If you’ve been keeping up with the content at blocmates, then you may have read our recent article covering Maia DAO. Within that guide, we touched upon one of the primary products launched by Maia DAO, the Hermes protocol. In this article, I will further expand and elaborate upon Hermes protocol.
Hermes – Introduction to the protocol
For those of you who have been around crypto for a while, you may have taken part in the game of layer 1 rotations. Users kept jumping from one chain to another in search of the best returns. Each chain had its own features but there were 2 DeFi applications that were consistent across all chains. A money market and a native DEX (decentralised exchange).
Every chain typically had a couple of DEXs operating on it allowing users to trade the different coins available there. They are simply a cornerstone of any new ecosystem. Not only do they allow anyone to swap between different coins but they also allow users to generate additional yield by providing liquidity.
As the layer 1 rotation game fizzled out and money started returning to the safety of Ethereum. The layer 2 rollup chains started gaining traction. One such Layer 2 was Metis. Maia DAO were very early to the Metis ecosystem and realised that since Metis does not have its own native AMM/DEX, they can fill that gap. Therefore, the team at Maia DAO built the Hermes Protocol.
What is Hermes Protocol?
At a high level, Hermes is a decentralised exchange that allows users to trade volatile & pegged assets in the same venue. That means users can trade regular tokens like they would on Uniswap as well as trade stablecoins like they would on Curve Finance but all in the same place. This is all facilitated in a low-cost environment with near 0 slippage.
The protocol itself is a fork of Solidly, an AMM that uses the ve(3,3) model. This ve(3,3) model is the brainchild of the renowned DeFi dev Andre Cronje. For those who don’t know what ve(3,3) is or how it works, here’s a brief explanation.
Ve(3,3) combines the powers of vote-escrowing pioneered by Curve Finance and the (3,3) bonding mechanism pioneered by Olympus DAO to create a token mechanism that distributes emissions without diluting users. Emissions of the tokens are adjusted according to the circulating supply which in turn is affected by the locking of the tokens. So ve lockers increase their holding proportional to weekly emissions.
Hermes maintained this general fee incentive model while building more features on top. Before getting into the nitty-gritty of some of the tokenomics of HERMES, let’s go over some of the features of the protocol itself.
Starting with the liquidity pools. Liquidity pools are imperative for the functioning of any AMM. Since Hermes supports pegged and non-pegged assets, it also has two different types of pools. Stable pools and variable pools. The variable pools are the pools used for trading volatile assets such as DAI/ETH or DOGE/USDT for example. This pool follows the standard constant product market maker formula of x*y=k popularised by Uniswap.
The stable pools on the other hand are different. It uses a new curve x3y+y3x where x & y are the two different pegged assets in the trading pair. This new curve allows for very efficient stableswaps.
The liquidity providers (LPs) who provide liquidity to the pools on Hermes receive rewards through emissions from the native token supply, rather than fees. To measure this activity, Hermes has gauges. The Gauges simply measure the usage rates among different LPs and then proportionally distribute the rewards to them. However, an update made by Hermes is the inclusion of custom gauges which will be discussed in further detail later on.
Apart from this, Hermes has a lot of minor additional features which culminate into creating a much better user experience.
· There’s a 0.01%
· Fees paid as rewards are always paid in the base asset (other AMMs convert them)
· Permissionless support for gauges and bribes
· Lazy LP management (like on Uniswap V2)
· Fungible LP positions
· Flashloan Proof TWAP
· There is no additional upkeep required for TWAPs
· Flashloan proof reserve quoting
While all of this is good, what ties the entire protocol together is the native token HERMES.
Since Hermes is an AMM and AMMs rely on liquidity providers for the protocols functioning, the overarching aim of the HERMES token is to incentivize liquidity providers. Under the ve(3,3) model, liquidity providers are not paid rewards from fees generated by the pools, they instead get paid from token emissions of HERMES making HERMES integral to the functioning of the protocol.
This aim is achieved through the three main uses of HERMES. They are:
To successfully do any of these 3 things, you are required to lock your HERMES tokens for veHERMES. This is a process known as vote-locking or vote-escrowing. Essentially a user has to choose an amount of time that they want to lock their tokens for, the more HERMES they lock and the longer they lock it for, the more veHERMES they get and vice versa.
