EMPOWERING COMMUNITY LIQUIDITY ON ICHI

How On-chain Liquidity Drives Liquidity Management

Introduction

At its core, ICHI aims to revolutionize the creation and management of community-governed, tokenized baskets known as oneTokens, or "Branded Dollars."

With ICHI, communities are able to tailor their own oneTokens to meet their unique requirements and aspirations. This flexibility opens up a world of possibilities, allowing communities to establish stablecoins pegged to their native tokens or curate baskets of tokens representing specific asset classes.

However, ICHI's vision extends beyond just tokenization. One of its current focuses is to create sustainable liquidity through its innovative Vaults, surpassing the capabilities of Uniswap V3. These Vaults combine single-token deposits with concentrated liquidity, enabling liquidity providers (LPs) to earn yields. Moreover, ICHI actively manages the Vaults to optimize each LP's position, ensuring it remains within the most profitable range. This strategic approach maximizes efficiency and offers users higher fees.

This article ventures into the era of community-driven finance, the concept of concentrated liquidity, explores the potential of ICHI Vaults, how the $ICHI token is integrated into the ICHI ecosystem, and how different participants interact with the token.

$ICHI Tokenomics

Below we can see the token flow diagram for ICHI. This showcases how the system works, where the relevant sinks and faucets are and how value flows through/around the protocol. 

A zoomable version of this diagram can be seen here

Ecosystem Participants

Liquidity Providers (LPs) 

Liquidity Providers (LPs) interact with the ICHI ecosystem by depositing tokens into the Vaults, providing liquidity for trading, earning fees and yields, and potentially participating in governance activities. LPs have the opportunity to earn additional yields through their participation in the ICHI Vaults. Vaults are designed to combine single-token deposits with concentrated liquidity, aiming to provide LPs with higher yields.

Token Holders/ Stakers  

Token Holders acquire the $ICHI token for various reasons. $ICHI holders possess governance rights that allow them to actively engage in community governance by proposing and voting on protocol changes. ICHI tokens offer opportunities for yield generation through staking programs or liquidity provisions in the protocol's Vaults. This can provide additional income or rewards for token holders. Stakers of ICHI tokens get xICHI tokens which can be used to participate in the governance of the protocol, This could involve voting on proposals, decision-making processes, or shaping the future development of the project.

How token Holders get $ICHI Tokens

• Decentralized exchanges like Uniswap

• Centralized Exchanges

• Depositing to a Vault/Angel Vault where the paired asset is $ICHI.

Communities 

Communities are the primary participants in the ICHI ecosystem. They are groups of individuals or organizations that create and govern their own Decentralized Monetary Authorities (DMAs) using the ICHI protocol. Communities define the asset composition, stability mechanisms, and governance rules for their DMAs.

Protocol Components

ICHI VAULTS

ICHI Vaults is a component within the ICHI protocol that allows liquidity providers (LPs) to deposit tokens and earn rewards. These Vaults use various strategies, such as slippage adjustment and liquidity concentration, to optimize liquidity provision and maximize earnings for LPs.

ANGEL VAULTS

Angel Vaults aim to align the incentives of DeFi projects and their liquidity providers (LPs) by concentrating the liquidity of a deposited asset below the price of a community's scarce crypto asset. To learn more about concentrating liquidity check here. 

ICHI Angel Vaults offers a solution that combines the benefits of Uniswap v2 and v3, enabling liquidity providers to earn more fees without having to actively manage the price ranges of their positions. In addition to providing liquidity providers with the opportunity to earn higher trading fees, Angel Vaults also provide a number of features that benefit the projects that establish them, including:

• Buy Liquidity: By providing single asset liquidity below the token price of a participating project, Angel Vaults increase the price of the project's token, benefiting its value and market dynamics.

• Deflationary Liquidity Rewards: Crypto projects can offset the cost of liquidity rewards by creating branded dollars through ICHI and establishing an Angel Vault with those branded dollars. This is achieved by locking the project's scarce token when minting the branded dollar and using it as the single asset deposited in the Angel Vault. This process creates upward price pressure and helps sustain the liquidity pool.

• Protocol Owned Liquidity (POL): Depositing a portion of the assets that back a project's branded dollar into the Angel Vault ensures the presence of sustainable and long-lasting liquidity. This benefits the project by providing stability and facilitating trading activities.

BRANDED DOLLAR

Branded Dollar is a community-branded version of a stablecoin that is tailored to the requirements and branding of that particular community. The Branded Dollar aims to provide stability and utility within its designated community.

ICHI FOUNDATION

The ICHI Foundation, established by ICHI token holders, has been formed to support the functioning of the ICHI DAO. As a recognized foundation based in the Cayman Islands, the ICHI Foundation assumes the responsibility of managing various entities on behalf of the ICHI Token Holders. These entities encompass a range of functions such as legal, public relations, development, marketing, and software organizations.

