SecondSwap - Unlocking Token Liquidity with

Decentralized Secondary Trading Platform
March 1, 2024

Problem Statement

Liquidity Dilemma:

Numerous token holders, in particular early investors, face the issue of tokens being locked or vested for extended periods, originally designed to prevent rapid market sell-offs and subsequent price volatility. This lack of liquidity can be a significant concern, especially if investors need to access funds or adjust their portfolios in response to market conditions. Further, if the project undergoes changes or faces challenges during the lock-up period, investors may find themselves unable to respond or exit their positions.

Similarly, new investors interested in investing in promising projects do not always have access to early funding rounds. As a result, there is an underserved market whereby savvy investors are able to build positions in promising projects and agree to accept the original vesting schedules. These higher conviction owners set new floor prices for tokens while diversifying the ownership base of successful projects.

Lastly, protocol owners remain susceptible to rapid sell-offs despite vesting conditions when original investors seek liquidity at the earliest opportunity. To resolve this issue, protocol owners are often asked to manually approve SAFT transfers from original investors to new higher conviction investors. They do so to minimize token sell-offs when vesting occurs as new investors have higher conviction on the protocol and ultimately set a higher floor price. Unfortunately, protocol owners are not directly incentivised to facilitate these transactions nor are they able to proactively exercise specific control over liquidity in the market.

The Secondary Market Landscape

The secondary market of locked primary issuances is estimated to be greater than USD 177 billion in locked tokens - circa January 20241. As we approach BTC “halvening”, investment
interest in crypto and blockchain-related companies reached an all time high with USD 90 billion invested in January 2024. The secondary market for locked tokens is already sizable and will continue to grow over time.

The Solution

Our platform and proprietary smart contract solutions address the need for a secondary market where locked tokens can be traded, offering Sellers an opportunity to get liquidity, at a discount or premium, while allowing opportunistic or higher conviction Buyers to capitalize on future upside. In addition, Protocol Owners have more control and are incentivised to facilitate transactions because they benefit by earning fees for every successful transaction.

Importantly, this secondary trading does not impact the current market prices of the token, nor does it change the original vesting conditions, due to the fact that the token or its derivative is not the subject of the current transactions. Rather, the platform facilitates the change in the original whitelisted wallet address (Seller) to a new whitelisted wallet address (Buyer) where the unlocked tokens will be transferred by the project in the future. This process is executed without interfering with the existing liquidity pools where the tokens are actively traded. At present this need is addressed primarily through opaque and inefficient Over-the-Counter (OTC) transactions with varying degrees of counterparty risks.

Our solution is differentiated from current OTC transactions in that the entire process can be driven by smart contracts rather than manual efforts.

In short, SecondSwap solves for an acute and growing demand for all ecosystem stakeholders. Protocol Owners have more control and are incentivised to facilitate transactions. By doing so, they diversify their investor base, increase the number of high conviction owners, and ultimately set higher floor prices to minimize the likelihood of rapid sell-offs. Sellers are able to achieve liquidity, hedge positions, and seek price discovery of their tokens. Buyers are able to access protocols that were previously inaccessible with more information and less risk.

Platform Functionality

Decentralized Exchange: Our platform operates as a decentralized order book-style exchange which offers transparency on all current buy and sell orders, allowing users to make informed decisions based on price discovery methods such as indications of interest, market depth, and liquidity profiling.
Wallet Integration: To perform a transaction, Sellers and Buyers will connect their respective wallets to the platform. Sellers connect their wallet originally whitelisted by the project, to establish proof of control and ownership, while Buyers connect their wallet they wish to receive the unlocked tokens in the future and validate proof of funds.
Sell Order: To create a Sell Order, Sellers input key details such as the project and/or protocol name or trading symbol, the number of locked tokens they would like to sell and their expected price relative to their exit price expectations or the market price of the freely traded tokens, if available.
Buy Order: To create a Buy Order, Buyers input key details such as the project and/or protocol name or trading symbol, the number of locked tokens they would like to buy and their expected price relative to their entry price expectations or the market price of the freely traded tokens.
Smart Contract Matching and Execution: Once the Buy order matches the Sell order, the platform's smart contract efficiently executes and settles the transactions by instantaneously and seamlessly transferring ownership.

Technical Solution
SecondSwap contemplates a solution for two types of token projects.
Projects that have already adopted a token and vesting smart contract. For projects in this category, we have developed a ‘wrapper’ contract that upgrades existing smart contracts to allow for secondary market trading of the token whilst maintaining existing vesting schedules and security protocols.

Projects that do not yet have a token or vesting smart contract. For these projects, our solution is a native token and vesting smart contract that enables secondary market trading whilst enforcing existing vesting schedules. Initially, our native protocol will launch on EVM compatible chains for broad reach, but we will add the capability of omnichain support for other popular Layer 1 protocols.