The first benefit of staking (or locking) your HERMES for veHERMES is trading fees. Since the LPs get HERMES emissions as rewards, the trading fees from a specific pool go to the veHERMES holders who voted on that specific pool. Voting on a pool simply means that a veHERMES holder voted for liquidity to be directed towards a specific pool, and the trading fees from that specific pool will be proportionally redirected to them.
The game-theoretic element of this tokenomic design comes with boosting. Even though LPs receive HERMES emissions as rewards, they are not maximising their rewards. If they lock their HERMES rewards for veHERMES this will allow them to boost their rewards by up to 2.5x. Vote-locking will give them voting power in the DAO which will allow them to boost their rewards. Depending on their veHERMES balance, LPs can earn between 40% to 100% of weekly emissions. So, it is more optimal for LPs to be aligned with the stakers.
The third element is voting. This is fairly straightforward. Holding veHERMES gives voting power which allows holders to vote on different proposals in the DAO as well as on the whitelisting of new tokens.
Now that you’ve understood the general functioning of the HERMES token, let’s look at its distribution.
The initial veHERMES supply was 20M. 85% goes to the community reserve currency Maia DAO to use for the voting power mining event (more on this later), and 15% is airdropped to Hermes LPs and MAIA stakers.
The initial available supply of HERMES was 0 with an initial release rate of 2M per day decreasing every week until tail emissions start.
The voting power mining event mentioned above is centred around other protocols on the Hermes protocol. Protocols get 1% of veHERMES NFT from the initial supply which equates to 0.2M HERMES locked for 4 years. In return, the protocols trading pair receives 5% of veHERMES initial distribution (1M HERMES) until 50% of initial total HERMES supply has been distributed (50M HERMES).
Now let’s look at how a user can claim their rewards. To claim your rewards, which are the trading fees, it goes as follows.
All fees are deposited as bribes. These bribes are paid out over 7 days to everyone who is voting on a specific pool. The user then needs to go to the rewards page and choose their NFT. After this, they must select each pool’s checkbox and then click the claim bribes button.
But this is not all, what I described above is merely phase 1 of the Hermes protocol. As you may know, the world of DeFi changes rapidly, and if you don’t adapt you get left behind. Therefore, Hermes protocol decided to adapt and build upon the base layer described above.
So, let’s talk about Hermes V2.
Hermes Protocol V2
There are 3 core elements that have been added to the Hermes protocol that make up the V2 upgrades. They are:
· Unified liquidity
· Decentralised liquidity management
· From ve(3,3) to b(3,3)
As DeFi goes multichain whether that be multiple layer 1s or multiple layer 2s, a major issue that has arisen is fragmented liquidity. Liquidity is siloed on different chains amongst thousands of projects which reduces the overall capital efficiency in DeFi.
Bridging and cross-chain protocols have come up as a solution to this problem but an issue with them is security and trust. Most of them are centralised and require you to trust a certain entity and they also have very weak security evidenced by the fact that the most amount of money lost to exploits and hacks has happened through bridges.
LayerZero changed the cross-chain game with their bridgeless messaging protocol dubbed the omnichain solution. Hermes has taken a leaf out of the LayerZero book and is working on building an Omnichain DEX.
This DEX will be similar to the V1 DEX in that it will facilitate swaps between pegged and non-pegged assets, only this time swaps can be done across multiple chains leveraging concentrated and unified liquidity.
This new omnichain DEX works by having a unified liquidity pool at the heart of the DEX. Connected to this unified liquidity pool are separate individual pools called ports. Each chain will have its own port and a set of Routers for users to interact with. After requesting a swap to the Router, the Ports receive the input tokens and the cross-chain message is sent. The Root Router then routes the transactions through the main liquidity pool allowing users to transact with any asset on any chain through bridgeless architecture.
Not only is this an enhancement of the user experience, but it also enhances the earning potential of the user. Users will have an omnichain balance which can be used to earn yield, manage liquidity, swap assets, and incentivize liquidity across multiple chains. The DeFi world is now in one place for you through Hermes V2 (unintentional rhyme).