ICHI GOVERNANCE

ICHI Governance empowers token holders to actively shape the future of the protocol. It promotes community participation, decentralization, and collective decision-making

Value Creation

Value creation refers to how the protocol is creating value and for whom. Value is created when a problem gets solved. Read here to understand more about value creation.

ICHI VAULTS

ICHI Vaults are Uniswap v3 Liquidity management protocols created to allow Liquidity Providers (LPs) to enjoy the user-friendly experience of Uniswap v2 while also benefiting from the high fee-earning capability of concentrated liquidity on Uniswap v3. ICHI Vaults are unique in that they let LPs deposit a single token into a liquidity position on Uniswap V3 to earn and return an ERC-20 liquidity token that can be used in incentive programs.

ICHI's Vaults offer Liquidity Providers (LPs) a managed strategy that allows the protocol to increase LPs earnings in the deposited token (i.e. provide ICHI-ETH, earn fees denominated in ICHI & ETH) through various strategies. The Vaults utilize a feature known as Greedy Liquidity, which is implemented in two ways:

• Slippage Adjustment: By adjusting slippage, the risk of overselling is reduced while making it relatively easier to purchase tokens. This means that selling tokens becomes more expensive, discouraging excessive selling pressure, while buying tokens becomes more accessible, facilitating increased demand.

• Liquidity Concentration: The Vaults concentrate liquidity by accumulating the deposit asset. This ensures that LPs can acquire a larger portion of the token they initially deposited into the pool. This concentration of liquidity helps LPs maximize their holdings and potentially increase their returns.

These features aim to minimize selling pressure and provide LPs with the opportunity to accumulate more of the token they initially provided to the pool. You can learn more about concentrated liquidity and ICHI Vaults here.

How do Vaults operate?

Vaults employ inventory management techniques to ensure a controlled liquidity range, preventing excessive token sales below market value. It also focuses on liquidity concentration to optimize revenue and minimize selling pressure. However, Vaults are actively managed to ensure that the price range of each LP’s position remains within the most profitable range 

Benefits of Vaults:

• Automated Pool Management: Vaults take care of managing pool positions, removing the need for manual intervention from users.

• The simplicity of Single-Token Deposits: Vaults allow for straightforward deposits of a single token. This results in higher trading fees per unit of liquidity provided.

• Resistance to Impermanent Loss: Vaults are designed to mitigate the impact of impermanent loss, which is a common concern for liquidity providers in decentralized exchanges.

• Deeper On-Chain Liquidity: By concentrating liquidity, Vaults contribute to the availability of greater on-chain liquidity within the protocol.

• User Control: Vaults are non-custodial, meaning users maintain full control over their tokens.

Overall Goal

The overall goal of the ICHI protocol is focused on optimizing liquidity provision by utilizing Concentrated Liquidity Market Makers (CLMMs) and Vaults. By concentrating liquidity within specific price ranges, ICHI aims to enhance capital efficiency, reduce slippage, and provide better yield opportunities for liquidity providers. The focus of ICHI protocol was once the Branded Dollar, a customised stable coin for different communities. However, the focus recently shifted to Liquidity management through the creation of Vaults.

Value Capture

Value capture refers to how the protocol is capturing the value it creates. Essentially, if value is being created then it has to flow somewhere (ideally to wherever the protocol deems most viable). Value capture can be broken down into (1) value accrual to the protocol and (2) value accrual to the token. Read here to understand more about value capture.

Value Accrual to Protocol

The ICHI protocol generates revenue through a portion of the trading fees, with 10% of the fees directed to the protocol's treasury. This revenue stream contributes to the protocol's funding for development, maintenance, and various strategic initiatives.

Additionally, 10% of the trading fees are allocated towards covering the gas fees associated with rebalancing the pools. Rebalancing ensures that the pools remain at their most capital-efficient state by adjusting the asset weights and maintaining an optimal composition. By dedicating a portion of the trading fees to cover these gas fees, ICHI ensures its pools' efficient operation and management.

This dual allocation mechanism allows the ICHI protocol to both generate revenue and cover the necessary expenses associated with maintaining the pools in an efficient and optimal state.

Value Accrual to Token

The ICHI protocol generates fees or revenue through its Vaults, which includes trading fees and other activities. These earnings are distributed among the participants who have provided liquidity, specifically the ICHI token holders. A significant portion, 80% of these earnings, is shared with the token holders who have contributed to the liquidity pools.

This fee-sharing mechanism is designed to promote value accrual for ICHI token holders. By actively participating in liquidity provision, token holders not only contribute to the protocol's liquidity but also benefit from the generated fees. This aligns the interests of token holders with the growth and success of the protocol, incentivizing continued participation and engagement.

