Dyad Space

Dyad's flywheel can be improved

Merkl is not optimal (2:45)

In the actual flywheel design, users earn Kerosene (KERO) by providing liquidity to the USDC/DYAD pair on Uniswap v3, and KERO is distributed through Merkl.

KERO can then be deposited in users' notes to mint more DYAD, provide more liquidity, get more rewards, and repeat.

The thing is, KERO distribution claiming using Merkl is not optimal. Some top notes are gaming the system by only holding kerosene without other collateral or minting DYAD.

Proposed changes:

• Keep Uniswap v3 pool, but start incentivizing liquidity on Curve
• Implementing a new "kerosene dispenser" contract, where users stake LP tokens from the Curve pool, and the contract distributes KERO based on the staking

The XP system has problems (5:40)

The current XP system also has problems: users earn XP for every second kerosene is deposited in their note, and XP is slashed proportionally when kerosene is withdrawn.

There is a risk of forming an "oligarchy" where top notes accumulate more XP and kerosene, compounding their advantages and discouraging new users from entering the system

A new XP system must be built, without slashing or XP inflation, or deflation.

That incentive structure aims to reward both depositing exogenous collateral + minting DYAD against it

A new XP system

Upgrade XP system with "mileage" (10:10)

So Dyad introduced "mileage". Mileage is the total amount of XP a note has accrued over its entire lifetime, just like a car's odometer that only increases

New XP accrual rate calculation:

• Base rate: ~0.0080 XP/KERO deposited/second
• Modified by note's mileage: 1 / (log10(mileage) * accrual rate)

As mileage increases, the XP accrual rate slowly decreases (decrease is more pronounced at higher mileage levels)

As a result, higher mileage notes accrue XP more slowly, and withdrawing reduces current XP but doesn't affect mileage, so it makes withdrawals more costly in terms of future XP-earning potential

Benefits:

• Slows down XP accrual for highest XP notes
• Gives newer notes a relative advantage
• Maintains strong disincentive against withdrawing kerosene

Mileage becomes a factor in determining a note's value on the secondary market. Notes with high mileage but low current XP (due to withdrawals) may be discounted

The DYAD-minted balance creates a boost (28:20)

For every kerosene deposited, the DYAD-minted balance on a note will boost the accrual rate of XP.

The most efficient boost is to have a 1:1 ratio of Dyad-minted to kerosene deposited. Any additional Dyad-minted beyond that will provide diminishing returns.

Seeing rewards as financial products (32:00)

This accumulated XP and kerosene can then be abstracted into different financial products, such as:

• Buy-now-pay-later functionality, where the longer a user is in the system, the more they can borrow against their collateral
• Increased "spending power" or efficiency against the collateral amount

The important aspect is that the kerosene accrual can be communicated to users as increased credit or borrowing power, rather than directly as "yield"

The goal is to make Dyad work better in the current DeFi ecosystem, while also laying the foundation for much larger future use cases and distribution channels.

The work on the extension system and refining the XP mechanism is not just for the benefit of current DeFi users, but to enable Dyad to be integrated into a wider range of financial products and services.

Questions about the XP system

Gaming the new XP system (15:40)

Magnolia (a listener) says there is a potential strategy where users could split larger kerosene stacks across multiple low-mileage nodes/notes. This could allow them to accrue XP more efficiently than they would with a single high-mileage note.

Joey (the speaker) says there will still be value in having very powerful single notes, even if they accrue slower mileage.

This is because those high-mileage notes may already have a large amount of the overall kerosene deposited, so their absolute XP accrual rate could still be higher than new low-mileage notes.

There will also be an upcoming "extension system" that would allow notes to delegate certain functions like minting and burning DYAD, and user activity would ultimately accrue XP and kerosene.

Building an alternative to Merkl (19:40)

SovereignLlama (a listener) asks what's the concept behind the alternative to Merkl the team is building.

The current use of Merkle is causing issues, like difficulties with the API and integrating with Uniswap v3 LP tokens.

The plan is to build a custom staking contract where users can put in their Uniswap v3 LP NFT positions and earn kerosene as staking rewards, with the rewards modified by the user's XP level.

This custom contract will allow them to better surface the connection between XP levels and the yield/kerosene rewards, which is important for the planned secondary market.

