How Does Vapor Work?

Overview of Vapor mechanics

Overview

VaporDAO is an experimental Defi project on the Sui blockchain. The core currency of this ecosystem is VAPOR, which is underpinned by a diverse treasury controlled by the DAO. VaporDAO engages in asset acquisition from investors, depositing these assets into its Treasury and issuing VAPOR tokens as a substitute.

A key differentiator for VaporDAO is its strategy to tackle the volatility often associated with digital currencies like Bitcoin or Ethereum. While stablecoins, pegged to the dollar, offer a semblance of stability, their reliance on the fluctuating value of the dollar undermines this stability. VaporDAO addresses this issue by pioneering a free-floating reserve currency, VAPOR, backed by an asset basket. The focus here is not on price appreciation but on supply growth, ensuring that VAPOR maintains its purchasing power in diverse market conditions.

Vapor as an Ecosystem

Vapor DAO constitutes not just Vapor, but other ecosystem assets on the Sui blockchain as well. The Vapor Protocol was initialized through the launch of the $VAPOREON memecoin. Vapor DAO also utilizes the unique Sui inscriptions potential as both a bondable and tradable asset.

Contrary to a stablecoin, VAPOR is an algorithmic currency backed by decentralized assets. It mirrors the gold standard, providing a free-floating value underpinned by the treasury reserves. Each VAPOR is backed by an absolute minimum of 1 USDC, but not pegged to it, allowing its price to fluctuate above this baseline. This backing guarantees a minimum value for VAPOR, with the market potentially adding a premium over this intrinsic value through protocol profits from bonding.

Operational Mechanics

At its core, VaporDAO comprises several mechanisms: the treasury, Protocol-Owned Liquidity (POL), a bonding system, and staking rewards, all designed to manage supply expansion. Revenue generated from bond sales enhances the treasury, which in turn disburses VAPOR to stakeholders. Through its liquidity bonds, VaporDAO accrues its liquidity, fortifying the treasury and backing.

The (3,3) and (1,1) Concepts in VaporDAO

Inspired by the 'Prisoner’s Dilemma' from game theory, VaporDAO utilizes the (3,3) concept. This represents the ideal cooperative scenario within VaporDAO, maximizing benefits for all participants. Users can engage in staking, bonding, or selling, with staking and bonding viewed positively by the protocol, while selling is seen as detrimental. The impact of these actions on the protocol's value is quantified, with cooperative actions (staking and bonding) being rewarded, and uncooperative actions (selling) being penalized.

Significance of Protocol Controlled Value

The assets inside the treasury is crucial in VaporDAO as it ensures that each VAPOR is always backed by an absolute minimum of 1 USDC, ensuring a calculable relability to the market price. The protocol's control over the treasury means that it can adjust the supply of VAPOR to maintain this backing, providing a level of security and trust in the system.

The Role of Proof of Liquidity (POL)

VaporDAO significantly owns its liquidity, a result of its bonding mechanism. This self-sufficiency in liquidity provides several advantages, such as reducing the need for high farming rewards to attract liquidity providers, ensuring constant market liquidity for transactions, and allowing the Treasury to accrue most of the LP fees. The POL supports VAPOR by marking down LP tokens to their risk-free value (RFV), further stabilizing the ecosystem.