Using a dynamic supply model and a basic market making strategy, Baseline provides new ERC20 tokens with constant on-chain liquidity and non-liquidating leverage right out of the box.
What is Baseline
When a Baseline token is deployed, it automatically directs initial liquidity to the Uniswap V3 pool (LP-NFT). At launch, 100% of the token volume is stored on the chain due to the protocol and used to protect its value forever.
Baseline guarantees ERC20's internal "base value" (BLV) by reserving enough liquidity in the pool to buy back their entire supply. Simply put, the BLV is the price at which the last token can be sold into the pool.
This is possible because the protocol owns the initial supply; teams can't issue tokens to themselves or investors in advance. Instead, each newly issued Baseline token must be purchased directly from the pool, allowing the protocol to accumulate liquidity.
This liquidity is then used in Baseline's permissionless market trading system and its own credit line to grow the BLV of the Baseline token over time. Both mechanisms are implemented in such a way that the BLV never decreases, resulting in a price that can only increase over time.
Baseline's market making strategy naturally increases the value of the underlying BLV token over time through a series of liquidity transactions. Each time the token price goes beyond a certain threshold, anyone can permissionlessly rebalance the liquidity belonging to the protocol among the three Uniswap V3 positions. This reduces potential information asymmetry arising from liquidity rebalancing and helps maintain a fair, predictable and transparent market.
At launch, the bid is allocated to a concentrated Uniswap V3 liquidity pool consisting of 3 positions: the Baseline Position (Floor Position), Anchor Position and Discovery Position.
- The Base (Floor) Position supplies reserve liquidity to a pool at the bottom of the order book, concentrating liquidity in a tight range. The base position exists to protect the price of the token during periods of heavy selling, and the lowest price it protects is the BLV of the token.
- An anchor position provides backup liquidity from the BLV of the token to the current market price over a wide range. The anchor position exists to maintain liquid trading conditions for the token even when a healthy speculative premium occurs.
- The discovery position supplies new liquidity to the token pool from the current market price and beyond in a wide range. The opening position exists to facilitate upward price discovery and responsibly allocate supply in the market.
Holders can immediately access the full value of their BLV tokens without having to sell them by utilizing Baseline's native credit line. When depositing tokens in the Baseline credit line, users can borrow underlying liquid assets directly from the Uniswap pool for a fixed fee and for a fixed term.
Since tokens deposited in the credit facility can't be sold into the pool, borrowing a BLV token can't create bad debt or affect the protocol's ability to meet liquidity obligations. In addition, the system does not require market liquidation of loans, as the price can never fall below the cost of borrowing. Loans in the Baseline system can only default if the borrower defaults on the loan by failing to repay the amount borrowed during the life of the loan.
If the borrower fails to repay the loan, Baseline takes back their deposited tokens, treating the situation the same as if the borrower had sold their tokens at the BLV price. This means that when the loan expires, the borrower forfeits any market premium in the BLV of the token, redistributing the value back to the remaining holders.
The essence of market accounting in Baseline revolves around two metrics: the capacity of the system and the total floating supply of tokens. In Baseline, capacity refers to the total number of tokens that can be absorbed by the liquidity structure, and floating supply refers to all tokens that exist outside of Baseline's liquidity position. To guarantee the solvency of all tokens, Baseline ensures that capacity > floating supply each time it deploys liquidity.
To determine the BLV, Baseline finds the highest price at which it can deploy its liquidity structure and still satisfy the solvency invariant. The protocol does this by gradually increasing liquidity at each price level until capacity can no longer absorb the total floating supply. This ensures that the protocol always offers to buy tokens in the most capital-efficient way possible, minimizing any unused liquidity in the system.
bToken Utility
Loans
Baseline offers simple fixed-rate term loans secured by bToken, providing users with a new way to realize value from their assets without sacrificing growth risk through borrowing.
At Baseline, bToken can be deposited to withdraw the underlying BLV liquidity for an upfront fee. All fees collected are sent to Afterburner, ensuring that any value generated by borrowing is credited directly to bToken holders.
Afterburner is an automated bToken redemption strategy designed to release value from accumulated fees over a longer period of time, skewing the value distribution towards holders with longer time preferences.
Users can customize the length of the loan in increments of a few days, which provides complete flexibility in loan terms and allows them to pay only for what they need. Users are limited to one active loan per bToken, but can add collateral to existing positions to increase their loan position.
Loans can be repaid early or renewed, but early repayment does not result in a refund of fees. Thus, it is advisable to open loans for shorter terms and extend them as needed rather than opting for longer terms initially. When the loan position is replenished, the term of the loan will be the same as the existing loan and any new extensions will apply to the entire aggregate loan.
Baseline credits are not subject to market liquidations, but they are automatically defaulted upon expiration. This is critical to the efficiency of the system because Baseline's BLV accounting allocates liquidity to each circulating token. Defaulting expired credits prevents the accumulation of “dead supply” from lost tokens or unavailable wallets, allowing liquidity to more efficiently support the remaining bTokens.
Since bTokens burn up upon expiration, expired loans cause borrowers to lose the premium value of their bToken collateral. Therefore, it is important to carefully monitor the maturity of loans to avoid default.
Boost. Baseline's unique lending model that allows users to borrow more liquidity without additional collateral when BLVs rise. This is possible because the collateral posted by the user has increased in value due to BLV growth: since the lending engine calculates how much can be borrowed based on the BLV of the posted collateral, borrowing opportunities will increase with each bump().
Loops
Unlike Loans, where interest is charged on the amount borrowed, Loops utilize a funding rate mechanism that continually “reduces” both debt and collateral. This avoids maturity while maintaining the same level of risk, providing a more efficient and convenient operation.
Loops allow users to effortlessly increase exposure to bTokens.
Looping consists of repeatedly borrowing bTokens to buy more bTokens, creating a leveraged position. When the price of the bToken rises against the reserve asset, the looped positions earn increased profits: Unlike basic loans, where users must pay interest based on the amount borrowed, Loops uses a funding rate mechanism to charge fees on looped positions. In this system, the protocol automatically “reduces” both collateral and debt over time, allowing users to maintain unlevered leverage without actively managing the position.
Typically, a loop is most beneficial when:
- The bToken's price is close to its BLV, providing maximum capital efficiency and less downside risk.
- You have strong confidence in the short to medium term growth of the bToken price.
- You understand the risks and have a clear exit strategy.
Loan migration allows users to migrate their loan positions to loop positions. In doing so, the amount of risk is retained, upfront payments are converted to fixed payments, and expiration dates are canceled, which is a smart solution for users managing active loans.
Benefits of loan migration:
- No more missed deadlines or defaults caused by expiration dates.
- Loops automatically adjusts debt and collateral with each block.
- The protocol eliminates upfront costs and automatically charges a fee for each block, reducing debt and collateral at a 15% rate.
