A new decentralized exchange coming to the Binance Smart Chain aims to solve the inflation problem many decentralized finance projects face.
Inflation by itself isn’t DeFi’s problem—it is a necessary part of launching a new protocol’s token. In order to attract and reward participants, DeFi projects distribute tokens to yield farmers who stake their funds. That’s how projects attract the liquidity they need to grow. But as more liquidity providers join and the token supply begins growing faster and faster, so does the selling pressure exerted on that token.
That can easily get out of hand, with “hyperinflation” driving off liquidity.
CaramelSwap is a third-generation yield farm that relies on a number of tools to prevent this, starting with an aggressive and multi-faceted token-burning deflation program and a token emission model that allows for adjustments as required.
A very new project, CaramelSwap said that having reached 5,000 token holders, the project’s next step is to get its token “listed on a respectable exchange,” and release a v2 of CaramelSwap.
Rewards and reassurance
At this writing, the protocol claims a total locked value of almost $1.9 million. The developers say the project did not hold a pre-sale or initial coin offering, making it a fair launch for the whole CaramelSwap community.
One mechanism CaramelSwap is using to attract liquidity is requiring that liquidity providers hold its native tokens, with the largest holders getting access to the liquidity pools with the highest APR, creating an incentive to bring in bigger providers. Beyond that, fully 80% of the initial token supply has been earmarked for liquidity.
Another aspect of the protocol that CaramelSwap’s developers focus on is avoiding rug pulls, by removing a notable section of its code. Because CaramelSwap forked off the PancakeSwap blockchain, it inherited the Migrator backdoor — which allowed developers to walk off with all staked assets.
Aside from removing Migrator, CaramelSwap developers say they added a Timelock contract at launch, providing a tool to eliminate counterparty risk. This requires the recipient of funds in a transaction to cryptographically acknowledge payment within a specified timeframe or the transaction is cancelled.
Burning away inflation
CaramelSwap has pursued an aggressive token-burning strategy to prevent out-of-control inflation from threatening its viability.
To begin with, CaramelSwap’s farms take a 5% deposit fee when funds are staked, with 3% of that used to buy and burn the native MEL tokens.
It also has a hybrid burning mechanism for its native tokens. This includes a 4% deposit fee charged to stakers of non-native tokens—Caramel Finance does not charge any deposit fee for staking its own token—with 80% of that fee going to the buyback and burn program.
A 3% transfer tax will be collected for every transaction. This will also be burned.
Another service CaramelSwap intends to offer is an initial farm offering platform (IFO) in which new projects can sell their own tokens. Buyers will have to use special MEL-BNB liquidity provider tokens. CaramelSwap will then burn half of the MEL tokens used.
Finally there’s the lottery, held four times per day, with entries costing one token. The prize pot is split four ways: a winner or winners with four numbers matched in the correct order take 50% of the pot. Three correctly ordered numbers takes 20% and two takes 10%. The remaining 20% of the pot’s tokens are burned. If no entrant hits the three-number match, another 20% will be burned.
Another tool against overinflation is emission control. CaramelSwap’s initial emission rate is a seven-MEL reward per block, decreasing to three MEL at the halving. The developers take 0.1 MEL per block. This is adjustable as needed from then on. The farmers get 95% of those rewards, with 5% going to the developers and for incentives.