Decentralised liquidity management
As I mentioned earlier, a feature of Hermes is that it allows for lazy LP management similar to that of Uniswap V2. You may be wondering if Uniswap V3 exists then why use the older model? Well, this is because Uniswap V3 uses concentrated liquidity to provide liquidity. While it may be more capital efficient, it is extremely difficult to execute successfully, especially by regular non-sophisticated participants. In fact, one study showed that a majority of LPs lose money by being LPs on Uniswap V3.
However, it cannot be denied that the earning potential is attractive. Therefore, Hermes V2 has a decentralised liquidity management tool called TALOS or Transparent Automated Liquidity Optimization Strategies.
TALOS is a product which offers multiple vaults to users. These vaults execute automated LP strategies on Uniswap v3 to generate consistent returns. All the users have to do is pick the vault they want and deposit their tokens. These strategies have been rigorously back-tested to ensure success and since concentrated liquidity often requires a frequent rebalancing of positions it makes much more sense for this process to be automated.
There are two general types of strategies on offer. Vanilla & Staked.
Vanilla represents one or more UNI V3 NFT positions. This contract will earn like any regular LP would, through fees generated from the underlying position.
Staked positions represent one or more UNI V3 NFT positions which are also staked in the Uniswap V3 staker that’s available on Hermes. Positions on this contract won’t earn fees but will earn rewards through emissions.
An additional feature here is the custom gauges which I spoke about earlier on in this article. Under V2 these custom gauges can support any form of underlying yield and its TALOS allows users to easily interact with these custom gauges.
From ve(3,3) to b(3,3)
This change is mainly from a user experience standpoint. For people that hold the veHERMES NFTs that represent their lock. There are 4 steps they need to go through weekly to maximise their returns and voting power.
1. Claim distribution
2. Claim bribes
3. Lock max date (4 years)
4. Cast votes
While this may not seem like much, for users who have multiple locks, doing this manually every week can be tedious. Even for those who do not have large positions to manage, there is a good chance that something is going on in their life which makes them miss out on the week’s rewards.
Active users and protocols who actively lock and participate in the ve(3,3) system often maximise their reward, therefore Hermes makes the assumption that for these users who keep increasing their lock every week, it is the same as burning the underlying since it will technically never be unlocked.
So b(3,3) makes the lock permanent and switches the ERC-721 veHERMES into an ERC-4626 bHERMES. What this essentially means is that users who want to maximise returns now don’t need to do so manually, this change reduces the steps mentioned above to 0, it all happens automatically, and the user keeps accruing rewards and voting power.
This sums up the V2 changes made to the Hermes Protocol.
Since Hermes protocol is under Maia DAO, the community discussions happen in the Maia DAO discord.
The Maia DAO discord currently has 2.74k members. Discussions around Hermes, TALOS, or Maia itself all take place here. The community is fairly active but overall activity has declined since the peak of the Metis ecosystem boom. As attention from the broader crypto market dissipated, attention on Metis dissipated with it too. However, relative to the market conditions, Hermes (and Maia) has still managed to retain a decent number of users who remain active in the community.
For that, the team deserves credit. They have a full anon team who are very active in the discord at all hours of the day. Their responses are prompt and they put out a very welcoming aura. In general, discussions are very fruitful with everyone in the community always deliberating about what to add next to the Maia ecosystem. Everyone is thinking big, and the team reciprocates this. This symbiosis between the team and the community is always a good sign.
We all know that AMMs are nothing new, and Hermes in no way tried to reinvent the wheel with their AMM. They played it smart and iterated upon existing innovations which have already worked well. They have just found the correct combination of different pockets of innovation to create a smooth and efficient AMM.
Over and above this, the team deserves massive credit. They constantly ship products and are active with the community. A dedicated team of big brains can only result in the creation of great things. Even though we are in a bear market now, such behaviour is a sign that the effort put in now will bear fruit later on.
Hermes has just migrated to V2 in an effort to compete in the cross-chain game, however, don’t expect them to stop there. As I said earlier, one cannot stagnate in DeFi. Adapt or get left behind. So as the demands and possibilities in DeFi keep changing, expect Hermes to adapt as well and stay on top of their game.