Introducing Baseline, a Permissionless Algorithmic Market Making Protocol. # Background The token launch process, as it currently exists, is problematic and often leads to unfavorable market conditions for investors. Issues arise when teams pre-determine token supply and distribution curves prior to launching, doing so without any feedback or understanding of the market. This practice can create oppressive or skewed distributions that place buyers at a significant disadvantage. Additionally, teams often arbitrarily set the initial price for token liquidity, leading to inflated and unsustainable market capitalizations without the necessary underlying liquidity to support them long term. Upon launching the token market, projects usually incur significant costs in emissions or operational expenses to incentivize third-party liquidity providers (LPs) or market-making firms to maintain liquidity for the token. The cumulative effect of these practices is that for many tokens in the cryptocurrency market, prices continually fall and investors are exposed to an array of hidden market risks and disadvantages. It often feels as though trading these tokens is like navigating a minefield blindfolded. # Vision Baseline envisions a new mechanism for launching a token that integrates the token's economic mechanisms directly with its liquidity strategy. The aim is to automate token economics and liquidity operations algorithmically, rather than predetermining these factors and then paying or finding third-party market makers or liquidity providers. This integration is a native property of the token itself, facilitated by smart contracts, making Baseline a permissionless system that can successfully perform market-making tasks for tokens in perpetuity, without requiring manual operation or external intervention. The system aspires to define a new standard for a more equitable, sustainable, and convenient model for token launches. Smart contracts manage token economics, eliminating the possibility of insiders pre-mining or distributing initial supply to themselves before the token achieves any success. This also manages liquidity, removing the chance for insiders to drastically alter the terms of their token's markets. In short, the combination of algorithmic token economics and liquidity results in safer markets for investors and participants. The permissionless nature of the system makes it sustainable, as the smart contracts and liquidity algorithm can operate indefinitely without external or manual intervention, thereby ensuring a “Baseline” for the market will always exist. The convenience lies in the fact that teams can effortlessly launch tokens via Baseline without the need to expend effort bootstrapping their token market. Instead of spending time figuring out token economics, contracting market-making firms, or incentivizing liquidity pools, Baseline allows teams to focus on building their core products and let the token manage itself. This reduces the startup cost and operational overhead to explore new innovations in the crypto space. # Mechanisms Liquidity functions as the regulator of a market, moderating the volume of capital that can flow in and out without significantly impacting the price. High liquidity enables participants to quickly and cheaply move in and out, thereby creating efficient markets that draw attention, incentivize trading, and encourage long-term participation. Conversely, when a market’s liquidity is thin relative to its total capitalization, it can result in high volatility and poor trading conditions. The resulting uncertainty and instability can add further risks to market participation, leading to a vicious cycle where illiquid markets become less attractive to trade. This discourages market makers and long-term investors from participating, which in turn exacerbates the liquidity challenges. Presently, projects and companies try to address these issues by commissioning third-party individuals or market-making firms to provide a backstop for liquidity. They pay substantial amounts of money to ensure that there is always a counterparty available for any prospective trades. However, these entities often lack inherent incentives to support their associated projects. They primarily operate for their own benefit, choosing when and how to provide liquidity in ways that are profitable for them, but not necessarily beneficial for others. Traders are then forced to trust these entities, hoping that they will not exploit their position to manipulate the market or take advantage of information asymmetries. Unfortunately, this trust is often misplaced, especially in the largely unregulated crypto markets. Despite these challenges, cryptocurrency provides unprecedented opportunities for the allocation of capital and access to markets, creating possibilities for innovation and financial opportunities beyond any other market in history. Crypto markets have evolved rapidly as projects and participants continue to experiment and innovate. Uniswap created opportunities for programmatic permissionless markets and composable liquidity provisioning. Olympus pioneered the concept of programmatic ownership of liquidity assets, and LOTUS developed programmatic management of liquidity assets in specific strategies, which are executed algorithmically and without permission. JIMBO V2 expanded on these strategies to address design shortfalls and adjust market cap to match current liquidity. Baseline seeks to combine these learnings to create a mechanism that integrates token economics and liquidity provisioning as core programmable primitives of the system. This novel approach is possible only in the world of cryptocurrencies and signifies the first time in history that such a system can exist, thanks to the unique properties of blockchain technology. There are four main components of