also provides additional opportunities for arbitrage (and thus strengthening pricing) on cross-chain platforms, as more markets mean more sources of mispricing, which will lead to low cross-chain flow of wtapETH. Additionally, the team will be looking to make wtapETH native to multiple chains (similar to the $USDC concept with CCTP) so that you can use a "burn and mine" bridge mechanism as opposed to the typical "lock and mine" mechanism.
Existing LSTs often face a dilemma where the bridged/wrapped version of their LST on non-Ethereum chains trades at a significant discount due to the fact that it cannot easily implement arbitrage due to bridge security risks as well as associated gas fees. All this means that cross-chain use of wtapETH will be much faster, safer, without the need for a third-party bridge and with much lower gas requirements, meaning pricing across all supported chains will be much more equal (since arbitrage can occur by simply "teleporting" wtapETH back to the Ethereum mainnet).
wtapETH will be available on both Ethereum Mainnet and all other supported chains.
What's next?
The team is working hard to create a new dual token model and is keeping the cross-chain strategy as a top priority when designing the next iteration of Tapio Finance.
They have already completed two audits: Mixbytes and Secbit, and also launched the Immunefi Bug Bounty program. They will continue to work on the security and codebase for updating tokens, as well as other aspects of Tapio Finance, such as the governance module.
The team will be updating the community frequently and regularly, so keep an eye on their official Twitter for updates!
Stay up to date
The team wants to work with everyone in the LST and LSTfi ecosystem, and they encourage anyone interested in the long-term future of Ethereum and liquid staking in general to join them on this journey.
