Trader Joe: How an Outsider Farmer became a King.
From meme magic to innovation.
The Humble Farmer
It’s the middle of Solana summer 2021 and everyone is getting rich. It was a simpler time, where one could just throw their money at any any token or NFT and 10x their investment in a day. Avalanche was an up and coming L1 with a focus on DeFi. All eyes were on it’s “flagship decentralized exchange (DEX)”: Pangolin. Coming out of the skunkworks of AVA labs, Pangolin was supposed to hold the DEX throne, similar to Uniswap on Ethereum. Meanwhile, there was another DEX being developed by cofounders 0xMurloc and Cryptofish named Trader Joe. Seemingly this DEX shared the name of a popular US-based grocery store and centered around a Santa-looking farmer named Joe (and his animal friends). The website was easy to use, colorful and the main characters and names were easily meme-able. While a community grew around this DEX, many on the outside viewed it as just another Sushi-fork; in fact LedgerStatus jokingly once said on UpOnly that Trader Joe still has references to Sushi in it’s code. Despite the criticism, Trader Joe’s popularity grew through the power of meme magic. At the time of writing Trader Joe has the second highest TVL (total value locked) on Avalanche (figure below) and an outsider named Joe has taken his throne.
While it does seem like I may have slighted Pangolin and AvaLabs, the fact that Trader Joe is so successful speaks volumes to the decentralized nature of the Avalanche ecosystem. Insider and outsider narratives exist in all L1s, but what sets strong ecosystems apart from weaker ones is when underdogs and outsiders thrive.
Farm and Pump?
Like many other DeFi protocols, the Joe token was implemented to incentivize liquidity providers (LPs). The problem with highly inflationary protocol tokens is that without a proper utility or incentive to hold them, people simply farm and dump them for stable coins or other more valuable assets. Tokenomics at a base level is just supply and demand. Initially, Trader Joe implemented a staking mechanism where part of the protocol fees collected were used to buy back and burn Joe. These staked tokens (xJoe) increased in value through this mechanism and was supposed to take Joe out of circulation. While these buyback mechanisms can be a short fix, generally they are not sustainable long term.
Recently, Trader Joe has implemented three new utilities for their native farming token (figure below). By diversifying the utility Trader Joe is trying to spark demand via multiple avenues that could counter the emissions from LP rewards. These new utilities are:
- sJoe- A form of staked Joe where instead of a buyback mechanism, stakers are paid in USDC from a 0.05% fee deducted from all stable swaps. The advantages to this model are the rewards are paid in an asset that users value more than a “farming token” and that long term value of the rewards are not dependent on the price of Joe.
- rJoe- Rocket Joe is a fair launchpad for new projects in the Avalanche ecosystem. Joe is staked, the user accrues rJoe which allows them access to these early launches. The advantage to this model is that users are early to up and coming projects, Trader Joe community white-lists legitimate projects (ie: no scams) and through a locking mechanism and fair price discovery prevents low liquidity rugs. While being early to a strong project has tremendous upside, users should still treat these projects as start-ups which may fail to gain traction. Furthermore, the lockup period is often ended by a rush to the door with users dumping the projects tokens anyways.
- veJoe- Vote Escrow Joe is the newest utility for the Joe token (image below is a bit outdated now). Following the strategies of Curve and Platypus, Joe is staked and users accrue veJoe over time. This gives them a growing farm boost. veJoe is non-transferrable and unstaking Joe leads to a loss of the entire veJoe stack and all the boost that is gained. In addition to the boost, veJoe acts as a voting token and allows users to direct higher and lower Joe rewards to different pools. This “ve” model has been successful in the space, particularly in protocols with strong communities, something Trader Joe has already built.
Future Joe
With these new utilities for Trader Joe’s native token and the long awaited introduction of governance to the protocol, speculation has been running wild about what is next. The most common speculation is whether there will be a “Joe War” for protocols like Echidna Finance, Vector Finance and Yield Yak to take control of veJoe, provide a more immediate boosting service and direct rewards to liquidity pools they prefer. A Joe War would definitely drive up demand for Joe token, with aggregators permanently staking Joe for veJoe. It remains unclear how governance would work for Echidna and Vector, who already have existing voting and yield aggregation for Platypus. In addition to veJoe, it would be interesting if part of the boost could be staked as sJoe, thus LPs and/or stakers in the yield aggregators or protocol treasuries could be paid out in Joe and USDC. By having all these avenues to stake Joe, the permutations for a flywheel becomes “infinite”.
With the launch of Avalanche’s “Multiverse” of subnets (the Dr. Strange references in this article!), many, including myself, have speculated how infrastructure between subnets will be built. Chainlink’s cross-chain interoperability protocol (CCIP) is a potential solution to bridging assets across subnets. The exchange of these assets from different “universes” will need a DEX to exchange upon. Trader Joe is in a position to take a share of this emerging use-case.
Trader Joe will go down in the crypto books as a legend, from it’s humble beginnings as a meme to experimental new use-cases for it’s protocol and native token.
Disclosures: I have financial interests in Trader Joe and many of the projects mentioned in this article. Comment here or on my twitter @CanuckLink
Originally published at https://canoecapital.substack.com on March 22, 2022.