By distributing a substantial portion of the earnings to token holders, the ICHI protocol recognizes and rewards their contribution to the liquidity ecosystem. This fee-sharing mechanism enhances the value proposition of holding ICHI tokens, creating a direct link between participation in liquidity provision and the potential financial benefits for token holders.

The Staking of ICHI tokens can also potentially contribute to the appreciation of the token's price. When tokens are staked and locked in a smart contract, they are effectively taken out of circulation, reducing the available supply. If the demand for ICHI tokens increases while the supply is limited due to staking, it can create upward pressure on the token's price and also by staking ICHI tokens, holders may have the opportunity to earn additional rewards.

Business Model

It’s important to understand the business model of the protocol since it ties into how value is flowing in the system and is relevant to the sustainability of the protocol.

Revenue comes from:

• Liquidity Provider (LP) Trading Fees: ICHI Vaults incentivize liquidity providers by allowing them to earn fees for providing liquidity to the protocol. A portion of these fees is collected by the protocol as revenue. Higher trading volume generally translates to increased revenue for the protocol.

Revenue is denominated in:

UNI v3 LP tokens (ERC 20 Tokens), which is the pool token, based on a ratio gearing more toward 80/20. So for example: If you deposited in a pool that is ETH/ICHI. You would only be depositing ETH. But like any Uniswap pool, your position in the pool starts to become a mixture of ETH and ICHI. So when you withdraw you are getting both ETH and ICHI. But instead of a 50/50 split like some protocols, it leans more toward your initial deposited token which is ETH.

Revenue goes to:

• Liquidity Providers

• Rebalancing of pools

• Treasury

Token Utility

This refers to how the token is being used within the project and by whom. Essentially the token’s use case. Read here to understand more about Token Utility.

The $ICHI token is the native token of the ICHI protocol. It can be used to provide liquidity to ICHI Vaults. Holders of ICHI tokens can stake their tokens, thus receiving xICHI which gives users: 

• ICHIpowah to propose and vote on ICHI governance proposals to determine future features and/or parameters of the ICHI platform as well as protocol improvements, with voting weight calculated in proportion to the tokens staked.

• Rewards for participating in governance proposals. Only users who have participated in the submission of proposals, commenting, reviewing and/or voting are entitled to receive ICHI token governance rewards.

ICHI token is also used to incentivise and reward the community for providing liquidity to the Vaults and reward community members for their contributions.

$ICHI Demand Drivers

Demand for a token can from three sources, those being demand for the token due to its utility, demand due to a mechanism (i.e. staking) and demand due to speculation. Essentially, demand drivers refer to who is buying/holding the token and why. Read here to understand more about Token Demand Drivers.

There are multiple parties who are likely to buy the $ICHI token:

• Investors and Speculators: Individuals or entities looking to invest in the ICHI token for potential capital appreciation or trading opportunities may buy the token. These buyers often speculate on the future value of the token based on factors such as market trends, project developments, and overall sentiment.

• Liquidity Providers: Users who wish to provide liquidity to the ICHI protocol's liquidity pools may need to acquire the ICHI token to participate. Liquidity providers play a crucial role in the protocol by depositing their tokens and earning fees or rewards in return. They may purchase the ICHI token to contribute to the liquidity pools and engage in yield farming.

• Governance Participants: Individuals or entities interested in actively participating in the governance of the ICHI protocol may buy the ICHI token to acquire voting power and influence decision-making processes. These participants often have a long-term interest in shaping the direction of the protocol and ensuring its success.

Factors that influence $ICHI Demand

• Governance and Voting Power: The ICHI token holders have the ability to participate in the governance process of the protocol. The demand for the ICHI token may be driven by individuals or entities seeking to acquire voting power and influence important decisions that shape the future of the protocol.

• Staking and Incentives: The ICHI protocol offers staking opportunities or provides incentives for token holders to participate in specific activities, such as providing liquidity or locking up their tokens. These incentives can drive demand for the ICHI token as users seek to earn rewards or additional tokens by engaging with the protocol.

$ICHI Distribution & Unlocks

It’s important to understand how the supply is being split up into different allocations and how these allocations will be distributed (vested or emitted).

The 10 million supply of $ICHI which is to be distributed over four years was allocated as follows:

• 70% to community (7M $ICHI)

This allocation is intended to encourage Liquidity Providers, community participation, engagement, and ownership within the ICHI ecosystem.

• 15% to purchasers (1.5M $ICHI)

These tokens are typically distributed to those who participate in token sales at launch.

• 15% to team (1.5M $ICHI)

This allocation is meant to incentivize and reward the team members who are actively involved in the development, operation, and growth of the ICHI protocol

Currently, according to Coingecko 67% (~6.7M) of $ICHI already in circulation, the continuous emission of the token is shown in the  Distribution Schedule below.