Farminception (38:10)

Eric (a listener) asks if it would be possible in the near term for a note with a lot of XP to borrow against that note while still being able to farm

Currently, in Astaria, you can use your note as collateral, but you cannot continue to farm with that note while it is locked up as collateral.

The Astaria team is aware that enabling borrowing against notes while still being able to farm with them would be very valuable and essentially kickstart the lending market using notes as collateral. This is on their roadmap to develop.

Only Mileage matters (46:15)

A note's “mileage” will now be the only factor affecting the XP accumulation rate.

XP accumulated by users can no longer be withdrawn. This creates a strong incentive not to withdraw one's position, as mileage remains.

Changes to the XP mechanism will be retroactive, applying to all existing notes. This is intended to maintain the fairness of the system, without benefiting existing users.

The team is also considering making the boosting system for Dyad minting retroactive. This would align incentives for all users, new and existing.

Upcoming features

Wen sDYAD? (23:20)

SovereignLlama asks when the team plans to unveil sDYAD (a DYAD staking module to get yields, like sDAI)

sDYAD is still on the roadmap, but will likely come later this year or early next year because the focus has shifted more towards enabling cross-chain integrations and liquidity.

Since the TVL takeoff, there has been a lot of inbound interest from other protocols wanting to integrate with Dyad, such as using Dyad notes as collateral (Astaria) or bringing Dyad to other chains.

Furthermore, they are building out a fixed-rate lending layer for Dyad in collaboration with a partner called Holyheld.

In the meantime, the sDYAD yield will come from integrations with other protocols and a "communal benevolent liquidation bot" that will compete with other bots to capture liquidation yields.

Potential integrations & collaborations (41:00)

• Frax: Exploring a stable pool with their FRAX stablecoin
• Usual Money: Evaluating their USD0 and USD0++ stablecoins as potential DYAD collateral
• f(x) Protocol: Interested in their ability to create "devolatized" versions of ETH (with fETH) to pair with Kerosene
• LayerZero: this would allow Dyad vaults to be deployed on other chains, while the main note remains on Mainnet

Partners > end-users (51:45)

Dyad will not target directly end-users due to core competency, interest, and regulatory considerations.

Dyad's strategy is targeting companies/projects that can onboard the end-users

Example with Holyheld:

• Users deposit cash or crypto into Holyheld's card product
• Funds are deposited into Dyad's liquidity pools (curve or Uniswap v3)
• All Holyheld users represented as a single note in Dyad's system
• Holyheld manages user accounts individually

Partners can present benefits as yield, additional borrowing power, or credit, and can take a cut of yield if desired

Another example with Dyad-wrapped staked ETH vault:

• Users deposit wrapped staked ETH into an ERC-4626 vault (Yearn, Morpho...)
• The deposited wrapped staked ETH is used to mint Dyad, which earns yield.
• The earned yield is returned to the users in the form of share tokens, which increase in value.

Alternatively, users can use their vault position as collateral to borrow more from Morpho's protocol (and earn KERO + XP)

Potential problem: high yields can seem "scammy" to traditional finance, so Dyad focuses on providing tools for partners to present benefits appropriately

Questions about upcoming features (56:30)

What if early fintech companies adopt Dyad's strategy as an internal strategy and present it to their end-users?

Even for companies like Holyheld, will need to purchase Kerosene to get their product to a level that is exciting for their users. Even though the end-users will not think about Kerosene, XP, or Notes, the companies need to acquire Kerosene to provide the desired functionality.

Can these early adopters go to the Dyad marketplace and use notes that have a strong position to strengthen their overall margin?

Yes. As the Notes marketplace becomes more established and there is more price discovery for XP versus Mileage, protocols or companies can go to the marketplace and purchase existing Note positions.

These Notes will have a certain level of XP and yield that is higher than the base yield. Companies can then offer this higher yield to their users and keep a portion for themselves

Magnolia raised a question about the mechanism for renting out or borrowing a Dyad Note and its time-bound usage.

For Joey, this is something that doesn't need to be built into the core Dyad system right now.

The current focus is on partnerships with fintech and consumer crypto companies, where they can buy Dyad Notes and Kerosene to get started, rather than the "note leasing" model.

That said, the Note leasing market will happen. It could be a good fit for a separate composing protocol like the one being built by Icarus and a few others.