Baseline: Liquidity Provisioning, Dynamic Tax Rates, Staking Incentives, and Collateralized Liquidity Loans. The protocol uses these various mechanisms to establish different incentives for different market participants. This encourages the emergence of diverse strategies and behaviors, thereby promoting maximally efficient markets. # Liquidity Provisioning On the bid side, Baseline focuses the majority of its Ethereum (ETH) liquidity into a single "floor price," ensuring that every token in circulation can be sold at this price at any time. This floor price gradually increases over time and never decreases, as the protocol accrues inflows from its other mechanisms. By calculating the buyback price as the total available liquidity divided by the total number of Baseline tokens ($BASE) in circulation, the protocol can guarantee that it has sufficient ETH to buy back every token in circulation. However, previous systems, such as those implemented by LOTUS and JIMBO, faced difficulties in their ask-side liquidity strategies. LOTUS's primary failure in its market was the inflexibility in how it provisioned upside liquidity, which led to a widening gap between the floor price to sell and the market price to buy over time, and extreme market volatility in the absence of third-party liquidity providers. While JIMBO attempted to address this by dynamically adjusting liquidity, its implementation fell short. Problems stemmed from its fixed token supply, making effective liquidity provisioning challenging within the structure of a liquidity book. Tokens needed to be recycled back into the liquidity pool to be redeployed, which often led to a counterproductive growth of liquidity inversely to the market size. In contrast, Baseline's core insight is that the protocol's ask-side liquidity should scale directly with market size. As more tokens are purchased from the pool and held in wallets, liquidity scales up to the size of the market within a tight spread. The protocol can directly issue new tokens into the pool, dynamically adjusting the token supply based on market activity. This dynamic nature means that Baseline doesn’t need to predetermine its token economics; they adjust to meet current demand for the asset in real time. This simplicity unlocks a novel innovation in markets. Traditionally, the market cap of an asset has always been a function of its liquidity—the price eventually converges around where the liquidity can support it. In Baseline, the token's liquidity is a function of its market cap. The inversion of this idea has never been explored before, and it could uncover entirely new discoveries about the dynamics of market systems. # Dynamic Tax Rates A critical component of Baseline is the application of dynamic tax rates on transactions. The idea behind this mechanism is to moderate market dynamics by increasing friction when the market is too active and reducing it when the market is too passive. In essence, the tax serves as an elastic dampener that helps to maintain stability within the Baseline market. The protocol applies a small fee to every transaction, including buys, sells, and transfers. The size of the fee is determined by the market activity, increasing during periods of heightened activity and decreasing when the market is calm. This mechanism discourages rapid trading and reduces the likelihood of price manipulation, as participants must consider the cost of taxes before executing trades. To balance this friction, a portion of these taxes is redirected back into the market, funding the increasing floor price and contributing to the overall liquidity of the token. This means the protocol continually strengthens its own liquidity and stability, offering long-term participants a more sustainable market environment. The remaining tax proceeds go to the staking pool, where they are shared among the protocol's stakers. This system allows for the more equitable distribution of gains and helps to incentivize active participation in the Baseline ecosystem. # Staking Incentives Staking incentives form a crucial part of Baseline's design, providing an additional layer of incentives for long-term participants. Participants who stake their $BASE tokens not only earn rewards but also gain the ability to influence the protocol's future direction by participating in governance. Participants can stake their tokens in the protocol and earn a portion of the tax proceeds. Staking provides an incentive for token holders to keep their tokens and participate in the long-term development of the protocol, while also reducing token velocity and encouraging price stability. # Collateralized Liquidity Loans The final component of the Baseline system is collateralized liquidity loans. When participants purchase $BASE tokens from the liquidity pool, a portion of their funds is locked as collateral for a loan, which they can use to purchase more tokens. This loan is overcollateralized, reducing the risk for the protocol and other market participants. These loans provide an interesting incentive for participants. By taking out a loan, participants can increase their exposure to $BASE tokens, potentially increasing their gains. However, the loan must be paid back over time, adding an additional level of complexity and consideration to the market dynamics. Through these four components—liquidity provisioning, dynamic tax rates, staking incentives, and collateralized liquidity loans—Baseline offers a comprehensive and innovative approach to algorithmic market-making. It goes beyond traditional methods by fully integrating token economics and liquidity provisioning, delivering a permissionless, self-sustaining market-making protocol that aims to disrupt the way tokens are launched and managed. With Baseline, a new era of more equitable, sustainable, and convenient token launches could be on the horizon.