Platform Architecture



SecondSwap is a modular platform with a focus to deliver a secure secondary trading platform through on-chain and off-chain technologies.

SecondSwap Markets
The heart of the SecondSwap protocol, responsible for protocol connectivity, deals with price discovery and OTC atomic swaps in a fully trustless manner.

Standard Vesting Suite (SVS)
Our comprehensive offering for new token projects with vesting needs. The Standard Vesting Suite is our standard protocol for powering swaps, designed to work with industry de facto vesting contracts and established launchpads. Projects with manual vesting could also migrate to SVS to automate their vesting.

Multisig Vesting Connectors

For existing and new token projects that require flexible control with a mix of manual and semi-automated vesting. The Multisig Vesting Connectors serve as extensions that plug into multisig vesting vaults to make them SecondSwap enabled.

Custom Vesting Connectors
Designed to work with protocols with existing vesting infrastructure, our Custom Vesting Connectors facilitates connectivity with the SecondSwap Markets through multifaceted strategies, such as upgrading vesting smart contracts.

Platform Revenue Driver
The platform charges a fee for every transaction successfully executed on the platform. The total transaction fee of the transaction quantum is divided between the Seller and Buyer, each paying 50% each.

Upon reaching a specified commercial milestone, we may assess the possibility of introducing an integration fee for new projects seeking to integrate with the platform.

The SecondSwap smart contract for token unlocks aims to become the industry standard for token issuance management. As our standard becomes adopted by new protocols, liquidity on our platform will grow exponentially with no additional engineering required to enable secondary market trading.

Platform Cost Structure
Up to 20% of the transaction fees earned will be paid to the project or protocol when its token and/or SAFT is traded on the platform. The remaining 80% of the transaction fees earned will fund the treasury and potentially be used as a buy/back/burn feature of the SecondSwap token.

Tokenomics Model
Our tokenomics model aligns with the proven structure of leading decentralized exchanges, incorporating key elements such as:

Transaction Fees: A portion of transaction fees are distributed to token holders, fostering a community-driven ecosystem.
Staking Incentives: Users are encouraged to stake their tokens in liquidity pools while earning staking rewards, to incentivize liquidity provisioning and to support and enhance the overall trading ecosystem.
Token Burns: Transaction fees may be used to buy and burn tokens periodically, reducing the total token supply and enhancing the overall trading ecosystem.
Discounts on Platform Fees: Token holders may receive discounts on transaction fees when using the token within the platform, encouraging token utilization.

Token Supply: 100,000,000

Addressing Concerns
Compliance Assurance: The platform primarily facilitates the transfer of locked tokens from one wallet address to another, and therefore should not prima facie violate any relevant securities law. There is no actual trading of the token asset or its derivatives. Determining whether the token constitutes a security in the respective jurisdictions remains the primary responsibility of the project or protocol.
Integration Requirements: The project or protocol must integrate with the platform to enable the change in whitelisted addresses once the platform executes the transaction, ensuring a smooth and secure process for all parties involved.
Liquidity Control: It is also important to emphasize that Protocol Owners are a key participant in the SecondSwap ecosystem. Protocol Owners will have control over the amount of available liquidity on the platform and earn fees for successful transactions. This feature will enable protocols to allow for more or less liquidity on the platform depending upon market conditions. Protocol Owners do this by ‘whitelisting’ wallet addresses that are approved for secondary market trading.

Conclusion
SecondSwap is committed to advancing the token economy by providing all stakeholders with a platform that enhances their oversight and management capabilities in token trading, pricing, and liquidity. The locked token market opportunity is significant and currently valued in excess of USD 177 billion with more protocols launching everyday. Through our SecondSwap platform and proprietary smart contracts, we aim to establish a new standard of excellence in the industry, facilitating greater control and transparency while promoting market stability and sustainability.

Specifically, our platform and proprietary smart contracts revolutionizes token liquidity by providing a secure and decentralized solution to trade locked tokens in a secondary market, benefitting all stakeholders including Sellers seeking immediate liquidity, Buyers capitalizing on future potential gains, and Protocol Owners that can earn additional fees without impacting token price volatility. Vesting conditions remain unchanged but ultimately higher floor prices are established with higher conviction owners. This ultimately benefits Protocol Owners and reduces the price impact as tokens unlock and are available for trading.

By aligning our mission with the evolving needs of all stakeholders, SecondSwap is poised to play a pivotal role in shaping the future of decentralized finance.

References:
https://token.unlocks.app/reports/tokenunlocks-annual-report-2023#topic-2023-unlock-stats-and-retrospective
https://www.theblock.co/post/278442/crypto-projects-have-received-over-90-billion-in-all-time-funding?trk=article-ssr-frontend-pulse_little-text-block

Updated on: 28/11/2024