 1–4 Year Distribution Schedule

Note: The ICHI token is 100% fair launch. There is no initial development fund, no pre-mine, and no investor allocation. The reason for this mechanism is to maximize decentralization and community participation.

Feedback Loops

A tokenomics analysis is focused on how value flows through the system and how it interacts with different users/components of the protocol. Feedback loops are relevant since they may be positive or negative and thus have an outcome on the underlying value capture (be it on the protocol or token level).

ICHI incorporates several feedback loops within its protocol to promote stability, and efficiency, and incentivize participation. These feedback loops are designed to create a self-reinforcing system that benefits participants in the ecosystem. Here are some key feedback loops in the ICHI protocol:

Liquidity Feedback Loop

As liquidity providers deposit assets into ICHI Vaults, they earn yields through trading fees and other incentives (xICHI). This encourages more liquidity providers to participate, which increases the overall liquidity in the protocol. Higher liquidity, in turn, attracts more traders, generating increased trading volume and additional fees for liquidity providers. This feedback loop helps to enhance liquidity and trading activity within the protocol. Certainly, this feedback loop within the ICHI protocol can also go the other way. As the number of liquidity providers increases, competition among them may intensify. This increased competition could lead to a reduction in the fee share and potentially lower yields for individual liquidity providers.

If the incentives offered by the protocol become less attractive over time, it may result in a decrease in liquidity providers. This reduction in liquidity providers could impact the overall liquidity within the protocol and potentially lead to lower trading volumes and fees.

Staked Tokens Feedback loop

Staked tokens often come with governance rights, allowing token holders to participate in the decision-making processes of the protocol. This includes voting on proposals, protocol upgrades, and other governance matters. Staked tokens grant holders the ability to shape the direction and policies of the ICHI protocol.

Additionally, staked tokens contribute to the overall stability and performance of the protocol by providing liquidity and ensuring sufficient resources for its operations, thus maintaining a healthy level of liquidity. Moreover, the protocol receives revenue from activities related to staking and liquidity provision, and a portion of this revenue is utilized for rebalancing the pool, Rebalancing the pool helps the protocol to maintain the price ranges of the assets within the most profitable and desirable range and also for risk management

Observations/Thoughts

Firstly, as with any DeFi protocol, there is always a risk of smart contract vulnerabilities and security breaches. It's crucial for the ICHI team to continuously conduct thorough audits, regularly update and maintain the protocol to mitigate these risks and ensure the safety of user funds.

Additionally, liquidity management in the ICHI protocol presents potential issues, such as the risk of liquidity imbalances. Insufficient liquidity can result in higher slippage and lower trading volumes, affecting the user experience, while excessive liquidity may lead to underutilized funds and suboptimal capital allocation. To address this, Continuously monitoring and rebalancing liquidity pools and vaults in ICHI protocol serves the purpose of optimizing capital allocation, maintaining stability, managing risks, maximizing efficiency, adapting to market conditions, and ensuring community engagement and satisfaction. By regularly assessing and adjusting liquidity provisions, the protocol can enhance overall performance, provide reliable services, and foster a healthy ecosystem.

Furthermore, the concentration of liquidity in Vaults exposes them to market manipulation risks, particularly in lower-liquidity markets or during periods of high volatility. Liquidity providers should carefully consider the assets they deposit, assess associated risks, and diversify their exposure to mitigate these concerns.

Summary

The native token of the protocol is $ICHI, Token holders have voting rights and can participate in the governance of the protocol. xICHI is the staked token of $ICHI which is used for governance participation

Participants in the ICHI ecosystem, including liquidity providers, stakers, and token holders, have important roles. Liquidity providers contribute assets to the Vaults, earn fees, and benefit from the protocol's liquidity and trading volume. Stakers support the protocol's security, governance, and stability while potentially receiving rewards. Token holders actively participate in governance and decision-making processes, shaping the protocol's direction.

ICHI generates revenue through protocol fees and trading volume, benefiting liquidity providers, governance participants, and ecosystem contributors. The demand for the $ICHI token comes from investors, liquidity providers, and governance participants, driven by factors such as governance power, fee-sharing mechanisms, and staking incentives.

On a final note, ICHI is a protocol that focuses on creating sustainable liquidity through its Vaults, which combine single-token deposits with concentrated liquidity. Liquidity providers (LPs) deposit assets into the Vaults and earn yields. The Vaults are actively managed by ICHI to optimize LPs' positions and maximize efficiency.

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If you’re interested in the condensed, need-to-know tokenomics information for ICHI including all the resources used for this article, check out the report on Tokenomics Hub https://tokenomicshub.xyz/ichi

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This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and that you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains.

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