First of all, we would like to express our gratitude to all our community members for sticking with us through an eventful 7 months when we’ve shipped a tonne and learned a lot. We would like to thank the community members who read a draft of this letter and provided a lot of important comments, which encouraged us to make a couple of important adjustments.
We have been quiet for the past couple of months as we have been developing a set of products for Mercurial, including the institutional vault and serum market-making systems. In addition, we were also evaluating the landscape and planning out the best course of action for Mercurial moving forward.
In this letter, we will share updates on the key areas of work we embarked on, important lessons learned, present conclusions, and main initiatives for 2022. There will be a lot of real talk in this post, and we will not shy from admitting mistakes we have made, which there are plenty of.
Stable Swaps
Stable swaps was a key focus for Mercurial in 2021 when we developed 3 major products related to stable swaps — multi-token swap pools, non-pegged pools, and Serum Market-Making pools. Our pools are currently doing about 5–10M a day in volume, representing around 5–10% of 100m TVL, a factor better than curve’s 4–6%.
For multi-token swaps, we solved several critical technical challenges, namely optimizing the stable algorithm for compute units to fit into the limitations of Solana and building out a fully custom UX and APIs.
We’ve also developed Defi’s first non-pegged stable pools by leveraging an innovative mechanism that leverages on-chain oracles to maintain capital efficiency between 2 tokens in the pool, even as the value of one of the tokens increases over time. For example, our non-pegged staked-SOL/SOL pool has been proven to work extremely well over time, with the pool remaining balanced and highly efficient even though the price of staked-SOL has diverged significantly.
Finally, towards the end of the year, we collaborated with Serum to develop the first AMM pool that can leverage the stable coin algorithm while pushing close to 100% of its liquidity into Serum orderbooks. You can see the beta version here.
As we were shipping these important set of products, we found the current approach to be increasingly tough to navigate, mainly due to 3 factors — the obsession with TVL in the ecosystem despite there being not that much correlation to value add, the difficulty in differentiating other than liquidity mining, and the launch of an increasing number of stable pools, including from Orca, Raydium and Aldrin, amongst others.
For example, the initial MER emissions, while highly competitive initially, were quickly overwhelmed by Saber and Sunny’s combined APY. Despite the increasing volume, using liquidity mining to boost and maintain TVL also created constant downward pressure on the token.
MER V2 will have to mark a strong departure from stable swaps and liquidity mining as the key focus and instead develop a new unique system for platform utility and a new foundation for tokenomics.
In the meantime, we will be working with partners to launch strategically important pools, although it is unlikely that we will be increasing LM further from current emissions.
Jupiter
Starting with the goal of making all the stables as useful as possible, we integrated with Serum to develop the first cross-protocol swap aggregation. After getting tremendous reception, we spun it out into a sister protocol, Jupiter, which quickly became the affirmative leader in swap aggregation in Solana, aggregating across more than 10 Dexes, and crossed $5b in trading volume in about four months since launch.
Jupiter helps Mercurial in several key ways — it allows less prominent stable coins like PAI and UST to gain immediate utility by being able to swap to most coins, and also levels the playing field for all AMMs and DEXes on Solana, helping Mercurial secure a strong level of volume even though we are not as high profile as other platforms.
Though there is no fixed timing for Jupiter’s token launch, 5% will be allocated to MER stakers when the token launches, to be evenly emitted over two years from the start of the MER staking pool. Any allocations accumulated before the Jupiter token launch will be distributed retroactively. Full details about the mechanisms will be released when the staking pool opens.
We see 5% as a significant allocation, considering that Jupiter will be a low emissions project since there will likely be no VCs nor the need for aggressive LM, unlike most liquidity-driven protocols.
In addition, we will continue to find ways for Mercurial and Jupiter to collaborate.
Institutional Vaults (Dropped)
One major project that we spent extensive time on was the institutional vault mentioned in the Q4 update. While the idea received a lot of support in conversations, and the product was already close to completion on the technical end, we ended up dropping the project due to several reasons.
- Our primary institutional borrower decided not to be named, and this would have created too much opacity regarding where user funds were going.
- Initial user feedback was firmly against a withdrawal window of up to 2 weeks, given that institutional partners needed a window of at least a week.
- While there was a lot of interest in borrowing from institutional partners, the rates came largely to about 4%, which was too low considering the opacity and withdrawal window.
In the end, we decided to drop the project, which was a setback considering the number of resources we put into it. We could re-visit this development at some point again in the future, but it is not an avenue we are currently working on anymore.
The main takeaway lesson for us here is how crucial it is to involve the community throughout the development process, including shipping early drafts. This is a crucial process that we will be embarking on as we move forward.
Community And Communication Efforts
When Mercurial first started, we created multiple communication channels on telegram and Discord to optimize our reach to potential users.
We have also spent a significant amount of time experimenting with several initiatives to boost community engagement. For example, we created many NFTs for community contributors and educational campaigns for our partners, including Terra, Serum, Port Finance, Parrot, etc.
However, with the growth of our user base and daily activities, we found it challenging to keep up with engagement as our efforts were too spread out with all the different channels. Furthermore, the initiatives took up a tremendous amount of resources but added very little value to our users.
In 2022, we aim to take a much more simplified approach towards community — focusing on communications, and updates with our community members, encouraging frequent constructive discussions around product, marketing, and other related topics.
We will be closing the Telegram group to focus on Discord, push product out on devnet testing early on, and involve the community in evaluating direction.
Mercurial Staking
Implementing protocol fees for existing pools will require a very high effort at the current stage of development but not provide that much value. In addition, giving governance rewards for MER will increase LM while not increasing platform utility. Lastly, we still have the problem of generating yield for high TVLs, which worsens as TVL grows.
Given these considerations, we will be keeping MER staking simple at the start, focusing on Jupiter token emissions over a 2 year period (more details of the mechanism listed in the Jupiter section above). At the same time, we will work towards a comprehensive MER staking mechanism, where there will be both more token utility from the yield mechanisms, and the possibility of more advanced token models like Protocol Owned Liquidity and others.
Mercurial Protocol Upgrade
As discussed earlier, we have been developing a range of systems while researching and developing the alpha versions of Mercurial v2. With Mercurial v2, we aim to solve the problem of highly capital inefficient AMMs by allocating assets to multiple lending protocols, where yield generated can also be distributed back to LPs.
There are a range of critical issues to resolve, mostly around ensuring availability of liquidity for swaps, smooth withdrawals, liquidation back into the vault, as well as overcoming Solana compute units and transaction size limits, which is a clear limiting factor in how many complex operations can be in a single atomic transaction.
One exciting possibility we encountered while building this is the realization that this is a mechanism that is needed by many other protocols, dapps, and wallets, and could be generalized as a yield infrastructure API for projects of all types, which will be very aligned with our principle of developing infrastructure level projects.
We will look to develop this openly with the community, starting with a litepaper and prototype. Learning from our past experiences with the institutional vault and serum market making, it will be crucial to ship fast, openly, and with the community feedback along the way.
Summary
Over the past 7 months, we have built a number of great products, but at the same time also spent a lot of time on products that ended up not being appropriate in the near term.
As a recap, these are the main initiatives for 2022:
- Continue to open up important pools with key partners like Hubble, UXD, Wormhole, and Serum.
- Execute on Mer v2 beyond stable-swaps into becoming part of the infrastructure for Solana.
- Develop a sustainable and comprehensive tokenomics model beyond using LM as constant emissions for boosting the vanity metric of TVL. In the meantime, we will be opening up a staking pool for Jupiter token emissions.
Last but not least, we look forward to being more open and communicative with the community, including sharing more decisions early on, organizing community AMAs, and giving users more visibility into key development processes. We have not performed well in this area, and probably the most intangible but important change we need to make in 2022.
We are looking forward to building great stuff together in 2022!
